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Real Estate Portfolio Management / Strategic Financial Analysis

Harmonization of Metrics and Industry Standards

Total Cost Metrics

There are a variety of standards and standard methodologies for calculating total cost, lifecycle costs, time-based costs, and integrated capital and expense costs. Each of the standards analyzes costs differently based on its intended purpose, and based on the types of data each role typically has available to them.

The metrics allow for the time-value of money in one of two different ways:

• annualized value – that is, costs are forecast using income values (e.g. Base Rents) that escalate, debt values that inflate using the internal cost of debt, capital opportunity costs that inflate with the internal cost of debt, or actual mortgage interest calculations.
• present value – future income and expenses are discounted by the Discount Rate, applied exponentially for every year in the future that the cost exists.

The following table summarizes the total cost metrics, their time value, sponsoring organization, and purpose.

Comparing the Standards

The stock ARCHIBUS product contains metrics that use umbrella categories to support multiple standards.

You can use the stock ARCHIBUS definitions of metrics with a variety of standards by adjusting which categories of data you collect. Alternately, you can adjust the list of Cost Categories that ARCHIBUS uses to map costs to these rollup categories in the Application Parameters table. See Define Application Parameters for Strategic Financial Analysis. 

Some of the standards use approximations because they do not expect that certain data elements will be available, or they do not expect that complex costs can be practically modeled. As such, your site may wish to include refinements on the standard.

Approximations are not an issue if you use:

• the ARCHIBUS applications, which collect the data you need as a by-product of usual operations
• the ARCHIBUS cost model, which can record and calculate income, expense, and capital costs that vary per asset per year.

The following table compares the standards. The numbers in the table's cells refer to the below notes.

Notes

(1) Asset Costs for Annualized Calculations. Annualized figures, such as Workpoint Cost, take into account the initial purchase price of assets by using:

• Depreciation of the building (annualizing the purchase price)
• Interest Costs (i.e. the cost of debt or the cost of borrowing to finance the purchase)
• Cost of Capital (the opportunity cost of the money invested in the down payment)

(2) Financing Cost for Present Value Calculations. For calculations on present value, the purchase price is included in present dollars and future costs and income are discounted to present dollars. There is no need to include interest costs or cost of capital, because these are accounted for in the discount rate.

(3) Depreciation Cost for Present Value Calculations. For calculations on present value, the depreciation cost is omitted since the cost of the building is included by including the Purchase Price in present dollars.

(4) Rentalizing Asset Costs under IPD. IPD assumes that the purchase cost of buildings, their depreciation and their financing is accounted for in the cost of Rent (per IPD A1a), as an estimate of open market rent for equivalent space (per IPD A1b), as an annual accounting charge in the nature of a notional rent (per IPD A1c), a replacement cost surrogate value (per IPD A1d). Organizations using IPD may wish to include depreciation, interest, and cost of capital as these form the most accurate equivalent for notional rent. Alternately, they may wish to omit these costs from the cost model and enter a notional rent for any building or property as a Recurring Cost representing an estimated equivalent rent cost.

(5) Financing of Capital Expenses under IPD. IPD includes the depreciated cost of fit out and capital expenditures but not the financing of these costs with the intent of measuring property values on a same basis without the fund level overlays of cash and debt management. Per item (4), financing of buildings is included as a rentalized amount assumed to be reflective of the local market value (i.e. assumed to be the average of market forces in an area rather than the financing choices of a specific real estate team). Organizations using IPD will forecast the depreciation for capital projects representing fit out, renovations, etc. but not the Interest or Cost of Capital.

(6) Cost of Land. Calculations intended to compare the costs of design and construction alternatives do not include the cost of land, or the appreciation or financing of land, as these do not impact the construction choices.

(7) RICS. RICS under 1.4.2, Relevant Costs has this guidance "8. Depreciation as an accounting mechanism is ignored; however, residual values (the estimated value of the asset at the end of the WLC period of analysis) will be included in option appraisal exercises and tested for sensitivity.... The opportunity cost of capital committed to the project is ignored."

(8) Appreciation versus Salvage Value. For any particular asset, estimate either appreciation or salvage value. Buildings and land are typically easiest to forecast using an estimate of appreciation. Capital equipment is easiest to estimate using a salvage value at end of life.

(9) Capital Renewal Costs. Account for capital renewal costs either:

• By creating and planning ARCHIBUS capital projects (which will have their own sets of metrics)
• By estimating yearly Capital Renewal costs using the Forecast Capital Costs action. Institutions that own their own buildings for long periods often favor this kind of estimate.

If you use the latter method, you enter in a Scheduled Cost for capital renewal, which will roll up within this Capital Renewal Cost Category. This estimate is an annualized value: Presuming that this capital budget is roughly the same year to year, the new capital expenses (which would go to the balance sheet) equal the depreciation (the portion of previous capital projects that are considered to be consumed in this year). If you are using IPD, you will want to create separate capital projects for Fit Out and capital expenses to be able to cost them separately and depreciate them per the IPD straight line schedules.

(10) Other PP&E Depreciation. Account for other PP&E depreciation costs:

• By creating and planning ARCHIBUS capital projects for the equipment asset(s) (which will then each have their own sets of metrics)
• By estimating yearly depreciation using Recurring Costs

If you use the latter method, this Capital Renewal Cost Category rolls up this cost.

(11) Capital Project Depreciation. Account for capital project depreciation in one of these ways:

• Create Capital Projects for each of your projects, and then create capital forecasts using the Forecast Capital Costs action. This is the most accurate means and can tie back to individual project invoice line items and their particular capital or expense treatment.
• Create a budget line item in the Scheduled Costs or Recurring Costs table for the building representing an estimate of the depreciation. If you do so, this Cost Category rolls up to this metric.
• Create a yearly estimate for Capital Renewal Costs per item (9).

You may wish to use different methods for different parts of your portfolio, depending on your management practice for capital projects, or the available data.

Note: You should use one and only one method for any individual building.