commercial buildings

Running a successful business takes guts, commitment and planning. Long term budgeting for building component repair and replacement projects is often left out of the equation for successful and too often results in "surprise" roofing, paint, siding, asphalt, etc. expenses that lead to the reliance on costly loans, deferred maintenance (aesthetic appeal reduced) and misdirected capital ( e.g. hurts operational & long term marketing efforts). There has to be a better strategy than sitting and waiting for these “surprise” expenses - And there is; A Capital Replacement Reserve Study.  

A replacement reserve study is a valuable tool which can be utilized for many purposes. We have seen our customizable studies utilized in many different ways that benefit our Clients for their specific needs; it’s one of several important differences between the services we offer versus others in the industry. A customizable study makes it possible for us to utilize the findings in a replacement reserve study with many pages and narrow it down to create a customizable and professional looking Summary Report for various uses; lending, disclosures requirements, business/building purchases, capital improvements, fund raising, time management to name a few. 

So what's a Replacement Reserve Study? Well it's a long term budgeting tool that provides a timeline of costs and repair / replacement projects over a 30 year period. The best part... It's broken down into easy to understand monthly and annual reserve amounts making it easy to follow and plan for. You don't need to be an expert where you don't need to be. We know you can follow a budget and that's all it takes.

Large scale building projects are a reality that impact the daily work environment, safety, equipment, customer satisfaction - essentially everything a business owner cares about. Most buildings will require significant large scale projects between the 20-25 year mark (roofing, asphalt and moisture intrusion issues around windows & siding) so if you’re in a building over 10 years old you are already “behind the eight ball” and can most benefit from a Replacement Reserve Study which will provide numerous funding strategies to adequately budget for these while minimizing the overall costs to the business

Ways a Replacement Reserve Study Pays for Itself​

When adequately implemented and utilized a replacement reserve study pays for itself and then some. With the extremely high costs of construction projects to roofing, siding, asphalt, windows landscaping, etc. even a small reduction to the cost of services or lost business will result in thousands of dollars saved. This savings will also reduce the funding requirements now even if the project is years from being implemented.  Below are several direct ways a replacement reserve study can be implemented to save money and more than pay for itself. 

  • Bid Verification – Utilize the reserve study as a bid verification tool when completing large scale building and site projects. The accurate measurements and costs estimates in the study are independent and market derived so that when you obtain bids and the costs estimates have extremely wide ranging you can tell right away which ones are off the mark. Our independence is one of the best features of our services; we have your interest at heart and provide honest and well researched cost data so you can be an informed Buyer when it comes time to obtain bids. Negotiating with vendors when measurements are found to be inaccurate or costs seem out of line are excellent examples of ways you can be a knowledge buyer and save real money. 

  • Time Management – Time management is a key factor for real savings related to building repair and replacement projects. These “unexpected” large scale building and site projects will often disrupt the flow of a business whether that’s equipment, staff or customers. Shutting down or relocating a business will absolutely impact the bottom line. Our reserve studies provide long term projections and timelines for these expected large scale projects. A business owner or facility manager can plan for any disruptions to the business and minimize the related impact and costs to a business well in advance of the actual failure of the building components. Need to re-pave the whole parking lot? – Do inventory of merchandise, mandatory vacation periods, plan projects to coincide with interior building remodeling projects, etc. Anytime a business must shut down or run on a skeleton crew it will have an impact but by minimizing the effects with proper time management the business will save actual money and limit losses in revenue. Our customizable studies provide actual timelines of expected failures to building and site components utilizing our expertise in the field(based on thousands of completed studies) as well as cost manuals and facility manuals data going back over 100 years. Additionally we are able to provide innovative ideas like, budgeting for mandatory paid vacations when the business must shut down. Is it ideal to require everyone to take vacations for a week at the same time? – Probably not but you can budget for that exact scenario if that’s the position you’re in. Replacement Reserve Studies are extremely flexible and items outside of just the building & site costs can be taken into consideration. Again we are looking for the real cost to the business.

  • Limit Your Risk For Reliance On Loans – Business loans are extremely costly, often resulting in total costs of 2-3 times what the actual costs of the project was. With adequate planning expected expenditures related to building and site component repair & replacement projects rarely require the need for a loan. Most of these large scale building & site projects are infrequent and have predictable timelines for failure – Take advantage of this and have a replacement reserve study completed to determine a realistic monthly & annual reserve deposit so loans from banks, family, friends or hard lenders are not needed. 

