How Far do I Forecast into the Future – Part 1

How Far do I Forecast into the Future – Part 1

As on organization begins their asset management journey, one of the first questions that their stakeholders must ask is how far into the future do I want to forecast my needs. This will determine the scope and focus on any Facility Condition Assessment (FCA) project and other condition assessment of non-building assets as well.

To answer the question, you first have to look at the purpose of doing the FCA. If you are getting it done to support (re)financing of a commercial property, you are typically looking at the term of the loan plus two or three additional years (e.g. For a 5-Year Term, you would create a 7 or 8 year forecast). The easiest way to answer this question in this case is to speak with your lender to determine what forecast period they require to underwrite the loan.

If the purpose is acquisitions or disposition, the industry standard is to develop a list of future renewal needs 10 years into the future, beyond the proposed closing date of the sale. This allows the acquirer to understand the short-term needs of the property so that they can seek a “haircut” on the purchase price based on the costs of the near-term needs. Additionally, the 10-year forecast also gives a general sense of the CapEx that they should plan for during the first decade of ownership.

If you are doing an FCA for capital planning and/or asset management purposes, this is where the decision becomes less structured. That being said, many condominium corporations are regulated to have a 30-year Reserve Fund Study (RFS). Ultimately, it is up to each organization to determine how far into the future they want to forecast capital renewal need. Typically organizations that do a time-limited evaluation period use 5, 10, 20 or 30 years, depending on their internal processes and organizational goals and objectives.

One of the problems with a time-limited evaluation period is that as each year passes your planning window decreases by one year. If you are at the start of a 20 or 30 year timeframe that is not that big a deal. However, if you do a 5-year evaluation period, next year you only have the ability to forecast 4-years into the future. The next year 3, and so on.

In next week’s post, I will discuss the option of not having a time limited evaluation period, but doing a complete element-level inventory.

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