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How can we budget to maintain our physical buildings and assets?

May 9, 2022

Physical assets like buildings need to be part of your maintenance budget.

Does your nonprofit own property? A building or other assets that you use to fulfill your mission can be a source of pride and stability. It can also be a source of frustration and worry. Buildings, in particular, can quickly fall into disrepair and when upgrades are needed, they often are system upgrades that don’t substantially increase its value. What happens in your organization when the floors need to be replaced, the HVAC needs an upgrade (or breaks), or when the parking lot needs to be resurfaced?

Some organizations turn to emergency appeals to their donor base to raise the needed amount quickly. What they find is that one problem leads to another as the HVAC repair turns into a need to replace plumbing or gas lines and the expected budget balloons. As the building ages, these types of appeals wear on your donors and their generosity.

Other organizations may choose to conduct a capital campaign to raise those elusive big dollars and do a complete overhaul of the building to ensure each potential area of concern is addressed. Some might even consider a comprehensive campaign to bundle the less exciting plumbing repair with an expansion of programming or some other capacity-building work to generate more excitement. This can be a significant undertaking that involves preparation time and expense as well as the execution of the campaign itself.

Finally, some organizations will proactively budget for repairs and upgrades to ensure that maintenance is not deferred and that both fundraising appeals and campaigns are conducted in ways that more closely connect donors to the mission of the organization.

To accomplish this type of budget planning is actually quite simple if you follow a few key steps.

Identify Your Assets & Replacement Costs

It's crucial to know what assets the organization has and what they are worth as well as what would it cost to replace them. We also recommend giving each item (or class of items) a useful life or replacement window. For example, let’s say you have 20 computers in your organization each with a value of $500 or an HVAC unit has a replacement cost of $20,000. Identify all the assets of your organization and how much you anticipate it costing to replace. Generally, we recommend that you identify assets that are greater than $1,000 for small/mid-sized organizations or $5,000+ for mid to larger organizations.

Assign a Timeline for Replacement

Next, identify the timeframe for replacement. In our earlier example, perhaps computers need to be replaced every 4-6 years while the HVAC until is replaced in 20 years.

Determine the value of your assets after you've made a list of them. Because assets depreciate, this isn't what you paid for them when you first bought them. Look for similar products (about the same age) for sale to establish the market value of these tangible assets. This isn't an exact science, but it will give you a general idea of how much they're worth, which can come in handy if you need to get estimates and compare prices.

Budget for Replacement

The next step is to identify what portion of each asset’s replacement value should be allocated to each year’s budget. For example, if you have $10,000 in computers and will need to replace them every five years, you could simply budget $2,000 a year for computer replacement and in five years you’d have $10,000 saved up to pay for them. Another option is to replace one-third of those computers every four to six years. This means, that you could budget less per year to be able to replace the first third in four years, the second third in year five, and a final lot of computers in year six. For something like the HVAC system, you might budget $1,000 a year towards the eventual replacement need.

As you can imagine, a long list of assets and their replacement costs amortized out can seem overwhelming. However, there are two benefits of doing this work:

Board and staff will have a clear sense of what funds are needed when in the organization’s future. If you have a large building with several systems that are all nearing the end of their useful life at the same time, it might be wise to start planning for those financial needs whether through savings or a campaign. Advanced work will help avoid emergencies and help your team coordinate these efforts.

Donors will have a clearer understanding of the overall costs of delivering on your mission. For example, a shelter for people experiencing homelessness or hunger has the direct and immediate costs of food and beds but certainly also needs to have a working heating system, plumbing, etc. Fundraising appeals can be updated to reflect the fact that all the costs of delivering service to the community are counted appropriately in the donor’s gift amount. This is an authentic and honest way of representing true programming costs.

Generally, we recommend aging infrastructure with deferred maintenance budget much more towards capital projects and improvements while organizations that have no deferred maintenance might budget 10% towards a capital reserve for future replacement needs.

Ensure that all assets are insured

While you are going through the process of budgeting for replacement costs, it’s essential that you protect your assets from unexpected or untimely failure. Business property insurance will cover replacement costs (flood, fire, etc.) if any equipment is stolen or wrecked due to acts of nature. You'll also require auto insurance if you utilize company vehicles. Yes, they are extra expenses when your budget is already tight, but as you are building your capital reserves, it is important to ensure that you are able to replace any asset that is critical to your nonprofit’s mission and operations.

Establishing a Capital Reserve Account

For near-term and small-dollar needs, we recommend keeping these dollars liquid and accessible. In our computer example, you’ll need at least $3,300 in year four to be able to swap the first set of computers. A savings account or money market account is a great way to have those funds accessible when they are needed. For longer-term and larger dollar needs, many of our clients create capital reserve funds that are conservatively invested in a diversified market portfolio. By putting $2,000 or $10,000 a year away for needs that are 10, 15, or 20 years away, the investment account could prevent inflation from impacting those reserves and potentially create the opportunity to reduce budget impact in the future through an appreciation of the portfolio.

If you have questions about budgeting for your nonprofit, creating an asset replacement reserve account, or conducting a capital campaign for your organization, we’d love to speak with you more.

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