For most institutions, a financial analysis is the first step in determining whether to renovate a facility or tear it down and build a new one. This analysis usually starts with a condition assessment, which is a review of a facility's condition to determine current and future capital requirements. For the purpose of determining building conditions, a physical assessment or a mathematical model assessment can be used. These capital requirements are priced and analyzed to determine required funding investments over a period of time.
An institution can compare the financial requirements of an existing facility side-by-side with the financial requirements of a new facility on a year-by-year basis. It also is possible to see cost differences between a new and existing facility for the next 10 or 20 years. The total cost of ownership over a period of time is an effective way to determine whether to renovate or build new.
One way to perform this analysis is by using the cost of facility capital renewal. Capital renewal is the cost of replacing building components. For instance, replacing a leaky roof on a building because it is 30 years old and should have lasted only 20 years, is capital renewal. Painting the interior of a building every five years is capital renewal. Maintenance issues are not part of this analysis. A maintenance issue is the day-to-day work, such as paint touchups, replacing oil in a compressor or re-caulking roof curbs.
The goal is to build and compare a financial model of an existing facility and another model of a new facility. The model can be used to decide, financially, whether to renovate or build new.
This method has two key elements:determining what is wrong with the facility and coming up with the money to fix those problems; and predicting the cost of future investments through a facility life-cycle analysis.
One way to calculate current and future cost of building renewal through the next 10 years is to use a mathematical model. With a simple spreadsheet, review existing documents and interview maintenance staff to determine the square footage, the year built and the facility's different building components. Record the information needed in Table 1 (above).
Table 2 lists the facility's major components (column 1) with cost per square foot (column 2) and expected life of each component (column 3). The sum cost per foot of these components adds up to the facility's total replacement value ($113/square foot in this example). Be sure to use current costs of component replacement while doing this analysis.
The RS Means' company is a good place to start when you are trying to determine the cost per square foot for replacing building components (column 2). When assigning each building component a useful life, the Building Owners and Managers Association (BOMA) can help (column 3). Components with their “life” at 100 years are considered non-renewable.
Column 4 is a calculation. The “current replacement value” is determined by multiplying the component “cost per square foot” by the facility's “gross square footage.” For “footing and foundations” at $8/square foot, multiplied by 30,000 square feet, the “current replacement value” is $240,000. The sum of all component replacement values is the facility's total replacement value. In this example, the replacement value is $3,390,000.
Determining the last year of each component renewal can be done one of three ways. First, this information may be found by reviewing maintenance records. The second way is to interview maintenance personnel. The least reliable method is to look at the component and guess.
Look at the line “roof membrane.” The “last renewal” was in 1970. After recording the “last renewal,” it is a simple calculation to determine the “next renewal.” If we have listed the expected useful life in column 3, and we know the last renewal in column 5, add column 3 to column 5 to come up with the “next renewal,” column 6. For the “roof membrane,” the last renewal was in 1970. The “life” is 20 years. The next renewal is expected to be in 1990.
Column 6 tells us two things. First, it identifies components needed to renovate the building. Any element with a year in column 6 that is earlier than the current year is work that is needed today, or deferred maintenance. For example, if the current year is 2003, and the “next renewal” is 1990 as listed for “interior finishes” in column 6, then “interior finishes” is considered deferred maintenance. Current deferred maintenance is identified as (a) in column 6. Column 6 also tells us is the next year each component should be replaced.
For this analysis, look at all renewal for the next 10 years. Because the year is 2003, column 7 records all renewals that are needed through the year 2013. All renewals needed by 2013 are identified in column 6 with either (a) or (b). The (a) designation is all component replacement that should be done now and the (b) designation is for all component replacement that is not due today but will be due through 2013. The total cost of current deferred maintenance is the total of all numbers with the (a) designation in column 6, which is $2,370,000. The additional cost of component renewal needed through 2013, designated with (b), is $90,000. The total cost of renewal through the next 10 years is $2,460,000 (column 7).
New facility costs
Much of determining the cost of a new building for the next 10 years is already done using the existing mathematical model. For instance, we know the current replacement cost for a similar building. Column 2 of Table 2 shows the total replacement cost of the existing is $113 per square foot. For a similar building of 30,000 square feet, the total cost of the new building is $3,390,000.
Second, determine the cost of any renewal needed until 2013. Do this using the same mathematical model as used on the existing building.
We assume the last renewal for all components is 2003 — remember it is new this year (column 5). We then calculate the next renewal in column 6. Then we calculate all renewal needed through the year 2013 (column 7). In this case it is $330,000.
Table 4 (above) is a summary of the two different buildings. The total cost of ownership for the next 10 years for the existing building is $2,460,000 and the total cost of ownership for the new building is $3,720,000.
The example is an old building that is in poor shape. Determine the percent deficiency of the existing building by dividing current deferred maintenance ($2,370,000) by the replacement value ($3,390,000), and the building is almost 70 percent deficient.
Even when analyzing this building against a new building, it is a better financial decision to renovate. Through the next 10 years, a new building will cost $1,260,000 more than renovating the existing facility ($3,720,000 minus $2,460,000). If these numbers were closer, you would want to include other variables such as yearly cash flows and the value of dollars through time. In this example, the savings are so large that these variables would have little effect on the financial decision to renovate.
When analyzing buildings using only financial criteria, often existing building renovations cost less than new buildings. This makes sense, because existing buildings generally do not need investments in components such as foundations, roof structures and exterior walls. Even for building components that need replacement often, it does not cost more to renew those components on a new building than on an old building. For instance, it costs no more to place a roof on a new building than to replace the roof on an old building. This means that the degradation rate for an existing renovated building is no different than the degradation rate on a new building.
Rabenaldt is a senior vice president at 3D/I, Houston. He sits on the company's board of directors and is responsible for facilities services provided by the company.