By Barry P. Familetto, CPA, CPM of Stetson Management & Development LLC.
Commercial Real Estate Asset Management requires a critical tool: the Comprehensive Asset Management Plan (AMP). This strategic approach to real estate asset management ensures maximum property value and efficient operations throughout the investment lifecycle.
An Asset Management Plan is a document that requires time and effort to gather information, documenting, and evaluating every mechanical and envelope system in the building.
The AMP also documents and evaluates the lessee composition, the building marketing plan, ideas for future development of the site and ideas to convert non-producing areas within the building to revenue producing areas. The AMP also evaluates the microeconomic and macroeconomic climate, as well as competition in the marketplace.
The AMP lives and grows from development or purchase of the Asset through its normal operating period, to its sale. The AMP can be thought of as the building investment Bible.
A well-thought-out and written Asset Management Plan is a roadmap to attaining the owner’s objectives.
Financial Benefit
Understanding efficient building operations can produce enormous dividends when the building is sold. Think of this; for every $20,000 increase to the Net Operating Income (NOI) line, when capped at 6% for sale, asset value will increase by $333,333. Therefore, it is critical to seek efficient operations. In terms of sale value, $1 added to NOI is $16.67 in value. Train managers to think value.
Kept in the AMP binder, management accumulates and analyzes operating data. They look for trends and watch for indicators that reveal when the systems are out of synchronization with one another.
For this article, we will focus on the exterior building systems. These systems are large, complex, and are the key to safeguarding all other systems within the building.
The façade system, the window system, the roofing system, and the associated drainage systems, …these are some of the biggest ticket items of the building. Often these systems are taken for granted.
Nobody complains that the façade needs to be restored before water intrusion occurs. Management is not able to easily view the façade regularly. It takes much effort and coordination of many people to evaluate the façade up close and therefore consumes large budget resources.
Today, regular drone inspections can bridge the access gap. Trained engineers can evaluate regular drone inspections of the building’s exterior economically.
Well maintained exterior systems contribute to the efficient operation of the HVAC and fresh air systems, which pay dividends toward the environmental comfort for the building’s occupants.
The AMP documents the engineered evaluations of the exterior systems. Bypassing the engineer’s evaluation in the preparation of an AMP is a major misstep.
The Benefit of Engaging Professionals
The exterior systems are not the areas that should be reviewed by a contractor who then submits a proposal to replace one system without any engineering scope, evaluation or oversight. Big mistake.
As asset or building managers, how often do we need to re-learn this lesson? Most every time we skip the step of engaging an engineer and/or architect to aid our planning of a project, we see less than a desirable outcome, usually with greater expense.
For instance, in a current project on which Stetson Management engaged Duffy Engineering to evaluate a long overdue window sealing project, the owner was inclined to skip the engineer’s evaluation and oversight. The directive was to obtain two contractor quotes, choose one and have the project completed ASAP.
After appealing to ownership that the funds expended for engineering evaluation and oversight on the project was crucially important, the building owner approved so the window problem could be repaired correctly.
Duffy Engineering was engaged to evaluate the bid proposals, tighten the scope of the project, and secure better pricing of the project.
The contractor began work on the project expediently. Upon the first Duffy Engineering inspection, they found that the construction crew was missing a step in the repair process. This was a critical find. If not detected within the first two weeks of the project, that missing critical step would have continued to project end. Even after pointing out the problem, upon the next inspection the process was still not correct.
The contractor is a very good contractor, but the onsite crew did not realize the error. It cost the contractor two weeks of labor, but they corrected the problem without complaints.
It is safe to say, that without Duffy Engineering oversight, an expensive window resealing project would have been a failure.
Results of AMP Documentation
The AMP is a living document, it should be updated regularly. It is an ongoing evaluation of the building. Maintaining the AMP during the holding period will prove to be an invaluable document to share with the future buyer of the building . The document provides insight and is a record of the quality of the management team and the quality of the care of the building during the holding period.
In my opinion, a professionally prepared, maintained, and presented AMP can close the sale of a building. To drive the AMP value, the Asset Manager will need to present and explain the plan, preferably before the price is agreed upon.
The backbone of the AMP is the engineered evaluations of the exterior and interior systems. It’s that simple.
Once you have the engineered evaluations, and have determined the scope of an RFP, you can consider the financial impact on the investment. At this point, the team can determine how to finance the project.
Project Timeline
Every real estate manager should advise their owner to begin the exterior evaluation process long before an emergency is evident.
From my experience, this process does not respond well to an emergency. When there is an emergency for these large projects, the best a manager can get is an expensive band-aid repair.
An exterior evaluation can take one to two months to secure an engineering proposal, schedule the onsite visit, document the existing conditions, determine the solution, and create an RFP.
Once an RFP is created, it takes another one to three months to identify the qualified contractors, have them evaluate the scope and working conditions, prepare a proposal, review the proposal, and evaluate and revise any new findings.
Once the proposal is signed, the project needs to get into the sub-contractor schedule, be staffed, order materials, and schedule and manage the delivery of materials. Adding one-to-two months to prepare for project commencement Is recommended.
Exterior projects are difficult to rush. It is an orderly process, and the work can typically only take place in the warmer months.
Project commitment to exterior engineered evaluation report, through the RFP process until construction begins will take three to six months.
Then, add the construction period timeline to completion of the project.
Evolution of Real Estate Management and Development
As asset managers and building managers, what we all know is that perfect project execution requires superior and detailed planning.
The Asset Management Plan is the next generation of real estate management excellence.
Most often building owners view the one-, three-, and five-year financial budget as a plan. These are in no way a detailed plan to operate the building efficiently to produce a maximum Net Operating Income value.
These yearly budgets are most often hastily prepared, and only provide a general ledger account by account projecting how the monthly costs may play out.
The budget process does not provide the breadth of scope and detailed comprehensive information to guide the management team to hit the sale value target.
The Asset Management Plan of a real estate investment should be viewed similarly to the detailed business plan a manufacturing concern would develop to achieve their growth targets.
Real estate management and development is still evolving as an industry.
Barry P. Familetto, CPA, CPM of Stetson Management & Development LLC is an active instructor for several courses presented by BOMA – Building Owners and Managers Association.
Courses Barry leads include Asset Management, Budgeting and Accounting, Real Estate Investment and Finance, and Law and Risk Management.
Barry may be contacted at: Barry@StetsonMD.com
