FP+A Blog

Repair, Replace, or Upgrade? How To Make The Right Choice

When you need major repairs for your car you are generally faced with three choices: 1) Repair - go ahead and fix it, 2) Replace - buy a similar used car, or 3) Upgrade - buy a new car. If you choose to buy a car (used or new) you consider the initial price, the trade in value of your existing car, and the cost of ownership. Since you will likely keep the car for about 5 years this cost of ownership analysis really determines the "price" of the car. There are numerous sources for cost of ownership analysis for cars to help in your buying decision (example: Edmunds TCO).

A similar process should be used to effectively evaluate decisions related to facility management. To develop a "cost of ownership" analysis you will need to consider:

• Terminology - how are the various expense factors defined.
• Processes and practices - how you currently make buying decisions and evaluate alternatives.
• Metrics and/or cost models - what data do you have or need to make an informed decision.
• Resources and skills - where can you get the advice and capabilities needed for the analysis.

The International Facility Management Association (IFMA) has publications which can help in the development of a total cost of ownership analysis. They publish various benchmark studies and Asset Lifecycle Model for Total Cost of Ownership Management. This latter publication provides an excellent framework for understanding the terms and definitions related to space management, project delivery management, operations management, and capital asset management.

We have developed an example of Total Cost of Ownership (TCO) analysis for the need for new 25,000 square foot office space. This analysis considers:

• Repair - Renovate existing space with hard walled offices and similar cube farm layouts.
• Replace - Move to new 'vanilla" space with office features but with lower rent.
• Upgrade - Move to "vanilla" space, but use new flexible office furniture and components.

Our TCO analysis, based on various assumptions and a 10 year lease period, indicates that the Upgrade option will have the lowest cost of ownership. The results are:

• Repair - $7,610,000
• Replace - $7,040,000
• Upgrade - $6,900,000

For details on our analysis, link to FP+A TCO for 25,000 SF office, or contact Garry Brinton at gbrinton@facplan.com.

What are you "preventing" through Preventive Maintenance?

"Preventive maintenance", along with "capital renewal," are fundamental strategies for facility management. But what exactly are you preventing? The common answer is failure. But how do you define "failure?":

• Lights-out, dead-stop, send everyone home and close the doors catastrophe?
• Roof leak in server room, computers ruined, data lost?
• Inefficient operation?
• Incorrect use?
• Inconvenience?

How you define failure determines the level, focus, and costs of maintenance processes. The facility manager should not only prevent failure but also anticipate user demands, system stress, technology limits, and varying conditions of use. Perhaps a more appropriate term to use is "pre-emptive maintenance." Timely and correct maintenance is an investment that extends asset life and creates the option to incur capital expenditure at the last gasp of assets' operational effectiveness, when they are completely work or woefully inadequate or hopelessly obsolete.

Facility condition assessments (and energy studies) provide a baseline profile of the current state for setting both maintenance standards and prioirities. We have defined four tiers of condition assessments, ranging from a basic technical review to a comprehensive program. Each tier has a specific scope of work, a specific work product or solution, and costs. For more information, contact us (Garry Brinton, gbrinton@facplan.com).

The Value of Facility Condition Assessments – Part 3: Know your 4 Cs.

Facility Condition Assessments generally conform to requirements defined by ASTM E2018-08. This ensures a comprehensive and thorough review of building and site conditions. The inspection and analysis process has four components (the 4 Cs):

Condition – What is the deficiency or problem? Where is it located? How severe is the problem?

Cause – What is the reason the deficiency or problem developed?

Correction – What repair or replacement is required to correct the deficiency? How critical is the problem and when should the correction be done?

Cost – What will be the labor and materials required to correct the deficiency?

Based on this analysis critical facility decisions can be made, maintenance action plans and budgets developed, and capital planning undertaken based on the severity of the problems.

