Pay Me Now or Pay Me Later

Written by Steve Banner on November 16th, 2009

In these times of budget optimization, expense reductions, tightening the belt, etc. it is important that owners and managers do protect the capital investments in their properties. The manager should not let short term financial goals impact the long term asset. The term used to define maintenance that should have been completed but has been put off is called deferred maintenance. Although deferred maintenance may result in improved cash flow for the short term, the impact on the asset could be long reaching. A good example of this concept would be the often forgotten about parking lot! Many folks have the misconception that parking lots require no maintenance and should last for ever and as a result, managers and owners many times will not budget any funds for parking lot maintenance.

Is the parking lot a good place to cut the building budget? The answer is almost always “no” because most owners have already deferred parking lot maintenance and repair projects, so any money that is approved is probably desperately needed. For the sake of argument, here is what you need to know before considering a cut in the parking lot budget:

What is the current condition of the parking lot? Every parking lot deteriorates in a predictable and measurable cycle, so make sure you know where this particular parking lot is on the deterioration curve, even if you have to guess. Don’t kid yourself or your owner by underestimating the actual condition of the parking lot because this will only come back to haunt you later (when your owner berates you for not anticipating a huge capital expense to repave the parking lot).

If you have a trusted paving contractor that you work with, ask for an assessment using a standard Pavement Condition Index (PCI) rating scale. This can be an informal assessment without any expensive testing. The goal is to get an approximation of PCI within 10 Index points.

What is the financial impact of a parking lot budget cut in the long term? Maintenance and repair projects immediately improve a pavement’s condition and they affect the rate of future deterioration. Most procedures will extend the service life of a parking lot, deferring the large capital cost required to rehabilitate the parking lot once it reaches a PCI level of 60. Cutting the budget means the pavement’s condition will continue to drop and the timing of a costly rehabilitation project will be accelerated. Show the owner a financial analysis showing the time value of money comparing several options and often it becomes an easy decision for the owner to make.

Ask a trusted paving contractor to give you the cost and timing of a rehabilitation job if the current budget cut is implemented. Then calculate the yearly costs required if the current budget plan is maintained. Always include the cost and timing of the rehabilitation process and do a financial analysis incorporating the time value of money and present to your owner.

Can the current project in the budget be phased in sections? Quite often, parking lot projects can be phased over several years without compromising the quality of the final product. The tenants may be inconvenienced and there might be additional costs involved for the contractor to do a series of small jobs instead of one large one, but the end result is always preferable to doing nothing and waiting for the budget to accrue again. This option is always better than reducing the specifications to meet a lower budget amount. Lower specifications usually mean huge reductions in longevity of the project, so money spent does not add up to anything and the entire project still looms.

Ask your paving contractor to give you a price for the projected work as a series of phases using current year prices and then spread out these costs for presentation to the owner. Make sure to include provisions for further damage that may result as a result of deferring part of the project over several years.

Here are the basic elements of a Pavement Management Program:

Master Database- Create a master database of all the parking lots in your portfolio of real estate and populate with key data fields needed for planning purposes such as year built, size (square yards) and PCI.
Assessment – Each parking lot must be assessed in accordance with a standardized methodology to ensure that rankings will accurately portray the relative condition of each parking lot in a portfolio of property. Consistent, accurate assessments can dramatically improve decisions when budget dollars must be prioritized.
Maintenance and Repair Strategy- Establish a standardized convention to follow for parking lot projects at each stage in the deterioration cycle. Conventions can be defined in CA levels, PCI ranges or specific years. Examples: sealcoat and stripe at beginning of CA level 1 and end of level 1; crackseal at PCI of 77 and 74; full-depth patching at years 10 and 14.
Rehabilitation Strategy- Establish a convention for when a parking lot will be rehabilitated such the beginning of level 5, a PCI of 60. Also determine the preferred method of rehabilitation so costs can be budgeted and allocated well in advance of actual need.
Multi-year Budget Spreadsheet – Create a spreadsheet for each property following the strategies defined above. This spreadsheet assigns costs to each maintenance and repair procedure and also to the rehabilitation plan if it will be done within the time window of this spreadsheet.
Review and Monitor - Regular updates to the plan should be done yearly. As this is just a plan, not all work will be done at the time originally determined so adjustments will have to be made to maximize the dollars spent throughout the portfolio.

Conclusions:

Assessment can be as simple as a visual survey of parking lots by a designated parking lot expert within a management company or it can involve hiring a geotechnical engineering firm to conduct the assessment. The level of accuracy is a function of the condition of the existing portfolio and the management philosophy of the property ownership. Do they want to spend money to defer capital expenses or do they want to hold the spending to a minimum and sell the property at a critical point in the deterioration curve? Since the cost of rehabilitation is so high at the end of a pavement service life, it certainly makes economic sense to defer this project as long as possible. The best way to defer the cost is to complete recommended maintenance and repair procedures at the right time in the cycle. This is where the life cycle cost analysis makes sense. Calculate the cost of each maintenance and repair procedure and evaluate the value of capital expense deferment. Once these determinations are made, they can become part of the strategy defined above. Planning for the cost to rehabilitate each parking lot is important because even though it is a one-time capital expense, it is very often a large expense and must be budgeted and allocated for in advance. It is critical to be proactive because the cost of rehabilitation at the beginning of level 5 is significantly less than the cost at the end of level 5 (by a factor of four to five times). Owners must be convinced of the huge financial impact of delaying the inevitable. If the cost of rehabilitation is $50,000 today, it will be $200,000 to $250,000 in less than three years for a 20 year pavement in level 5. Manage your parking lot as you would any other fixed asset in your owner’s portfolio. A pavement management program based on visual parking lot inspections updated every year will reap huge rewards in the long term. Your tenants will be happy because they will have a well-maintained parking lot, and your owner will be grateful for a realistic budgeting process without big surprises.