How to Plan a Capital Budget for Aging Real Estate Assets
We interviewed Cherisse Vanloo, a Project Manager at WSP Canada, who shared tips on how property managers can effectively plan a capital budget for aging real estate assets. With over 9 years of property condition assessment and building evaluation experience, Cherisse brings an in depth understanding of operating costs and capital expenditures.
1. What are some of the elements that usually puzzle real estate managers, assets managers and property managers when balancing their buildings’ capital expenditures and operating costs?
One of the first challenges in balancing capital expenditure costs and operating costs is determining the correct category for the expense and the source of the funding. Managers often ask themselves “at what point do operational repairs become a capital expense? Can capital budgets be carried over year to year if work is not complete and if they are carried over, do you lose capital if the project is not completed?”. Management firms often have coded systems for classifying expenditures. Defining what code a repair gets can be problematic for managers with only a basic understanding of building components and systems.
Operational repairs can be a capital expense if:
- They are in excess of some predefined monetary threshold, say $5000
- They are accounted for in the annual capital plan
- They require a specification and tender or involvement with restoration engineers (they cannot or will not be carried out by maintenance staff)
In most cases capital budgets can be carried over if a project is deferred or incomplete, but the capital plan should be updated to reflect changing project timing. In some cases, capital dollars must be used in the year in which they are allotted; this is typically driven by management requirements or objectives. Tt may be appropriate to pre-pay for some portion of the work, but this obviously is at increased risk. In those cases, a consultant should help manage the scope.
2. As spring approaches and annual budgets are approved, what are some of the challenges property managers and owners have in getting a grasp of their capital budget?
Although budgets are approved annually, they should be monitored and updated on an on-going basis and adjusted accordingly. Often budget approval arrives half way through a fiscal year and project timelines are compressed. Managers need a good understanding the scope of work and timeline required for design, tendering and execution.
The biggest challenge is often prioritizing the work required. A good capital plan should take into account the overall budget, the current performance level of the systems, the benefits of completing the project now (good examples might be to take advantage of temporary energy incentives or low prices in one sector) and the risks involved in deferring one project over another. A building engineer will help define those.
Capital budgets are sometimes underestimated. Possible hidden increases and unplanned capital expenses in the budget can be curtailed by including a contingency allowance. Contingencies provide a financial cushion for unforeseen budget increases such as scope creep and change orders. Planning ahead as much as possible can help capital budgets from going over budget.
3. What are some of the suggestions and advice you would give to a new property manager when managing capital projects?
A property manager’s responsibility is to bring together the best team to define and execute a capital project; it’s not to provide expertise on budget, scheduling, scope or construction management of a capital project. Managing the building and managing a capital project are two very different and unique skill sets.
- Use an engineering professional advisor (consultant) to assist in capital planning (budgeting and scheduling), definition of scope and execution of the capital project.
- Do not overlook the value of feasibility studies, pre-planning and design. This is ultimately the key to a successful project execution.
- Use an engineering professional to assist in the overall planning for execution of capital expenditures each year. They will best understand the overlapping project restrictions and complications that various projects may incur.
- Communication is key to managing the building tenants. There can NEVER be too much communication and there are now many great methods for distribution.
It’s important to consider what success would look like to your client: the building occupants! For the owners and occupants, a project will be successful if it:
- Minimizes disruption to their normal use of the building, which includes dust, sounds, odors, traffic management, etc. Make sure the specification and kickoff meeting clearly lays down the ground rules and requires the contractor to spell out how they will control these
- Doesn’t drag on for longer than planned – get a schedule and hold the contractor to it
- Doesn’t cost a lot more than what was planned – be wary of choosing the lowest fee supplier, as they might be keeping the base fee low with a plan to escalate with extras. For most jobs it is imperative that a consultant helps plan, manage, and certify payments for the work done.
4. What are some of the main risks when phasing-in, deferring, and combining different building renewal projects?
Each category of schedule or coordination change introduces unique risks which can all lead to increases in project budgets.
- Phasing-in should be developed with your engineering professional. What may seem to be logical phases may not be practical to execute, and some costs may be multiplied instead of divided due to multiple mobilizations. Phasing is also more disruptive to tenants and can create tenant conflict.
- Deferring projects can increase future project costs as repair quantities and costs can increase. Increased risk of component deterioration may lead to possible shut downs or closures of building areas.
- Combining multiple, large projects can limit management resources for overseeing these projects. Overlapping projects that are not separated by time and space put site safety at risk. A manager often trusts onsite contractors who indicate they are capable of taking on additional work outside their main expertise. This is often a recipe for disaster. Only use contractors in their area of expertise. Use your engineering professional to identify qualified contractors, to defer the scope, and to ensure you get what the project for which you paid.