The value of Facility Condition Assessments – Part 2: Minimize risk in real estate acquisitions

Facility condition assessments for commercial properties are similar to but far more comprehensive than home inspections. Home inspections are done for the buyer’s benefit so that he or she knows the problems associated with a specific property and can use this information to negotiate repairs, replacements, or cost reductions. They are usually recommended for any real estate transaction, they are done by trained professionals, and they basically answer: “What problems exists that I do not know?” This process minimizes risk for the buyer.

For potential commercial transactions of existing properties a Phase 1 Environmental Site Assessment is usually done. This assessment examines public records for a past use which may indicate potential environment hazards, such as underground storage tanks or on-site industrial processes. A facility condition assessment complements Phase 1 studies. The knowledge of what is below ground and above ground combine to provide a comprehensive look at the problems of existing properties. Prospective owners can deal with these problems immediately and reduce their risk of ownership.

The value of Facility Condition Assessments – Part 1: Your existing conditions are thoroughly documented.

We see the use of our Facility Condition Assessment service similar to the use of a GPS. To use a GPS you need to input two locations – where you are now, and where you want to go. The destination for most facility or real estate managers is a clear understanding of any problems or deficiencies, a prioritization of the problems, and the cost to correct the problems.  The starting point is your existing conditions. We use, in part, a thorough and systematic process which conforms to an industry standard (ASTM E2018-08). This ensures a comprehensive  process which surveys and analyzes eight key site and building elements:

1. Building/site data
2. Site Conditions
3. Structural frame and building envelope
4. Mechanical,  electrical, and plumbing systems
5. Vertical transportation
6. Life safety/fire protection
7. Interior elements
8. ADA compliance and other issues

"Sustainability" is NOT jargon

Advertising Age magazine listed the "jargoniest jargon" of 2010 in their 12/13/10 issue. These are words the editors wished would no longer be used. Number eight was "sustainability." (By the way the #1 jargon word was "choiceful"). The editors noted that "sustainability" was:

A good concept gone bad by mis- and overuse. It's come to be a squishy, feel-good catchall for doing the right thing. Used properly, it describes practices through which the global economy can grow without creating a fatal drain on resources. It's not synonymous with "green." Is organic agriculture sustainable, for example, if more of the world would starve through its universal application?  

The problem is that there is no accepted definition of sustainability. In some case, LEED certification has symbolized sustainability, but post-occupancy performance has increasingly  raised questions on the value of this certification. Sustainability has also be used to define approaches which save energy and water in comparison to traditionally designed buidlings.

But given this ambiguity should we put the term "sustainability" on the backburner?  Absolutely NOT. We simply need to be smarter about how we use the word. We need to ask probing questions to our design teams, to our suppliers, to our corporations, and fellow world citizens. We need to know how they are defining sustainability and how their actions positively contribute to our future health and welfare.

The Top Ten Misconceptions Tenants Have (And How To Fix 'Em) - #1 Not Seeking the Advice of Design Professionals

You would not consider entering into a long term lease agreement without the assistance of a realtor or a lawyer.  The first will guide you to the facility best suited to accommodate your business’s needs.  The second will protect you from costly surprises during the term of the lease and your eventual move out.  That depth of experience is all you need, right?  Wrong!

Here’s why:

1. Neither of those trusted advisors have the skills and experience to assist you in determining how much (or how little) it should cost to improve the leasehold to work for you.  They (and you) may have the benefit of years of similar transactions, but all suffer from the dangers of a little knowledge.
2. Most architects and engineers are willing to provide an initial consultation at no or a nominal charge, just a quick walk through the prospective property.  An immediate identification of structural concerns or a simple “what were you thinking?” can save you much time and legal fees.
3. Your leasehold-related costs are apt to be the second largest line on your expense statement.  An accidental overstatement of, say, 400 square feet at $16.00 per square feet over 5 years would increase lease costs by $32,000.  Leasehold improvements for a 10,000 square foot leasehold could top $150,000.  These are the line items whose order of magnitude and potential risk justify bringing in the expertise to lower those costs and manage those risks.

