Can you confidently predict what the next 20 years of capital needs at your facility? Are you positioned to avoid catastrophic failures? Can you absorb the costs of surprise capital replacements?
A firm grasp on long-term capital needs is critical for setting budgets, establishing minimum revenue needs, and planning capital replacements. An understanding of these needs cannot be fully apprehended without a systematic objective assessment of existing fixed assets.
We at zumBrunnen are regularly asked to assess future capital needs. Over the years we have developed a rigorous approach to this process. Here we bring you a brief summary of the key components that inform a thorough and accurate capital needs assessment, or as we call it, a Capital Reserve Analysis.
Before moving forward, an operator must first know their purpose for this exercise, and what form of output is desired. Are you looking for round figures for high-level strategic planning, or for a detailed line-item report for making day-to-day spending decisions? Is the assessment for the benefit of the C-Suite alone, or should it be useful to the facilities department as well?
As a planning tool, the assessment will be only as useful as the quality of the output data. The operable principle is Garbage In – Garbage Out. Quality output requires quality input which will come only after thoughtful preparation and execution of the assessment.
Before a Capital Reserve Analysis commences, three major parameters should be defined: Scope of Work, metrics to be evaluated, and methodology.
First, define a Scope of Work: Specifically, we mean to define the criteria for determining which assets are to be included in the evaluation, and which will be excluded.
What are the minimum requirements for inclusion: An estimated useful life of at least 1 year and a replacement cost at least $1000 is a good place to start. If you limit your evaluation to assets over $1k, you can limit the output to a manageable replacement forecast. Including components below this lower limit tends to open the exercise up to operating expenses, and can generate very long lists of expenses with little capital planning benefit. Do you really need to evaluate doorknobs and light bulbs?
How will you evaluate and report multiples of similar components? If your property includes 35 rooftop HVAC units of identical size, will you evaluate them as a group, with an average operating condition and average useful life, or will you regard each as a unique asset each on its own line? The granularity of the expanded version could prove useful to facilities personnel.
What categories of assets will you include? Is the evaluation limited to architecture and mechanical infrastructure? Or will you include moveable assets like office machines, vehicles, medical equipment, tools, furniture, window treatments and fitness equipment? What about site improvements?
Are leased assets included? Will leased kitchen and laundry equipment, vehicles or tools be considered in an assessment? If your organization regards lease payments as operating expense, leased equipment may be excluded.
Next, an assessment must have specific and limited metrics by which to evaluate each asset. For each asset, time and money must be quantified:
Remaining Useful Life, and replacement cycle, informed by industry standards, and by location-specific operating conditions.
Replacement cost. An installed price including labor, materials, and incidentals.
Maintenance and repair input: Considering repair dollars could have bearing on a replacement date.
The third component is methodology:
What standard will you employ for asset evaluation? The standard need not be uniform across all asset classes. ASTM E2018-24 defines a “visual walk-through survey” which precludes equipment startup, destructive testing, or use of specialized equipment. This visual survey standard may be enough for most, if not all assets. Some aging or problematic components may require analysis by a more specialized vendor with special knowledge and tools. Some assets, such as corridor carpet, may be evaluated by cursory visual observation, consulting accounting records or marketing needs.
How long is the replacement term for your assessment? The term should be long enough to capture at least one replacement iteration of every asset. If the term is too short, you’re likely to miss critical and expensive replacement needs. Pay special attention to long-life and expensive items, like elevators.
Consider replacement strategy: A practical approach will consider the organization’s operating tendencies. Will you replace one roof at a time? Will you wait until each roof is beyond its useful life and beginning to fail in service? Or will you replace several roofs at once, taking advantage of economies of scale? Will gutter replacement necessarily coincide with roof replacement, regardless of the gutters remaining service life?
Will you employ software tools built specifically for the purpose of forecasting capital needs? Or will you use a spreadsheet program? Or a paper and pencil?
Will the resulting output alert you when it’s time to stop spending money on repairs on a particular asset and to invest in replacement instead?
Will you consult with department personnel who may have special knowledge of hidden or chronic problems?
Will you rely on in-house staff to perform the assessment, or will you contract the assessment to a vendor whose objectivity, expertise and efficiency can yield a quality product, while preserving your internal resources?
A Capital Reserve Analysis is more likely to generate valuable data once your objectives are known, and your scope, metrics and methodology are clearly defined.
Rob Milam is owner and CEO of zumBrunnen, Inc., a consulting firm dedicated to supporting sound stewardship of facilities across the country, by performing facility assessments and Capital Reserve Analyses for real estate owners and operators.
