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As we wrap up 2018, it’s time to look back: how did your budget hold up? Did any maintenance surprises—or worse, unexpected capital expenses—derail your net operating income? As you plan for 2019, you can minimize those unexpected setbacks with a few strategies to improve your visibility and up your budgeting game.
Facility Condition Assessments: Your Window into the Future
Before preparing a property budget, consult the property’s Facility Condition Assessment (FCA). An FCA can predict short- and long-term costs for the maintenance of your buildings’ components. It will identify the following:
- Routine and/or deferred maintenance requirements
- Systemic deficiencies
- Remaining Useful Life (RUL) of all major building systems
- Capital replacement needs
- Overall system compliance with the original design/engineering intent
- Compatibility with contiguous systems
- Prioritized list of repairs
Because an FCA is a tool to predict performance of building systems, it’s important that the FCA is accurate and up to date.
If the building use has changed since your FCA was written, or if the components of your property have not performed as predicted in your FCA, you may want to order a new assessment. Many portfolio managers keep their building data fresh and their projections accurate by ordering FCAs on a three- or five-year cycle.
Creating a comprehensive facilities budget based on a current, accurate FCA is the first step to sustaining the value of your property.
Your planned expenditures, as well as your tolerance for the risk posed by operating under dated information, will determine how often you order an FCA.
Budgeting for Maintenance
Beyond day-to-day expenses like bulbs in your lighting and filters in your HVAC systems, your budget should include preventive screening and maintenance of your major building systems.
Take roofing, for example: one of the largest expense categories in any portfolio. In the long run, inadequate roof maintenance can shorten the life of your roof. In the short term, a poorly maintained roof can quickly escalate into major fixes and secondary damage to structure and property.
If you manage a portfolio, you can save considerable hassle and expense by developing a portfolio-wide program of regular roof inspections and maintenance.
This will give you the information you need to determine when replacement is more cost effective than repair, and allow you to proactively schedule capital expenditures over time, instead of unexpectedly shelling out to resolve a crisis.
Budgeting for maintenance not only increases the life of your systems; it may decrease overall operating costs. Well-maintained HVAC systems and plumbing that is regularly screened for repairs run more efficiently, resulting in lower utility bills.
Your facilities budget should reflect the priorities established in your FCA. The larger components of a building—HVAC/mechanical/electrical systems, plumbing, and roofing—usually have a 10-25 year expected useful life. Having a contingency budget now for deferred maintenance can better insulate you for a larger cost item down the road.
If your building is 10 years or older, it is especially important to start setting aside funds so that when significant repair expenses arise, they won’t be such a blow to your cash flow. Should you need to refinance, lenders will also consider the state of these big-ticket items to ensure that the property doesn’t depreciate or become unoccupied due to unfavorable conditions.
Creating a comprehensive facilities budget based on a current, accurate FCA is the first step to sustaining the value of your property. If preparing a realistic, comprehensive budget seems daunting, a qualified consultant can help you interpret your FCA to effectively prioritize resources, and even identify opportunities for cost savings.
Bob Geiger is a principal at Partner Engineering & Science, heading up Partner’s Chicago and Lombard offices. Bob has more than 20 years of experience focusing on engineering and environmental services. He provides due diligence services to a wide variety of real estate lender and investor client types. In addition to the transactional support, Mr. Geiger provides his equity/owner clients with energy efficiency and sustainability services, capital budgeting and planning services, as well as civil and MEP engineering projects. He speaks and writes regularly about real estate due diligence trends, as well as developments in the facilities management space.
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