Facilities management paper
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ZemkeCh3PPT1.pptxThe building’s impact on financial performance
Chapter 3
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Construction vs. maintenance
Consider the costs incurred over the entire lifetime of a building
25% of the total costs are incurred when the building is constructed
75% of the total costs are then spent to maintain the building!
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The cost of equipment
When choosing a piece of equipment, you need to consider the cost of the equipment (and its installation) as well as its lifetime costs for maintenance and utility cost if applicable
The less expensive option will often cost more to maintain and will use more energy than the more expensive option
If this is the case, then calculating the simple payback period for selecting the more expensive option is easy!
Cheapest is not always the best or the least expensive
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Simple payback – how long it will take to realize the benefits of one option over another. Let’s say that we’re choosing between two walk-in coolers
Option A
Material & installation costs $600 more than Option B
Maintenance costs = $210/year
Energy costs = $140/year
Option B
Material & installation costs $600 less than Option A
Maintenance costs = $350/year
Energy costs = $200/year
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Simple payback
Your first instinct is to choose the less expensive cooler. But is it really less expensive? Divide the cost difference by the total savings if selecting Option A:
Simple payback period
= Price difference / annual maintenance and energy cost savings
= $600 price difference / ($140 maintenance + $60 energy cost savings per year)
= 3 year simple payback period
Therefore, the Option A will be less expensive than Option B in the long-run
Most hospitality managers will consider projects with a payback period of 3 years or less.
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More sophisticated techniques for evaluating options include:
Net present value (NPV) analysis
Internal rate of return
Discounted payback period
You’ll cover these in other classes: accounting, business finance, etc.
Life Cycle Cost Analysis (LCCA) – we’ll discuss this in greater detail shortly
Definition: Net present value = a capital budgeting formula that calculates the difference between the present value of the cash inflows and outflows of a project or potential investment.
In other words, it’s used to evaluate the amount of money that an investment will generate compared with the cost adjusted for the time value of money.
• Ct = net cash inflow for the period
• CO = initial investment
• r = discount rate
• t = number of periods
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How do you know if your property’s costs are too high or too low?
Benchmarking – an outside metric that can be used to compare your company’s performance against industry standards or other, similar properties
Your company may provide internal benchmarking metrics, or you may use outside sources. The following are databases and reports that provide good, reputable benchmarking data.
Tools available:
CBRE Trends in the Hotel Industry
Smith Travel Research reports
Building Owners and Managers Association (BOMA)
American Society of Heating, Refrigeration & Air Conditioning Engineers (ASHRAE)
EnergyStar
Examples:
Energy cost per sf. Energy cost per guest room
Solid waste(tons/lbs) per sf
Revenue per sf restaurant
Revenue per guest rom
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Operating costs
(These appear on the P&L statement and affect profitability)
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Facilities Management cost categories
Property Operations and Maintenance (POM) costs
These are the costs to operate the Engineering department, including salaries & wages, supplies, tools, and maintenance contracts
For hotels, POM costs will run between 4% - 6% of gross revenue
Utilities costs
These are the costs of electricity, natural gas, steam, water, propane, fuel oil, and any other energy source
For hotels, Utilities costs will also typically run between 4% - 6% of gross revenue
Chapter 1: annual maintenance cost approximately 5% of annual revenues
Annual Utility cost 5%, all in R&M, utilities, renovation, equipment = 20%
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Restaurant benchmarks
The restaurant industry does not have benchmarking data that are as well-established as the hotel industry.
POM costs will be somewhat lower (3%-5% of gross revenue)
Utilities costs may be somewhat higher, depending on the style of service and food production
Restaurants considered the most energy intensive type of property, or portion of the overall property
F&B operations are utility hogs. Example: LVCVA F&B operations natural gas consumption is equal to monthly use during winter months (September F&B uses about the same amount of gas as the central plant does in Dec)
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Non-hospitality benchmarking sources
Real estate industry sources may provide benchmarks in terms of your POM or utilities costs, on a per square foot (or per square meter) basis
They may also provide data about how much energy is used on a per square foot (or per square meter) basis.
All of these tools provide good data to compare your property’s performance against.
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Capital Expense Planning
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Capital Expense (CapEx) planning
Capital expenses are the money that is reinvested back into the building or the business
In terms of Facilities Management, CapEx projects are intended to stabilize or increase the building’s value.
Therefore, if the property was sold today, CapEx projects would increase the appraised value and the selling price of the building.
In contrast to operating expenses, which are day-to-day expenses that are written off against revenue (and affect the company’s net income and profits), CapEx projects are depreciated over time.
Usually will have a minimum life expectancy : 3, 5 or 10 years or more. Some organizations will not allow capitalization for like-for-like equipment installations, must improve the performance or increase the value: Example: a vehicle needs a new engine
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Who pays for CapEx?
The owner of the company or the property
The owner deposits money into a “reserve” account each year
Reserve accounts are “in escrow”
A third-party administrator (usually a bank employee) oversees the account.
Withdrawals from the account are limited to specific purposes. For example, a Reserve for Replacement account only funds renovation projects.
