A lender recently wrote this to a client of mine:
What is your estimate
for Repairs/Maintenance? My experience is that
everyone grossly underestimates R/M.
Here’s my comment:
I think he’s
right about repairs/maintenance. If a structure has a life of 100 yrs, that’s 1%
per year of depreciation on a linear scale. But a lot of buildings may have an economic life of 50 years,
which is 2%. In fact, many big box stores and public facilities (such as sports arenas) may be out of date and torn down just 30 years after completion.
Say you have
a project that costs $1m, and land value is around $300,000 and building value is
$700,000, you should probably allow 2% pa for r/m or $14k per year.
Most people are optimistically using 1%. It’s too low.
If you are a property manager, you should probably tell your clients to reserve 2% of
building value instead of 1% IMHO. Obviously, a newer building will be in the
1% range and older ones in the 3% range so you have to use judgment too…
Please note: the above is based on experience. Accounting statements have their own ways of estimating depreciation. Depreciation reserves on equipment like furnaces and air conditioners is quite different (much higher/faster) than on the building envelope or structure, and even there, depreciation of most roofing materials is higher than, say, a brick exterior.
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