Owners spend tens of millions of dollars in the design and construction of new communities for older adults. Yet, once the contractor and architect hand over the keys, the owner is left with the questions of “What’s next? Now that we’ve spent all this money how do we plan for the future? How much money should we plan for to take care of this place?” For existing buildings, owners need to know how to plan for their future as well. How do they budget for those physical assets that need to be maintained. That’s where a Capital Reserve Analysis (CRA) comes into play. Architects hire their engineers and other design consultants, why not include a Capital Reserve Analysis?
After 46 years in the practice of architecture with a focus on senior living, I found a new career in a related field. Facility Forecasting is a unique service that I recently learned which also takes advantage of my many years of experience in the design of senior living communities and multifamily communities, as well as my estimating experience. After preparing a couple of these studies, I can’t help but think – Why did we not offer this to our clients?? Building owners and developers would be best served by having this service as part of their “close-out documents” at the completion of construction.
Allowing assets to age and degenerate to the point of failure can have catastrophic consequences. Having a Capital Reserve Analysis (CRA) identifies building elements that will need to be addressed during the first 40 years of the building’s existence in an effort to keep your reserve funds at optimal levels. This forecast does not include operating expenses but can be added to the forecast. Elements such as the exterior enclosure, roofing, windows, doors, mechanical equipment, Kitchen equipment, finishes, etcetera are reviewed for Estimated Useful Life (EUL) and entered into a spreadsheet for owner’s planning of capital reserve budgets. These EULs are listed based on their warranty life or other EUL determined by national organizations such as ASHRAE, FannieMae or other industry experts.
The value of having a CRA is to assist in planning and maintaining your valuable asset and keeping it functional. It gauges the urgency of capital needs using a matrix that measures the severity of a failure event against the likelihood of that failure. This is also true for existing assets that are in your portfolio. It can identify a repair or replacement of a building element before it fails under normal use or circumstances. It allows owners to eliminate deferred maintenance activities that can cause greater expense in the future by planning for the cost of maintaining the asset on an annual basis. It has been documented that deferring maintenance can cost owners three to four times what a timely repair would cost. With a thorough facility assessment and reserve study, where capital replacements are scheduled using an easy to follow matrix, owners can be armed with the information necessary to make economically sound choices about where to accelerate capital replacements and where to defer.
Let’s look at a simple example of a roof. The CRA would evaluate the cost of the roof for say, 20 years. Within those 20 years, we would include a “tuneup” or “fine tune” which is a simple maintenance cost for a roofing contractor to review the existing conditions on a 5 year timetable and make minor essential repairs as necessary. This would happen three times and on the 20th year, the owner would already have planned for a roof replacement. The alternative of not performing the interim tasks may result in a catastrophic failure that could have been avoided.
Another example would be planning for the caulking of exterior wall penetrations such as windows and doors. Typically, the integrity of caulking lasts six to seven years. The CRA would allow for the planning of the replacement of caulking and would eliminate the surprise of having that expense coming out of other budgets.
Faded and discolored carpet will likely have a manageable consequence. The impact is generally a negative impact on your marketing campaign. However, a hydronic HVAC system that fails could be disastrous. Remedies can involve displacement or residents and staff. Ruptured piping can damage interior finishes and introduce contamination to the environment. Other impacts will likely involve inflated emergency service costs, quick ship replacement parts or equipment and loss of goodwill among residents, families and staff.
Finally, we can look at other expenses such as replacement of appliances or mechanical equipment kitchen equipment, asphalt paving, each water heater, each elevator, entry door systems and the list goes on. Experience tells us that not all of these items will go out at one time. Imagine if every heat pump in the apartments went out all at once. That would play havoc on your budgets. However, if the costs are planned properly, pooling the cost would allow for a bell curve of the items being replaced. A few would need to be replaced in the first round while the number increases as time goes on and decreases further down the line. Then it starts all over again. But this is no surprise because it was planned for.
For those new buildings, the cost of the items are based on the general contractors current values and consider an inflation rate over the next 40 years. The items must include direct costs as well as an estimated cost for removal and disposal of the existing item, labor and other related costs. All items need to be properly categorized into various building elements.
A Capital Reserve Analysis is a vital tool for effective planning of your facility expenses, enabling your organization to assess the condition of the physical plant. It is correspondingly necessary for maintenance or upgrades that may be needed in the future. These studies will also help you to be proactive in maintaining your community. By having awareness of future capital needs and their associated costs, a capital reserve analysis will support the strategic financial planning and budgeting for years to come.
Take a look around your community and plot each capital asset on the matrix with a thoughtful evaluation of its likelihood of failure and the severity of such a failure. Everything has a finite useful life.
Gary Prager, AIA, LEED AP, CDT has over 46 years of experience designing senior living projects across the nation. He has developed a thorough understanding of senior healthcare, memory care, assisted and independent and active adult living as well as age and income qualified multifamily planning and design.
Throughout his career, he has worked with significant clients on both new and repurposed projects including prototypes. His knowledge has made him a highly regarded speaker, speaking at both local and national conferences including LeadingAge, Environments for Aging, the Colorado Real Estate Journal Senior Living Summit, Housing Colorado, Argentum and many more.
He is a Senior Project Manager at zumBurnnen providing Capital Reserve Analysis, Project Condition Assessments, Pre-Construction Document reviews and Construction Monitoring for various clients. He has a distinct insight into designing spaces that keep the user in mind. It further gives him an insight into the way zumBrunnen provides our services.
