December 13, 2018
How many times have you written a maintenance budget for a facility, only to have it derailed by unanticipated expenses? The annual chore of facilities budgeting is a waste of time if your budget isn’t thorough and realistic enough to get you through the year. We asked Bob Geiger of Partner Engineering and Science, Inc., to outline strategies to improve planning and visibility, so you can avoid unexpected setbacks that derail your projected NOI.
Q. How can property owners accurately project annual expenses?
A. First, make sure your property’s Facility Condition Assessment (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 your FCA had predicted they would, you may want to order a new assessment.
Many portfolio managers order FCAs on a three- or five-year cycle to ensure fresh and accurate data. Your planned expenditures, as well as your tolerance for the risks you can incur with out-of-date information, will determine how often you order an FCA.
Then, prepare your budget with the FCA in hand. FCAs can predict short- and long-term costs for the maintenance of your buildings’ components, including:
• 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
Q. What’s the most cost-effective way to budget for maintenance?
A. We advise our clients to take a preventive approach to maintenance. Beyond day-to-day expenses like lightbulbs and HVAC filters, your budget should include preventive screening and maintenance of your major building systems.
Take roof repair and maintenance, for example: a significant expense in any portfolio. In the long run, inadequate roof maintenance can shorten the life of your roof. But a poorly-maintained roof can also quickly escalate into major fixes and secondary damage to structure and property.
Furthermore, a programmatic approach can save you money, as well. If you manage a portfolio, you can avoid 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.
Properly maintaining your building systems decreases overall operating costs and extends the life of your systems, so budgeting generously for maintenance will pay off in the long game.
Q. What about the inevitable unplanned capital expenses?
A. Your FCA should project capital expenses based on the expected life of your building systems, and your budget should reflect those projections. Still, an FCA is not a crystal ball. Environmental factors and operation conditions can affect those timelines, so you need to prepare for the unexpected.
Having a contingency budget now for deferred maintenance can better insulate you for a larger cost item down the road. The larger components of a building—HVAC/Mechanical/Electrical systems, plumbing, and roofing—usually have a 10-25 year expected useful life. If your building is 10 years or older, it is especially important to start reserving funds now, 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.
For comments, questions or concerns, please contact Paul Bubny