capex yea or nay

I lead a small organization of just under 500 Team Members. Creativity, Engagement, and Empowerment are all characteristics we wish to encourage; delegating responsibility and authority are major goals to that end.

At the same time we have limited resources and must make a profit otherwise we cannot stay in business nor be able to attract the capital necessary to grow. Few banks, few investors wish to be involved with poor stewards of resources! Thus annually we create Financial Plans for each apartment community we own. In the process thereof and throughout the year we get a fair number of “asks” for resources, the majority of which quite frankly get turned down. As owner-operators we invest heavily in our communities, more so than many. At the same time, it is possible to walk on to any site and easily see opportunities to spend money, most of which fall into the “nice but not necessary” category. Realistic life safety issues get automatic approval and right after that is true asset preservation. Beyond that it becomes a question of 1) Will the marketplace (Our Residents) sufficiently reward this expenditure? and 2) If so, how does the project rank (complexity, feasibility, amount of return) compared to all the possible projects being presented? 

Answers are rarely cut and dried and a great deal of professional judgement is usually involved. Will we get more rent? More occupancy? If so, for how long? And how SURE are we? 50/50 v. 90% probability? Will the investment yield a return for 3 years? 5 years? 10 years? At some point the wear and tear or changing tastes reduce the ability of the original investment to produce a premium. Commercial real estate is organized into “Property Management”, the day to day, year to year operating and leasing at the site level, and “Asset Management”, dealing with the longer term purchase, sale, capital investment and financing decisions. It is not unusual for site personnel to move from community to community every few years where as asset managers often have oversight of the same assets for a longer period of time. Most projects look nice in the very beginning, but do they stand the test of time? I’ve noticed that since site personnel frequently move on before the ravages of age take their full toll on a project that often they have a more optimistic view of the durability of a given improvement than someone who has viewed a number of projects age over the decades. 

There is also the psychological or soft side: often I wonder if at least a portion of the rent increase weren’t already there for the asking; the CapEx project simply provides the energy, enthusiasm, and confidence to go ask. I’ve seen an improvement project flourish under a community manager who initiated and championed it and then languish under a subsequent manager who seemed to lack the same level of belief or buy in.

Also, many investments/projects require significant oversight in order to insure that quality is both properly specified in the scope and then truly delivered. It is disheartening to see the impact of thousands and thousands of dollars diminished by sloppy install or messy trim. The intellectual capital to properly oversee capital expenditures can be as limiting a resource as financial capital. And, unfortunately, paying top dollar is no guarantee of top quality. Plus a vendor who delivered excellence in the past may have performance issues if a less capable or motivated supervisor or under skilled work crew shows up on the next job. When we pick a general contractor for construction projects we insist on interviewing the site superintendent as well.

As always, I share what I most want/need to learn. – Nathan S. Collier