You must convince the bank to let you withdraw money for your project. Therefore, you cannot use Reserve for Replacement account funds to make payroll or pay your food vendors.
Know all 3 characteristics of a reserve account
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How much money should go into the Reserve?
For hotels: at least 7% of gross revenue each year (ISHC)
For other commercial real estate, such as office buildings: 3% - 5% of gross revenue
For restaurants: usually 3% - 5% of gross revenue
Why do hotels reserve 7% vs. other commercial properties?
These are only rough estimates! A more accurate, detailed plan will help you:
Not have too much money tied up in escrow (inefficient use of money)
Not have too little money in the reserve, if 7% is not enough to cover your property’s needs (especially for older buildings)
Every organization is different, these amounts are guidelines, recommendations from historical data. Ask what your properties policy is.
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Alternatives to the “reserve” account
Why “trap” money in a reserve account, when other options are available? Some common options.
Borrow, finance your CapEx
Economy may make borrowing difficult, loan must be repaid, interest on the loan may mean higher income is needed
Sell an asset(s) to finance CapEx
Less assets available to generate revenue, fund future growth, eventually runout of assets
Sell an equity stake in your company, e.g., take on a partner, merge, issue additional shares of stock
Dilute control of the company, less say how the company is managed
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Planning for CapEx projects
We usually use at least a 3 – 5 year time horizon to list of everything that will need to be replaced, and when
Equipment life expectancy tables are available to help us estimate when our equipment will require replacement
For hotels, we normally plan to perform “soft” renovations every 5 – 7 years, what are soft renovations?
We also need to track changes in codes or regulations, which will often need to be funded by the Reserve
We can track the changes in our guests’ tastes and preferences
Major damage from an emergency
CapEx is an opportunity to look at improving efficiencies, new technologies, safety issues.
Soft renovations: interior finishes, carpet, paint, wall coverings, draperies, upholstery, etc.
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Property Improvement Plan (PIP)
A PIP is generated when buying a new property or rebranding an existing property
Representatives of the new brand or the new owner will survey the property intensively
They will develop a list of renovations or other changes that need to be made to comply with the new brand’s requirements or to fix deferred maintenance items
The PIP will usually provide deadlines for compliance
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Life Cycle Cost Analysis
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Life Cycle Cost Analysis (LCCA)
This technique requires us to identify all of the potential costs and benefits of a project
Financial costs and benefits
Non-financial costs and benefits
The basis used in this technique is the “life of the project”, or the life expectancy of the piece of equipment
If you are choosing between two options, the basis will be the expected life of the option that has the longer life expectancy
Other planning techniques might use annual estimates (i.e., per year), but LCCA uses life expectancy
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Life Cycle Cost Analysis (LCCA)
Accounts for the cost of acquiring, owning (operating & maintaining), and disposing of a building or a building system.
Initial cost – land, building itself, FF&E including major systems (HVAC, electrical, plumbing, water management)
Energy cost – electricity, natural gas, propane, fuel oil, water, steam, etc., do not use residential rates when calculating energy cost.
Operation, maintenance & repair – prevailing wage, union contracts, materials, supplies & parts cost.
Replacement cost – depending on life expectancy of the original building systems.
Residual value – remaining value at the end of useful life; salvage, resale or scrap value: net of any disposal cost.
Finance charges – interest and taxes
Nonfinancial cost & benefits – the intangibles
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LCCA - Financial costs and benefits
Financial Costs
Cost of the project itself
Lost revenue if the property is closed during renovation
Costs to train employees on new equipment
Utilities
Labor
Materials
Financial Benefits
Increased revenue
Decreased production costs
Decreased costs for maintenance or energy
Decreased insurance costs (if property is safer)
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Non-financial costs and benefits -- examples
Non-financial costs
Loss of customer loyalty while property is closed for renovation
Loss of employees while property is closed
Decreased guest satisfaction due to noise and dust during project
Non-financial benefits
Increased guest satisfaction
Increased reputation
Compliance with laws and codes
Property is safer
Employee morale
Labor savings (increased productivity)
Greater conservation/sustainability
Decrease in energy consumption is considered a?
non-financial benefit of a renovation project?
Reduced customer satisfaction survey score is considered a?
Non-financial cost
Word-of-mouth advertisement for a newly renovated space to a restaurant is a ?
Non-financial benefit
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Once you have performed the LCCA…
You can make a decision (or a recommendation, if you are not the final decision-maker)
Persuade the decision-maker of your recommendation by using the “rule of three”
Support each recommendation with at least 3 data- or fact-driven points of support
You identified these points in the LCCA (they are your benefits)
You completed a LCCA earlier in the semester: Converting from CFL to LED lights and the group re-lamping project, remember?
Rule of three:
3 data – fact driven points:
The new restaurant is expected to reduce energy consumption by 10% with the energy start rated appliances.
The new design of the space will improve employee efficiencies allowing for table turn over to be increased by 15%, more meals/guest served = higher revenue.
The restaurant equipment will reduce maintenance cost by 30% and down-time by 50%.
Rebranded theme will attract ??? Patrons, which represent 30% of the properties clients. More guest will stay to dine on property, expected to increase 9% more guest per meal.
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