Fixed-asset reserve can save you headaches down the road

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If you have recently completed a major capital expansion or you are settling into a brand new facility, it’s likely that the last thing on your mind is future building repairs and/or replacement. Like the cars we drive, building components experience wear and tear and eventually require our attention. Also, like cars, the timing of these repairs can be predicted.

It has been my experience that 20 years of building age is equivalent to about 100,000 miles on a car — things just start to break. Fortunately, because replacements can be predicted, building owners can plan for expenses using a tool called a fixed-asset reserve.

List your fixed assets
The first step in creating this plan is identifying and categorizing all major components of your building. This is typically done using a “building division” breakdown similar to what contractors and architects use to organize major projects.

Categories like “heating, ventilation and air conditioning” (HVAC) or “doors and windows” will help you organize the items on your fixed-asset list. Under those categories, you will identify all the major components of your specific building.

For instance, under the “HVAC” category, you would likely list each piece of equipment like air handlers, heat pumps and boilers. Under a category like “lighting,” you might break your building down by area or by “exterior” and “interior” lighting.

A tip here is to find a balance between major and minor building components. Any building maintenance program likely will include some annual repair and replacement, so you are only trying to identify those major pieces of equipment or building systems that will result in larger capital expenditures, not every little piece and part.

Replacement/repair value and life cycle
Once you have identified your building components, you can work with contractors and vendors to identify the current replacement value of each item, as well as its expected life cycle.

A simple example is a rooftop mechanical unit. Most commercial heating and cooling units have a 10- to 15-year life expectancy. Combine that information with a present-day replacement value, and you now have the data to complete your reserve study.

Fixed-asset reserve
With the combined data of the previous steps, you can now predict your fixed-asset repairs and replacement costs over time. With some relatively simple spreadsheet work, you can adjust for future inflation and plan for annual contributions to a reserve fund.

A reserve fund is essentially a savings account that builds up over time. If done properly, the reserve fund should grow to cover your predicted replacement costs in the year that you predict the work will need to happen. Setting aside these reserve dollars takes discipline, but it will soften the blow when major components of your building need attention.

Regular updates
We would advise that you update your fixed-asset reserve each year. Regular updates include adding new equipment to the list, tracking the prior year’s expenses versus your budget and updating the general condition of components as they are used and maintained.

The expected life of building components is not an exact science, so some equipment may underperform or outperform your predictions. Increasing or decreasing your reserve contributions each year can be a balancing act that may be necessary based on the performance of your overall organization.

The bottom line is that it’s never too early to plan and it never hurts to revisit the plan regularly. A fixed-asset reserve can take away some of the anxiety about building maintenance and replacement, and also allow you to focus on good preventative maintenance and other facility goals.

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