CRE Capital Plans Need Strong Front-ends and Back-ends
Ed Bartlett, Vice President of Capital Planning, Accruent
Forward-thinking commercial real estate organizations know that rigorous planning for their capital needs is an essential part of their facilities fully supporting their mission over the long term. It’s essential to completely grasp the funding level it will take to keep the roofs from leaking, the lobbies and conference rooms modernized, HVAC running at top efficiency, hitting CSR-related green targets, and maintaining safety systems that are in compliance. It can be a daunting task, especially for managers of large dispersed portfolios or complex campuses.
When real estate managers ask what I see as the fundamental building blocks for a credible and bankable capital plan, I tell them it boils down to five major components:
- Identify each and every building asset or component
- Quantify how many of each asset exists
- Grade the condition of each asset
- Predict each asset’s remaining lifecycle
- Cost estimate the replacement budget per asset
The first four steps are considered to be the “front-end” of the capital planning process. These auditing steps are performed by skilled building professionals, such as surveyors, engineers or architects, through an onsite inspection. Whether they use do-it-yourself tools (see my August guest blog on that) or through a facility assessment package, the data on all component assets in a facility must be observed and documented. For instance, within a university’s academic building, the inspector will look at each classroom and lecture hall, examining all elements including the seating, walls, ceilings, windows, roof, lights, Wifi and A/V system. For each element they quantify what exists and project the element’s future Iife expectancy. That data is then collected and categorized (hopefully no longer by pencil and paper in three ring binders) and stored in a software system.
Many sophisticated organizations then create a model of their assets through what’s called a Facility Condition Index(FCI). The FCI serves as a benchmark of the overall condition of a portfolio, enabling management to have an objective, quantifiable measure of how their facilities are doing over time. The FCI also allows the ability to target what level of condition they aspire to, and a benchmark with which they can compare their facilities to peer groups or competitors.
Then comes the back-end – replacement cost. This is how your condition assessment is transformed into the foundation of a capital plan, when you apply estimated costs for replacement and/or repair of those same components. Just as with the inspection itself, the replacement cost data should be airtight. The cost of mis-estimating can be enormous. If replacement cost estimates are off by 20% for your most critical components, your overall replacement budget estimate could be off altogether by as much as 100%.
That’s why it’s recommended to use replacement cost database services in your process. Real estate managers and professionals in the US can get such a database from RSMeans, and in the UK, professionals depend on BCIS. These services offer a rich collection of data points collected and monitored by experienced cost engineers, helping to create accurate budgets, estimate projects, and plan for ongoing facilities maintenance with information that’s appropriate for your specific location. The best of these databases represent information well beyond a one-time pick and add. With online or CD-based solutions, the data shifts as the database improves, and users get a solid benchmark against which they can track the costs of their actual projects.
The best of both worlds is when your front-end and back-end work seamlessly together, with data collection software automatically pulling in information from your costing database. That enables you to be sure your information is always up to date, solid, reliable and defensible to others evaluating or funding investment decisions. With an integrated solution, you need fewer staff to develop a capital plan, meaning you can combine surveyor with cost person into a single resource.
When a great front-end and back-end are integrated into a complete cycle that leads into a continuous process of evaluating, applying accurate costs, planning, implementing and re-planning. At Accruent we call this virtuous cycle Shape, Drive, Manage and Control. When applying something like this to your own portfolio, you’ll have a system where facility condition data is constantly gathered and improved. Importantly, you’ll also have a complete, fully-funded path forward.
About Ed Bartlett
Ed is Accruent’s Vice President and General Manager of Capital Planning, where he is focused on helping surveyors, building inspectors and asset managers deliver their expertise smarter, faster and more accurately. Ed is a frequent panelist at industry conferences where he speaks about using the latest web-based and mobile technologies to drastically reduce the time and cost it takes to survey and plan for the repair, maintenance and replacement to physical assets. Ed was the originator of Accruent’s Kykloud, the first iPad-based enterprise-class building surveying app, which has been used to survey over 150 million m2 (1.5 Billion sq ft) of property to date.