It’s true: Nothing lasts forever. Childhood innocence, sports dynasties, the latest coolest smartphone… oh, wait—I’m supposed to write about real estate management. So let’s switch that list to “parking lot pavement, HVAC systems, access control software…”
An ongoing reality of property management planning and budgeting is that there’s almost always something that needs repairing, replacing or installing, either right now or very soon. That’s why one-year capital planning is such a crucial element of the work we do for property owners and tenants. As a commercial property manager at NAI Elliott, my clients look to me each year for guidance on capital planning and value-added budgeting—to help them maximize net operating income (NOI) and investment property market value, enhance property curb appeal and keep deferred maintenance at bay.
Annual capital planning is an ongoing process that property managers perform throughout the year, based on factors such as regular property inspections, determining owner goals, cash flow analysis, useful-life reviews, maintenance and repair trends, contractor feedback and technical obsolescence. To me, it may be the most important thing in the budget forecasts I do every year, because it can be the biggest variable.
The key to successful capital planning is pretty simple: Be proactive, not reactive. Sounds simple enough. But in reality your planning approach can make the difference between a successful property and a financial fiasco. You’ve got to get ahead of it. With the budget season on the horizon, now is a good time for property managers to look closely at their capital planning.
Here are five key elements of successful, proactive capital planning.
Rust never sleeps: planning is a constant, year-round process
A good property manager always has a complete and current understanding of a property’s conditions. I visit all my properties regularly, and I’m always assessing (maybe it’s obsessing) every detail. If I identify something that needs work, I’ll immediately prepare information for the owner. As an example, if I see faded building paint or “alligator” cracking in a parking lot, I’ll email the owner with photos of the problem and one or more contractor bids for the work: “It looks like the parking lot has reached the end of its useful life cycle. See the attached proposal to repair the deficiency, which I recommend for the 2024 budget.”
Beyond that, I strongly encourage every owner to regularly come out with me and walk the property. Photos are great, but seeing the needs in person can be much more compelling.
No surprise: communication is the key
Like every other aspect of my job, creating and maintaining strong channels of communication is crucial. This includes owners, tenants, contractors and my NAI colleagues—because each group provides a unique and helpful perspective. For instance, regular communication with contractors provides valuable feedback regarding capital needs such as elevator modernizations, plumbing upgrades, HVAC replacements, etc. And I’ll loop in colleagues such as the NAI Elliott Construction Management (CM) team to survey a property so they can develop useful-life analysis reports based on their extensive experience with properties.
You can’t have too much input: make informed decisions
A useful-life analysis from our CM team delivers one of many important bits of information for planning capital projects. Another piece of the puzzle is repair request data. We use industry specific work-order-management software to gather data showing trends in critical system failures that should be addressed in the upcoming budget.
For example, we advised a building owner that we’d seen an uptick in work orders for roof leaks; we included a useful-life report for the roof and three roof-replacement proposals, and the owner approved a roof replacement for next year’s budget cycle.
Keep everyone happy: spread out the costs over time
You have to maintain a delicate balance on capital outlays—the costs must be justifiable to both the owner and the tenants. Ideally, commercial properties have triple-net leases that often allow the owner to pass most or all capital expenses to tenants on a pro-rata basis. But you can’t just pile on a bunch of improvement costs to the tenant’s monthly cost all at once; it has to make financial sense in the long run for everyone.
In the right situations, we’ll work with an owner to amortize large capital projects over the useful life of the improvement. This strategy can let us keep the property in top shape while reducing the financial impact on tenants by spreading out the cost of the capital improvement over multiple years, and it lowers the barrier of entry for future tenants.
Have some fun: don’t underestimate the positive benefits of capital projects
It’s easy to look at capital planning as a necessary-evil element of property management. But capital projects can be real value-adds, too. Try to incorporate some creative or fun projects that tenants and customers will enjoy. For example, at a small-city retail shopping center with a grocery anchor, we illuminated the parking area seasonally by installing LED light strings in 24 trees between the aisles. The tenants loved it, their customers loved it and we even got local media coverage of the change. The positive feedback has inspired us to partner with a media company to install outdoor speakers so we can play music, and even add tenant messages in between songs.
Planning and budgeting for a new plumbing system or a fresh layer of asphalt isn’t sexy. But capital planning constitutes an ongoing investment in the property, and that benefits everyone in the end. Owners increase the value of their property, tenants know their needs are being recognized and met, and customers enjoy a better experience—whether it’s a visible improvement or behind the scenes.