NNN – Lease Negotiations

A Capital Replacement Reserve Study​ provides a Building Owner and the Tenant adequate knowledge of the long term expenses associated with a commercial building. Before signing a 5-10 year lease wouldn’t it be a good idea to know the real cost to you? Depending on how the lease is set up and the definition of NNN (triple net) is defined the Tenant may be just as responsible as the Owner for the repair and replacement of the building components interior and exterior; nothing like a $30,000 “surprise” bill from the Building Owner. If you are in a lease which states you are responsible these repairs why not fund to save for them now? It’s the most fiscally responsible and cheapest way to pay for these large expenses. If you are in a beneficial position to get a bank loan for these expenses plan to pay 2.0-3x the actual expense – if you are like most businesses and must rely on other sources you will likely be placing your business in a financially precarious position for the foreseeable future.

A replacement reserve study provides you the opportunity to plan for and negotiate realistic terms whether you are the Owner or Tenant of a commercial building – when everyone is on the same page these expenses don’t end up being surprises but can be expected expenditures that can be baked into the negotiations. Owner and Tenant relationships are often tenuous and it has been our experience that when everyone is aware of the expenses neither side feels like they are getting a raw deal – open and honest – isn’t that what business should be about anyways? 

Budgeting for Your Future

Budgeting - Successful businesses must budget for all costs so that they in turn can adequately price their product and end up with a profit at the bottom line. While the daily and monthly expenses are obvious and impact the short term bottom line it’s the very large but infrequent building expenses that are most often overlooked in the final calculations. The bookkeeper may know you send $300 on ink and paper but nobody seems to be aware of the $50,000 asphalt project that will be needed in 3 years. This asphalt project is going to be required, whether you’re prepared or not… what would you decide to do? An “unexpected” fifty thousand dollar asphalt project creates a very unstable financial environment for a business. 

Our solution? Begin saving for it now in small monthly amounts, placed in a reserve account. Begin to save for it years in advance and take advantage of compounding interest earned and time management benefits which will result in lower overall necessary funding and no “surprise” moments. Many businesses don’t have the luxury of desirable low rate bank loans; instead most rely on very high interest, short term, hard money lenders or other sources such as retirement accounts and family friends. - How about no loan at all? With proper planning and budgeting these “unexpected” expenses are just another area of your balance sheet. Our reserve replacement studies can be customized for business owners who are seeking bottom line numbers – save time, money and the headache of dealing with the funding for these large scale projects – We break it down into easy to follow recommendations – years in advance. 

Growth of a Business

Building New Versus Buying Old – As a business grow they will have to decide whether it’s more economical to lease buildings, construct new buildings or buy older ones. Our studies can be catered to show which option(s) is in line with your goals as the long term costs for repair and replacement are a very important but often overlooked consideration when working with brokers and loan officer who have a shorter time scale that they are concerned with. – Is the older building that’s cheaper now going to stay that way as the building components deteriorate over the next ten years? – Perhaps the savings up front is dwarfed by the longer term costs associated with building repair and replacement projects like HVAC systems upgrades, siding replacement or landscape refurbishment. These are considerations that can be addressed in a customizable and catered replacement reserve study. Again we have your best interest at heart – no matter what decision you go with – we are independent from commission fees or fees related to you making a decision one way or the other - our independence is our strength and your benefit. 

Buying & Selling Businesses & Commercial Buildings

Most Lenders & Brokers will suggest hiring a commercial building inspector but few will suggest determining the actual expenses related to the longer term building costs. The building inspector may state the roof has “at least” 5 years left on its remaining useful life but what does that mean to you? Well from our experience that usually means in 5-10 years you will be paying for a new roof.  A reserve study will provide a simple to follow revenue requirements for each component that is in need of replacement. If you have specific concerns regarding the roof our studies break down the funding requirement by the specific building or site component into monthly and annual funding suggestions – for every component.  You can see our recommendations on how much you will need to set aside now to replace the roof in whatever timeframe it appears the roof has remaining. A Buyer or Seller can utilize this information to make more informed and appropriate decisions in the purchase of a business of building; again shining the light on these expenses. 

Surprise Shadow Expenses

Building & site components expenses are going to happen whether you are ready or not… So why not be prepared, save yourself money and limit the headache when they do occur? We call these building and site projects “Shadow Expenses”. For the typical Business Owner they are there lurking in the shadows until “surprise” you have a $100,000 roofing bill to worry about. What the reserve study does is shine a light on these expenses way before there is a “surprise” moment. Surprises are for Haunted Houses not for expected expenditures related to large scale building projects.

See snapshots of our studies here: About Our Replacement Reserve Studies​ - We look forward to seeing how we can provide guidance in this field for your long term goals. Building & Site expenses are real and very costly but they are rarely unexpected which makes adequately planning and budgeting for them a realistic goal for any business owner or commercial building Owner or Tenant. 

Written by Joel L Tax - Professional Reserve Analyst - 02/29/2016