If you own commercial property, one of the main questions you will ask yourself when evaluating the health of your property is “Can I fix my roof, or is the damage so much that I have to replace it?” Whenever the time comes that your commercial roof starts experiencing problems, it is important to address these issues immediately and not wait. Otherwise, these issues may become more expensive as time goes on.
When it comes to roofs, making repairs is the most cost-effective option available. Minor issues can be safely and easily repaired, which include missing individual shingles and small leaks. If there is no damage to the insulation, flashing and membrane, then you can afford to repair a single isolated area, which will help extend the life of your roofing system.
When assessing the current condition of your roof, one of the first things to consider is the age of your roof. Most asphalt shingle roofs generally last anywhere from 15 to 30 years. If the roof has damage but most of it is still in tact, a spot repair can be performed.
You should also consider the value of your commercial property especially if you intend to sell it in the future. After determining how long you want to own a commercial property, if your roof is mostly in good condition it would make more sense to have repairs done. If you become a seller in the commercial real estate market, scheduling minor repairs is the best action to take.
In other cases, however, the roof has sustained so much damage that a minor repair will not address the issue. If the current roof’s integrity is compromised to the point where a roofing overlay is not possible, then you will need to consider having a complete replacement. Hail, strong winds, and severe amounts of rainfall can lead to major interior leaks. Because of this investing in a new roofing system can potentially save you thousands of dollars.
After replacing an old roof with a new one, you will be better prepared to stop future leaks from developing and prevent future repairs that may become too expensive to afford. You will also protect the value of your commercial property by having your roof replaced. If you decide to replace your roof, depending on the type and/or quality of the material you use, you may qualify for significant discounts on your insurance policy. You may also qualify for local or federal tax credits to offset the cost of your roof replacement if you incorporate environmentally-friendly features.
Concerning HVAC Units
The HVAC system is a highly important and often highly expensive part of a commercial property. As the property owner you face a tough decision to make when this system starts developing uncharacteristic habits. You particularly want your HVAC system ready for the colder temperatures of the winter season, so typically an annual inspection is scheduled for the furnace and heating system during the fall season. If substantial issues with your heating system arise, you must decide to either repair or replace it.
A case can be made for delaying the replacement of your HVAC system because there are some advantages to making repairs first. At first glance when your furnace goes out, it initially seems logical to have it replaced. However, considering the current condition of your commercial property and its long-term possibilities along with the ever changing weather patterns, it could be wise to hang on to additional thousands of dollars and instead pay less for repairs.
Whether you decide to repair or replace your HVAC system, you will need to have a plan in place. Ask yourself the following questions; How much will a repair cost? When is the right time for a complete replacement? What is the best long-term option for your commercial property? In terms of function and dependability, will the new system be worth the investment?
Potential HVAC Issues
Beware of the signs that will indicate whether you should repair or replace your HVAC system. Potential issues that could affect your HVAC system include the system becoming sluggish or inconsistent, or if it is simply not working at all.
If you turn on the heat but the building does not warm up, then the filters should be checked. Clogged filters do not allow proper air flow, and because of this the HVAC system can become inefficient. Check your filters on a monthly basis and plan for regularly scheduled replacements.
It is easy to diagnose an HVAC system that has leaks, but it can be complex to fix these leaks. Start with what you can obviously see and trace back to the source of where the liquid is leaking from. If it is coming from anywhere but the condenser pipe (the part where the water should leak from), then it needs to be repaired immediately. If you let the leaks linger for too long then the HVAC system will need to be replaced.
There are electrical components in all HVAC systems, including units powered by oil or gas. Most electrical issues typically involve the ignition system. If your unit clicks many times before ignition or it continues to click without igniting, then the issue is with the electrical igniter. Fuel is wasted and the HVAC system’s performance suffers as a result of electrical issues.
Parts wear out as HVAC systems age. Parts such as belts and motors can easily wear down, which causes the system to become less efficient. If your system starts operating out of the ordinary, then contact a professional technician for an annual inspection. The upfront cost may be steep, but in the long-term you will save money with an efficiently running HVAC system.
