Voices: Why COVID-19 Makes CapEx Planning Vital

This article is sponsored by Plante Moran Living Forward. In this Voices interview, Senior Housing News sits down with Living Forward Partner Dana Wollschlager to learn the two most commonly under-budgeted areas of a CapEx (capital expenditure) plan, how providers can get the most out of their existing assets and why the COVID-19 pandemic makes CapEx planning more vital than ever before.

Senior Housing News: For those providers who do not have a CapEx and deferred maintenance plan, what do you recommend they do first?

Dana Wollschlager: You need to have a third party help you develop this plan. Many maintenance staff members aren’t trained to assess and consider the entire system of assets. That means both the condition of the assets and their estimated costs to maintain or replace based on useful life and actual replacement value based on current construction costs. You need a professional who can perform a facility condition assessment across your campus, which will become the basis of your capital maintenance plan. We would also recommend adding low voltage systems to your technology platform, as they are playing a larger strategic role in your CapEx needs.

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Why have a formal capital maintenance plan?

To stay ahead of these maintenance costs, providers have to be proactive instead of reactive. This has always been true, but it is critical now during COVID-19. Reactive plans are not really plans at all. Think about having a repair budget and just fixing problems as they come up until that budget runs out. The faucet in one unit breaks, maintenance fixes it, then the next week another faucet in another unit breaks, gets fixed, and so on. Nothing changes.

A proactive approach looks at your assets holistically and helps you understand that the faucets are through their useful life. Then you can plan a replacement of all of them with a better function faucet, or you can schedule to replace them in batches over time. You just saved multiple staff hours by doing all related repairs at once, instead of repairing faucets week after week. And guess what? The resident is happier.

If you start thinking of the thousands of items like this on a campus, you can start saving hundreds of hours of staff time just making repairs.

What expenses should a capital plan cover?

Your capital plan should cover all the bricks and sticks, site, furniture and equipment of your community. In other words, your fixed assets: the roofs, landscaping, parking lots, windows, doors, furniture, kitchen equipment, and so on.

It should also look at how the operational efficiencies are affected by infrastructure. One example is the maintenance faucet example I mentioned earlier. Another could be if the dining room in your assisted living building is in the east side of the building, hundreds of feet from the far west resident rooms, residents may need more assistance navigating to that dining room or be demotivated to use that space at all. A centralized dining room — or, say, adding one on the other side — would save staff time and improve the likelihood of the resident being able to get there unassisted.

Your capital plan should also cover failures and future advancements in equipment, technology, HVAC systems and other large expenses. Expensive things like the boiler are a crisis when they stop working suddenly, so being able to plan ahead for maintenance and replacement is important whether you are evaluating one building or a large campus.

What is often under-budgeted in a CapEx plan?

There are two big ones: technology and furniture. Technology, as many are finding during the pandemic, is wildly important for your campus, for both operations and residents communication. Yet many providers had a rude awakening that they hadn’t been investing enough in updating that infrastructure. Taking into account that technology changes so quickly, and you need to assess it at least every five years, with a reasonable budget that actually covers the costs.

A technology assessment, done by a firm that understands the unique factors involved in senior living, is your best resource for understanding the ongoing cost of technology in your CapEx plan.

Furniture, meanwhile, is probably the second least-funded item. So often folks get used to seeing the chair in the corner of the room or not using this piece of furniture because it is broken, ripped, stained or just too darn hard to get out of that no one is really owning repairing, cleaning or replacing it until someone is really disgusted with it and points it out. Someone needs to own assessing and replacing furniture before an adult child of a potential resident gives you that look.

What are the signs senior living providers are not spending enough on CapEx?

Problems selling units. The biggest sign is probably in the decline of the apartment and common areas, which then leads to a slow and steady decline with occupancy or census. If you secret shop your competitors and take pictures then do the same at your campus — a picture is worth a thousand words. When your staff members are on campus daily, it’s easy to get accustomed to the way things are and not see what your prospects see. In the minds of adult children, the single-family residential market sets the bar for the latest housing trends. If your community is not in line with those trends, adult children will view your spaces as outdated.

Everyone can tell when a home or especially a campus is not being maintained adequately. That can be a signal that financial issues are ahead. You should always be reinvesting in your product to stay competitive.

Another sign is if you’re constantly fixing the same equipment. Everything — furniture, fixture, roofs, sidewalks, lighting, technology, etc. — has a useful life. One clue you’re past the useful life is when maintenance staff are constantly fixing the same things over and over, or getting surprised by emergency repairs or replacements in the middle of the night or weekends.

Lastly, if the product is depreciating dramatically faster than what’s spent on CapEx, that’s a sign too. If you have $3 million in depreciation per year, but after five years of being open only budgeted $1 million in CapEx, every year that difference adds up. That doesn’t mean you have to match it dollar for dollar, but if you aren’t spending 75% of your depreciation amount, you are on your road to an expensive day when you will need to get caught up, and it will cost much more money overall.

What methods are effective for determining how to budget for CapEx and deferred maintenance?

Different providers approach budgeting in different ways. Ideally you are sitting down with lead staff and getting a list of known issues, and every three to five years having a third party come in and assess the campus for systems that the staff sometimes aren’t thinking as much about: utilities, roofs, major mechanical systems, etc. Then you are creating a three-to-five-year future plan that can be tracked and held accountable to staff executing the plan.

Others may just use a set of contingency CapEx annual budgets with a list of equipment that is earmarked for replacements, and request the rest as needed throughout the year. Issues can exist, though, if you don’t know what is set to happen over a longer range of time.

One major benefit of a good organization capital plan is that it allows you to bundle scopes of work together strategically to bring in bulk purchasing agreements. Instead of selling one roof replacement each year for 10 years, what if you could put in the agreement five roofs for the next two years? You will be amazed at how much that will drive down your capital costs. If you have multiple campuses, you can leverage that even more. The typical maintenance person on a campus isn’t thinking about what’s happening on the other campuses and may not recognize this avenue for cost savings.

How do you know when maintenance repairs aren’t enough and a complete replacement or reposition is necessary — to the equipment, technology or physical environment of assets?

Sometimes it will cost less — in upfront dollars, operational expense and staff time — to replace one or several items together rather than fix. To do this, you need to understand how much useful life is left. A facility condition assessment is the way to understand the breadth of maintenance needed, from critical needs to deferred maintenance to aesthetic upgrades. It will help you begin prioritizing your expenses and roughing out a budget or estimate.

One of our staff members tells the story of a five-story building — mostly glass — with windows that were 40 years old. When the client built a new building adjacent to it the same size, they decided to go ahead and replace all the windows in the original building. Over the course of the first year, at full occupancy in the new building, the total utility costs for both buildings was actually the same as it had been for the original building alone with those 40-year-old windows. The utility saving from replacing those windows paid for the cost to buy them in less than five years. That was a decision they wished they would have made 10 years earlier!

How can providers get the most out of their assets?

Preventative maintenance programs spur providers to put management procedures in place for maintenance and the upkeep of their assets. With regular maintenance, you can track how much time your staff spends on maintenance, track useful life and know the best time to replace before it becomes an emergency — while being confident that you got the most value out of the asset you spend precious cash resources on.

Editor’s note: This interview has been edited for length and clarity.

Plante Moran Living Forward provides development advisory and owner’s representation services that address the evolving real estate, development, and construction needs of senior living communities. To learn more about how Plante Moran Living Forward can help your business, visit them at pmlivingforward.com.

The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact sales@agingmedia.com.

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