The Top Ten Misconceptions Tenants Have (And How To Fix 'Em) - #2 Using the Wrong Size

You already understand that quoting rent as a cost per square foot is one method of comparing the relative costs of multiple lease options.  Apples-to-apples, right?  Wrong!

Here’s why:

1. There are several ways to quantify square footage:  gross, net usable, net rentable.  Each landlord may be quoting based on a different designation.  Kind of like yards and meters;  close, but not exactly the same.  Over a large building over many years, these differences can be a significant cost.
2. Even if each landlord is quoting net rentable square footage, they may not be using the same measurement method.  The industry standard is to use BOMA.  This standard accounts for common areas, columns and mechanical shafts, and demising wall thicknesses such that two people should come up with almost exactly the same measurement.
3. Landlords may be quoting square footage that they believe is based by BOMA, but they can still be wrong.  These calculations often come from area measurements that were provided from others, sometimes predating current BOMA Standards.  Best to employ an independent third party with expertise with the latest BOMA Standards (and is willing to seal a letter certifying the measurements).

The Top Ten Misconceptions Tenants Have (And How To Fix 'Em) - #3 Short-Cutting The Due Diligence Process

After months of searching for a new space, you have finally found the building at the size, location and terms you wanted.  While the lawyers from both sides are negotiating the lease, you are in what is termed “the due diligence period.”  You have taken our good advice and had a test fit done, had a scope of work developed and then priced by a friendly contractor, and even ordered a Phase I Environmental Study to be sure your landlord will not be remediating the site while you try to run a business.  That should cover it, right?  Wrong!

Here’s why:

The hardest part about due diligence is trying to determine what you don’t know.  There are three (3) ways to lower your risk, to better understand what you’re getting into:

1. Commission a Facility Condition Assessment (FCA):  This is a systematic approach undertaken in accordance with ASTM standards by architects and engineers that identifies a multitude of concerns as well as the priority and costs to address them.  In some ways this is akin to having a home inspection, except the risk of a business disruption due to an undetected building problem is much worse.
2. Secure a Code Analysis:  This will indicate what work will be required to bring portions of the facility up to code as part of any remodeling you will need to do.  In some cases, perspective tenants are more surprised about what grandfathered conditions do not need to be addressed than what ancillary work is required.
3. Order an Energy Audit:  This will highlight what the energy costs are likely to be as well as what investments can be taken that will lower energy costs over a payback period that is shorter than the lease.  The landlord may be willing to share in these investments.

The Top Ten Misconceptions Tenants Have (And How To Fix 'Em) - #4 Unfriendly Use of a "Friendly" Contractor

The landlord of the suite you are considering leasing is offering a $15 per square foot under ceiling tenant improvement allowance.  A business associate recommended three “friendly contractors” she knows who could each work up a price to do the work at no cost and no obligation.  You would then have three bids for the work.  This sounds like a smart way to go, right?  Wrong!

Here’s why:

1. In order to receive a realistic price from any contractor, you will need to provide them with a fairly detailed list of requirements plus a reasonably good test fit layout.  This would include both what is happening “under the ceiling” as well as what is happening above the ceiling (HVAC, electrical) and perhaps outside the suite (see Tenant Misconception #9).  Good to have an architect involved at this point.  Otherwise, the cost estimate may miss a number of things you will need, or will include some things the contractor is incorrectly assuming you want.
2. Putting together a construction estimate, especially based on sketchy information (i.e., not bid-quality documents), is a lot of work.  Asking three contractors to do that is a bit unfair.  Best to ask just one contractor, with the understanding that if you lease the suite, they will get a chance to hard bid the project.  Asking three contractors will likely result in three bids that are not apples-to-apples-to-apples.
3. Defining what the “under ceiling” allowance covers and does not cover is also important.  Will the landlord be covering work above the ceiling or any incidental work involved in the common areas?  Your attorney can help define this, as well as to include provisions of what will happen if the hard bids come in over the allowance.  Might be prudent to include an escape clause!