Managing a property portfolio means managing its performance, for the benefit of users, and its risks, to best, anticipate problems that would require immediate and often ill-prepared action. But almost always, property management activities are carried out in a constrained financial environment. It is therefore necessary to be well aware of one’s financial needs in order to target a budget that is in line with the issues and objectives of one’s organization. But what are the accounting techniques to identify the required budget envelopes? And how can operating expenses (OPEX) and capital expenditures (CAPEX) be adequately estimated?
A bit of history: the origins of value counting and its objectives
The idea of accounting for the activities of an organization dates back to the time of European antiquity, but it was officially theorized by the Italian Franciscan Luca Bartolomes Pacioli in a book published in 1494 in Venice. Much more than the simple recording of acts related to the purchase of products or services, accounting aims, from its origins, at estimating the value of tangible goods considered as useful assets for production and trade in order to determine an exchange value and possibly a profitability. And in the case of accounting for cities and other public entities, the interest is not profitability, but rather the fair expenditure to achieve the objectives of society.
A cow is an asset that costs €1,500 to buy and has a milk production of about 10,000 liters per year. It brings in about €345 per 1,000 liters but also generates many expenses to feed and maintain it during its 15 years of productive life. The accounts show a profitability.
By analogy, in the field of public expenditure, let us take the case of a primary school: the building is a physical asset enabling the headmaster of the establishment to train citizens who will be both bearers of the values of a country and contributors to the wealth of that country through their economic actions. There is therefore a series of expenditures necessary to achieve the objectives during the nine to ten years of a pupil’s schooling.
As with any activity, the right cost is sought. Today, accounting standards are tending to become uniform in organizations with certain requirements for the use of IFRS in addition to the French standard. The approach often used is that of the historical view of expenses based on general accounting, which is an information tool aimed at the legal correctness of the use of funds. In addition, it is essential to set up analytical accounting, as an analytical tool that enables good decisions to be made.
In the field of physical asset management, the knowledge of the architect, engineer, and all other technicians responsible for the construction or operation and maintenance of a building is essential to establish both the structure and content of cost accounting.
Applying accounting tools
Even with the best will in the world, an accountant, experienced in the exercise of general accounting, needs the asset management expert, whether internal or external to the organization, to properly estimate the financial needs required throughout the life cycle of an asset.
An analysis of the expenses incurred in the context of real estate asset management reveals essentially two distinct but complementary types of budgets:
- the investment budget (CAPEX);
- the operating budget (OPEX).
Within each of these budgets, there are several sub-categories to be defined according to the desired cost accounting. OPEX, which is the contraction of Operational Expenditure, generally groups together expenditure leading to the establishment of the maintenance budget devoted to the “well-being” of assets (buildings and infrastructure) and the operating budget, which could, in turn, be associated with the “well-being” of people, whether users or users of the asset in question.
The so-called “OPEX” budget is thus more commonly referred to as the operating budget for operation and maintenance. It largely covers regular expenses such as maintenance, routine building maintenance, fluids, cleaning, security, safety; in short, all activities aimed at restoring, maintaining, or improving the thermal, lighting, acoustic, aesthetic, and other environments.
The CAPEX budget, which is the contraction of Capital Expenditure, is generally made up of expenditure resulting from activities related to the following three sub-categories:
- the “addition of assets” (new constructions, expansions, miscellaneous extensions, etc.);
- “maintenance of assets” (replacement of equipment, rehabilitation, etc.);
- “disposal of assets” (sale and leaseback, deconstruction and recycling, etc.).
OPEX or CAPEX
The accounting rules on the identification of the budgetary nature of an action are subject to interpretation. It is the role of the person responsible for asset management to assist the Accounting Officer in this step. And the key to interpretation lies around the reflection on value, life cycle and depreciation, and impairment.
A CAPEX-type action, therefore, aims to significantly increase the useful life of the asset and thus to restore, maintain, and sometimes increase its value in use. Thus, this expenditure is essentially the result of financial debt and monitoring its depreciation, through accounting depreciation, will be necessary.
On the other hand, when an action tends to restore or maintain the proper functioning of the environment and daily use, without having any significant impact on the extension of the useful life or on the value of the asset, this expenditure is associated with consumption. It is then the responsibility of the OPEX.
If a defective luminaire is replaced by in-house maintenance staff as part of routine work. This is an intervention under the OPEX budget. On the other hand, in the case of more extensive work such as complete replacement (“relamping”), it is rather a CAPEX budget intervention that extends the service life of the “Lighting System” component.
In both cases, regardless of the budget concerned, the objective is the same: to safeguard or improve the use-value of the property assets. In the first case, it is a replacement of “consumables” and therefore a routine operation (OPEX), while in the second case, it is a significant one-off intervention that restores the use-value of the asset (CAPEX).
A suite within your reach
It is estimated today that between 1 and 5% of the current replacement value (CRPV) of a building stock would have to be invested per year in OPEX budget and between 0.5 and 3% in CAPEX budget to restore or maintain the value in use of its assets, in short for a good state of health of the buildings.
With an aging building stock, the increasing obsolescence of the buildings, the significant increase in pressure to comply with regulations and the expectations of changes in the use of certain spaces make it difficult to provide a simple response to the need to establish fair and reasonable OPEX and CAPEX budgets, based on the organization’s issues and objectives.
However, solutions do exist: setting up and monitoring a property master plan and an organizational and technical plan for regular maintenance are the essential steps and fundamental tools for identifying and estimating these budgets.
Without them, how can we answer the increasingly frequent question about the overall cost of assets, the TOTEX (Total Expenditures) that feeds the short, medium, and long-term decisions of the State, cities, companies, and all entities seeking to maximize the value of their physical assets?
Keywords: CAPEX, OPEX, accounting, budget, life cycle, value, depreciation, deterioration, operation, regular maintenance, investment, operation, asset management, asset management, real estate, PACKiT, 3t, myA
Date of the article: 20/05/2020
Editors: Thomas Pradier, Jean-Pascal Foucault.
Sources and notes:
- Pacioli, L. « Summa de arithmetica, geometria, proportioni et proportionalita », 1494, Venise: Pacioli listed and explained the best practices of northern Italian merchants such as bookkeeping and its double-entry accounting, trial balances, balance sheets, the rule for predicting the future value of an investment, and many other tools still used by professional accountants.
- Pierre Vernimmen (Auteur) P. Quiry, « Finance d’entreprise 2020 », 18ème édition, Dalloz, EAN 978-2247187904, ISBN 2247187900, 2019, 1220 pages.
- IFRS Standard, https://www.ifrs.org/issued-standards/list-of-standards/, The IFRS® Foundation is an international not-for-profit organization responsible for developing a single set of accounting standards that aim to establish common rules so that financial statements can be consistent, transparent, comparable and reliable from one organization to another and from one country to another. (accessed April 2020)
- Autorité de normes comptables, http://www.anc.gouv.fr/cms/sites/anc/accueil.html, The Autorité de normes comptables (ANC) aims, in France, to establish in the form of regulations the general (Plan comptable général) and sectoral accounting requirements that must be complied with by natural or legal persons subject to the legal obligation to prepare accounting documents that comply with accounting standards.