Capital projects build revenue by making assets more competitive in the marketplace, allowing them to draw higher rents. Capital projects also reduce operating costs by managing the cost of running those assets.
CAPITAL PLANS & REAL ESTATE RETURNS: - IRRs & EQUITY MULTIPLES
Two metrics crucial for measuring returns are internal rates of return (IRRs) and equity multiples.
IRRs are weighted returns impacted by the timing of capital flows. While they are a useful metric, they do not measure profits precisely, on their own.
Equity multiples, which are cash distributions received from an investment divided by the total equity invested, ignore time but do indicate how much investment make or lose.
Knowing all this, what elements are critical for real estate owners to optimizing their capital planning processes and, as a result, maximize returns? More than just handoffs, we believe that teams across the organization must align their goals and collaborate for success.
1. IMPROVE THE HANDOFF BETWEEN THE ACQUISITIONS AND ASSET MANAGEMENT TEAMS
The acquisitions team’s main incentive is to close deals. Their success is measured by their ability to conduct analysis and plan strategically in order to acquire assets at competitive cost. Achieving that goal means underwriting assets in a way that makes them compelling investment.
Once assets are acquired, acquisition teams move aside as asset managers and operations begin implementation. In order to make sure that all team needs and expectations are met, keep channels open, share information, and build in accountability.
Take these three steps to ensure efficient handoffs:
1. Ensure that your approvals process includes members from leadership, asset, operations and acquisitions teams.
2. Establish regular, open opportunities for communication.
3. Make acquisition teams accountable for asset performance, encouraging them to be more realistic in underwriting.
2. IMPROVE THE HANDOFF BETWEEN THE ASSET MANAGEMENT AND ACCOUNTING TEAMS
Align calendars. How can teams work together if they’re not working towards the same deadlines? How can asset management and accounting teams effectively collaborate if some organizations use fiscal while others rely on calendar year for tracking purposes? If for some reason it is not feasible to put various teams on the same format, make certain that all capital plans can be broken down by month, making cost prorating simple for accounting.
Are the systems integrated? When the capital plan ties directly tie into the accounting team’s system, data entry errors are eliminated, information is consistent, and reporting becomes reliable.
3. IMPROVE THE HANDOFF BETWEEN THE PROPERTY AND ASSET MANAGEMENT TEAMS
Property managers are closest to tenants. Effective asset managers should listen to their insights on issues and check in with them during every reforecast. They should undertake conversations with existing property management teams, where possible, to verify and refine underwriting, and stay close so that little concerns don’t grow into big problems.
4. LEVERAGE PAST DATA TO MAKE BETTER DECISIONS ON CURRENT CAPITAL PLANS
Often, owners feel like they’re starting from scratch every time they reforecast capital plans. Historical data is rich with valuable information that could alleviate potential pain points, but it’s inconsistently leveraged because:
• Rolling up and consolidating information in spreadsheets is challenging.
• Without linking the files, information is outdated and inconsistent.
• Spreadsheets are not databases, meaning they are not easily searchable.
Every project, as well as its corresponding line items, should be saved in a way that makes the data easily accessible. Furthermore, you should make this historical project data searchable by various filters and conditions. Looking at the average price or range of prices is incredibly helpful in the allocation of capital in this scenario.
Ideally, all invoiced amounts and change orders would be automatically pulled into a single location or project management system, e.g., the capital plan. Since a capital plan is only as accurate as its last reforecast, “live” data consolidation uncovers potential problems before they get out of control. As a result, large change orders are reflected in the capital plan in real-time, without the dangerous lag that happens with teams that reforecast periodically. If you can’t manage this with spreadsheets, it might be worth looking into purpose-built software.
6. ENSURE THERE IS ALWAYS ONE—AND ONLY ONE—OFFICIAL CAPITAL PLAN AT EACH PROPERTY
There should only ever be one official capital plan, but, when you’re creating them using spreadsheets, multiple versions are often created, causing confusion as they circulate amongst the team.
Prevent the curse of the replicated spreadsheet:
• Designate key people to own responsibility for creating and maintaining capital plans.
• Require that revision be documented, and tracked, including by whom and when.
• Created standard naming conventions. For example, “buildingname_year_ month_type.”
• Store plans, clearly labeled, in central locations, preferably in a cloud-based software accessible to stakeholders.
The Power of Capital Planning Data
An effective capital plan is the roadmap to an asset portfolio’s future, and consequently, its financial returns. Real estate owners unlocking their power of data recognize that the information they have from previous projects, like pricing and timelines, empowers them to make smarter decisions about the future.
Aggregating that data so that it is usable requires diligent cost tracking in real-time, linking past and present data with future projections, and regular reforecasting.