Just Nailed It: Let’s Talk About Capital Expenditures…

Last week, after we posted our article on the business plan, another reader reached out to us over email:

“Hey guys -- I love the idea of how you go about formulating your property specific business plan.  I know that capital expenditures must be a big part of this plan, but what is your process for choosing and handling the specific improvements?  It seems to me that choosing the right capital expenditures has a lot to do with the cash flow and value of a property.  Could you shed a little light on how CF Capital approaches this portion of the business plan?”

It would be easy to refer this reader to some of the popular books and articles talking about Capital Expenditure -- CapEx -- but since our process is different and ties to our unique business plan, it is worth discussing this topic with all of our readers.  So thank you for your email!

As a quick review CapEx is money used for improvements in a property beyond normal repairs or maintenance.  

On the finance side, it is treated as an investment in assets that can have an impact on cash flow and the overall value of a property.  In a separate article we can discuss how we handle CapEx with depreciation/amortization and its impacts on tax, but today we will stick to our approach.

In our previous article about our business plan, we discussed how we arrive at a point that allows us to picture what it is going to take to get the property where we want it to be.  That means what income and expense changes can be made to raise the cash flow and NOI, thus increasing the value of the property.

The business plan lays the groundwork for us to be able to visualize our path from “acquisition to exit.”

By implementing our CapEx projects we can make the necessary improvements needed to properly reposition the property.  From this point, it’s all about getting granular.

Does the property need a new roofing? Does the property need new windows?  A common misconception is that making improvements in those two specific areas will automatically increase the value of the property.  This is not totally true.   

But if it is not true, then why would we dedicate any money to these areas?  Here it is more about protecting the property and giving it longevity so that other costs in areas like maintenance do not get out of control.  In other words, they’re a necessary investment, and expense.

Our approach in selecting “new roofing” or “new windows” comes down to a cost-benefit analysis.  If we project that the benefits exceed the costs (immediate and long-term), we start collecting quotes and taking bids from professionals who can help us arrive at those numbers.

These contractors also provide insight about the “numbers” we are looking at now as well as in the future.

We follow the same process for areas like heating, cooling, electric, and plumbing.  Similarly, we can make additions or improvements to amenities, parking lot enhancements, signage, etc.  Capital expenditures can be invested across anything that goes towards the operation of the property itself.  

The ultimate goal is to ensure that the asset is protected. 

It also means that we can think about efficiency and the types of benefits we can receive by “going green.”  We can qualify for green financing if we make a substantial amount of eco-friendly improvements to the property, thus lowering the interest rate on our loan.

Regardless of what we do in the CapEx area, we want to make sure it all relates back to the business plan and supports our investment thesis, while enabling us to go out, execute, and perform for our investors while providing quality product for our occupants.

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