When real estate professionals think of relative market value for properties, certain standard investment metrics come to mind. These usually include net operating income, capitalization rates and comparable sales. But they might not think about some other key metrics. The physical characteristics of buildings and their long term operating costs are sometimes overlooked.
Enter the facility condition index (FCI). At its most basic level, an FCI is a ratio comparing the total deferred maintenance for a building to its estimated replacement value. The key focus of the FCI is to place a value on the future capital costs that an owner may need to incur in the future relative to the costs to build new. The higher the ratio, the larger the capital needed to keep the building in a functioning state.
The general equation for an FCI is:
Facility Condition Index = (existing major repair costs and replacement deficiencies/current property replacement value)
A Facility Condition Index is typically on a scale of 0 to 100%. The higher the number, the greater the capital requirements. Usually an FCI of 10% and below signals a building with good effective age. An FCI greater than 10% suggests the building is beginning to deteriorate, with components reaching the end of their lifecycle.
How a Facility Condition Index Helps Prioritize Capital Spending
A typical application for an FCI is prioritizing maintenance relative to building use over the long term. For a basic example, imagine a property had an FCI of 20% but was slated to be torn down and redeveloped in five years time. Maintenance may be delayed due to the upcoming development potential, despite the high FCI.
FCI analysis does not only apply to the whole building. Individual component systems or portfolios can also be indexed to help prioritize capital spending. Having FCIs for the entire portfolio could help large organizations spend capital more effectively. It makes it possible to target buildings with significant capital needs. It also enables the comparison of FCIs within portfolios. FCIs can be compared over time to derive a historical performance metric.
Customizing a Facility Condition Index
What’s described above is standard FCI methodology. However, many organizations develop their own FCI calculations and standards, especially if they want to achieve a certain metric. But it is important to remember that custom FCIs should be more data inclusive than exclusive. For example, some groups exclude energy conservation measures from their FCI analysis. But energy use is a critical input in estimating long term capital needs.
Another benefit of a Facility Condition Index is the ability to set target levels for certain property types. Critical facilities, such as manufacturing or production buildings, may be given a lower FCI “threshold” to ensure capital is prioritized for those key assets. Other common use buildings may be given a higher threshold.
A Facility Condition Index helps distribute your capital efficiently across your real estate portfolio. But remember that the results you get from a Facility Condition Index are only as accurate as the data you put in. For reliable results, ensure you’re using effective real estate software such as 4tell™’s iPlan™.
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