Terms Concerning Repairs and Replacements
Duty to Repair
Pay attention to the commercial lease agreement you have because in that agreement you have specific responsibilities that can affect the condition of your commercial property. Any major defects in the premises of your commercial property can negatively impact your business. If you let repairs to your damaged premises go for too long you will be forced to shut down the premises and halt business until repairs are done.
Should anything go wrong with the premises where you operate your business, make sure your business will still be able to function in some capacity, or at least get compensation if it cannot. The following listed terms are referred to as the “Duty to Repair” terms of a commercial lease agreement.
Repair Defects in a Timely Manner
It is wise to put a provision in the commercial lease that states the tenant is allowed to make the repairs and then receive compensation from the landlord either directly or by way of a proportionate deduction in paying the rent.
It is recommended to negotiate with the landlord to put a provision in place that the landlord will be held liable for any loss that your business experiences because of any defect in the premises. With this provision you are ensured that the landlord will stay vigilant in making fixes to any problems that have been reported about your commercial property as quickly as possible.
Reasonable Rent Reduction
A provision can also be negotiated that will grant the tenant of the commercial property a rent reduction for the period of time the defect remains in tact. This will keep the landlord motivated to fix any defect, whether minor or major, as quickly as possible.
A replacement reserve is basically a dedicated fund that serves to finance the periodic replacement of commercial property components. When setting up your annual budget, as a commercial real estate owner and investor you should have a replacement reserve in place.
Money in a replacement reserve is what you put aside to cover any major replacements or refurbishments that need to be done to your property. Replacement reserves should be specifically used to pay for capital expenditures to your property, including resurfacing an attached parking lot or replacing old floor tiles and paint in the building’s most common areas.
In the case of homeowners and condominium associations, a reserve requirement is always in place, or at the very least dedicated statutes that outline how much money must be kept in funds at any given time. Reserves help these associations avoid the need to charge residents any special assessment fees when a major project needs to begin.
At the heart of the matter, having adequate replacement reserves for the commercial real estate investments you make is a logical thing to do. Compared to a homeowners association’s governing body that depends on multiple residents to fund its reserves, you and your team of investors are the only ones responsible to pay the bills for replacements. If you have a sufficient operating reserve in place you will have the necessary funds to handle capital expenditures whenever they emerge without adding anything to your existing debt service.
What are Replacement Reserves Best Used For?
Any items in your commercial property that have a shorter lifespan than the building itself will need to be replaced at some point in time. This is where it helps to have a replacement reserve fund ready. The more support you have in this fund the more you reduce the possibility of constantly deferred maintenance to the building.
A replacement reserve fund normally prioritizes tasks such as putting on a new roof, replacing an old HVAC system, replacing windows or exterior masonry, and making accessibility upgrades, among other things. Routine maintenance costs are not factored in to your replacement reserve fund because they are normally considered to be part of your traditional operating expenses.
Other tasks that are well suited for your replacement reserve fund are reparations to a communal plumbing system, repaving the sidewalks, driveways and parking lots of your commercial property, and overhauling any elevator systems.
How Replacement Reserves Factor in to Your Budget
Any debates that you might have when it comes to where to put this line item in your budgeting plan can be put to rest. Should a replacement reserve component be included in your Net Operating Income (NOI) calculations? Items of capital expenditure are not counted as operating expenses, so therefore they should not be included in your NOI. Instead, consider your calculations for your cash flow and incorporate these items there.
The standard accounting equation for your cash flow should look like the one below.
Net Operating Income – Replacement Reserve – Existing Debt Service = Cash Flow
The main question to ask is “Should you repair or replace your commercial property?” The answer depends on your situation, what your needs are, how much you can afford in either action, and how much of an impact either action will have on your business. The condition of the building you own should be your first priority, and whatever message the building’s condition is sending you is where you develop your plan around. Whether you decide to repair or replace your commercial property, one thing for certain is that you must be aware of the expenses involved with either action.