One of the responsibilities of the commercial property manager includes the development of a capital improvement plan. An all-inclusive capital budget should encompass the entire property, and not just the physical structure. It serves as a means to evaluate the physical condition of the property and determine the anticipated requirements as well as the upkeep, operations and modernization costs.

A good starting point for a well developed capital budget would be a complete and comprehensive physical inspection including the exterior grounds, building or structure, the interior appearance and just as important, the mechanical, electrical, plumbing and fire/life safety systems.

Prioritize your projects and identify those that should be addressed based on the order of safety and value. An example would be:

  • Fire/Life Safety Concerns including fire alarm, sprinkler, fire pump, etc.
  • Building Code related deficiencies
  • Projects that will reduce future operating expenses or have adverse consequences if not addressed
  • Projects that affect the marketability of the property

A reasonable assessment of the current conditions including the useful life expectancy of major equipment is critical and one of the least understood aspects of a capital budget. Let me say from first hand experience, a well prepared property inspection can be time consuming and tedious. It is of utmost importance  while developing a capital improvement plan to stay focused and keep a clear understanding of the owner’s objectives.

Typically a five or ten year plan is developed. However, once you start looking more than five years out, it is difficult at best to maintain the accuracy. The important thing is that you make note of these improvements and include a cost based on the best available information you can find. You might start with the manufacturers recommendations.

You can and should update your capital schedule annually at a minimum and this should help to maintain the integrity and accuracy of your schedule. Many institutional investors require a ten (10) year capital plan be included with the annual business plan and operating budget.

To help keep my sanity during this process, I separate the plan into two equal time periods of five years.  I spend a considerable amount of time on the initial five year plan for several reasons. I have a better understanding of what will be needed including the costs. The remaining five years of the capital schedule are more about identifying what will be needed and not so much the accuracy of the costs. Don’t get me wrong, you still need to do your homework, and apply your efforts consistently throughout the schedule.  However, market conditions, supply and demand, can and will affect the accuracy of your estimates. A good grasp on the useful life expectancy of the mechanical equipment as well as the construction materials is helpful.

Projects such as a roof replacement or chiller overhaul are fairly easy to determine when major costs will be incurred. As those projects get closer, a more accurate picture can be painted and re-evaluation of the cost will be necessary.

Long range capital planning should be reviewed and updated annually. Upcoming projects should be re-evaluated to determine the priority and ability of the property to absorb the costs. You can either include it in your upcoming budget or move it to the next budget year or farther into the future. If it is no longer a viable option, then scrap it.

Most reputable contractors will be happy to provide you pricing and budget numbers. I do it all the time and if you approach contractors in a friendly and honest way, you most likely will get their best effort with accurate pricing. Make sure you invite them to participate in the bid process and let them know they will have a fair chance at winning the bid as long as their prices are reasonable.

On the other hand, if you just send out an email or solicitation asking for a quote, you might get an estimate the first time, but if you are not honest and upfront by inviting their participation in the bid process, you most likely won’t get them back out to your project again.

There are many ways you can work with contractors to get accurate bids for capital projects and for those projects that are 5 or more years out, you can use industry standards initially until the project is within 18- 24 months. This is when I would concentrate a little harder on getting more accurate budget numbers.

Just remember to address deferred maintenance items and understand the scale of the issues at hand. Quantify and communicate the financial impact and develop a strategy that will make the project successful. Another words, use good common sense, and try to spread the projects throughout the year so you are not slammed in the first 2 or 3 months of the year. Share the timing with your accountant since the monthly income of the asset varies throughout the year and in most instances, you don’t want to have a capital call where the owners need to take money out of their pockets to fund a particular project unless it is absolutely necessary. It should go without saying, constant communication with your accountant will save you and the company from making a mistake.

Of course you want to start outdoor projects in the spring, summer or fall. You may find that materials and men don’t work so well in parts of the country where it is 10 degrees outside and you are attempting a façade restoration, trust me, I’ve tried it and failed several times before I learned to build in down time for inclement weather and other unknowns.

Capital planning is an ongoing exercise and one of the most important aspects of budgeting due to major costs involved. You would do well to add an evaluation of the plan on a quarterly basis to you task list. There is much to write about when discussing capital costs and which projects are warranted. Clear and consistent communication between the owner, manager and accountant are necessary to achieve a successful capital plan.

Good Luck! And Happy Budgeting!