Costs are key considerations for any firm’s real estate operations. Operating costs in relation to building value and revenue are ultimately what drive returns for investors. For owner-occupiers, operating costs and capital costs over time drive management success.
Organizations rarely discuss the total cost of ownership (TCO) for real estate. TCO is the underlying value of an asset plus the ongoing costs of operations and maintenance over its useful life. For example, the cost of buying a new car is not just the purchase price. Additional costs such as gas, maintenance, insurance and parts all contribute to the total cost of the vehicle. For real estate, it is the building value plus the cost of all aspects of critical operations. This also includes capital expenditures, labor, energy use and environmental impact.
Why a Life-Cycle Perspective is Important for TCO
Life-cycle cost analysis (LCCA) is an analytical tool used to understand the TCO for an asset. Like a discounted cash flow analysis, LCCA quantifies TCO by balancing initial investment costs with capital costs and maintenance costs. The difference is that LCCA focuses on operating costs and maintenance, not revenues or occupancy factors. This includes costs like building envelopes, HVAC systems, water, and energy use and lighting.
Understanding total operating costs is critical during the construction and design of new properties. It’s also important in the cost-benefit planning of major capital expenditures for existing buildings. Knowing the TCO can help optimize both short-term and long-term capital needs.
LCCA is particularly important for green buildings and infrastructure. Upfront costs can be large, but taking a life-cycle view can justify the high short-term investment. Energy and operating cost savings over time often balance out the initial spending.
TCO, Life-Cycles and 4tell™ Solutions
4tell™’s Strategic Planning products help real estate organizations understand the TCO of their properties. It captures both direct and indirect operating costs over a building’s life-cycle. For example, a window replacement is not only about the cost of the window itself. There are additional costs for removing the window and sill, cutting out the drywall, putting the new window in, recalling the window, waterproof lining, framing and crown molding. 4tell™ provides data used in property life-cycle analysis and transforms it into actionable information.
Having a full life-cycle view of their assets helps real estate organizations understand the TCO for their buildings and portfolios. This enables them to make more strategic investment decisions for both their short- and long-term goals.