The “Real” Cost of Facility Ownership: What they didn’t teach you in seminary
As many of you know, I come from a background of planning and building ministry facilities. Prior to launching Cool Solutions Group and becoming a part of Visioneering Studios, I was blessed to invest 23 years of my life in serving churches to develop new and renovated ministry facilities. That phase of my life brought me great joy and fulfillment. But now I am very burdened by the millions…and billions of dollars that are spent each year on religious construction without a clear understanding of the “real” cost of ownership. I also think that most ministry leaders do not understand that the ongoing costs eclipse the initial costs and do so in a much bigger way than you would imagine.
Let’s look at the REAL cost of ownership of our ministry facility:
1. INITIAL COST: For this exercise, let’s assume that our new ministry facility is 30,000 SF and we can have it built for $125/SF….of that, the construction partner’s fee was 9% and we paid the design professional a fee of 7% of the construction value. We will also assume that the land has been paid for and is unencumbered of debt.
So what do the numbers look like?
INITIAL COST: 30,000 SF x $125/SF = $3,750,000 plus design fees = $4,012,500
Construction Partner Fee: $3,750,000 x 9% = $337,500
Design Professionals Fee: $3,750,000 x 7% = $262,500
2. COST OF “MONEY”
Let’s assume that we borrowed $3,000,000 to pay for the project and we did so based on a 15 year loan at 6%…but paid it off in 7 years. In this scenario, you will have paid approximately $1.1M in interest.
3. COST OF OPERATION:
Based on our research and benchmarking provided by IFMA (International Facility Managers Association), the average church in America will spend $4.50 to 7.00 per square foot annually for janitorial services, utilities and general maintenance. In addition, a church will spend an additional amount in capital improvements that will be in the $1.00 0 2.00/SF range (if the capital reserve account is started at the time construction is complete…this number grows significantly higher if you neglect the capital reserve account during the early years of the building’s life cycle). For the sake of this exercise, let’s assume that we will spend $6.50/SF for operational and capital reserve items. This may be low…but want the calculations to be realistic. I was recently contacted by Gary Gabriel from CDH Partners who shared that in 2010, the Building Owners and Managers Association also used $6.50/SF as their bench mark number…so I think we are in good company here.
30,000 SF x $6.50/SF = $195,000/yr.
Assume a 40 year life cycle (which is not that long)….at 1.5% per year of inflation. Remember, that operational costs are perpetual and paid for with inflated dollars….so this is going to increase, and 1.5% is probably TOO LOW.
$195,000/ yr x 40 years = $7,800,000 + 60% (1.5% per year inflation for 40 years…without compounding) = $12,480,000
So let’s look at what this means:
1. Initial costs including design – $4,012,500
2. Cost of Money – $1,100,000
3. Cost of life cycle operations and capital reserve – $12,480,000 (that is $416/SF…OUCH)
TOTAL COST OF OWNERSHIP = $17,592,500
WOW….that is a BIG number…now…here is the shocking part:
1. The combined cost of the construction partner and the design professionals ($600,000 in this example) is only 3% of the total cost of ownership
2. The construction cost…including the design…is only about 22% of the total cost of ownership
3. The interest paid is only about 6% of the total cost of ownership
4. Leaving…71% of the total cost of ownership in operation costs and capital expenditures.
As I indicated in a past blog, State Farm Insurance found that they spend about 80% of the total cost of ownership of commercial buildings on operational costs over 40 year. Further, a book was published in 1969 by THE AMERICAN INSTITUTE OF ARCHITECTS entitled – LIFE CYCLE COST ANALYSIS 2:USING IT IN PRACTICE by David S. Haviland. In this book, Mr. Haviland states:
“The INITIAL DESIGN and CONSTRUCTION of a facility comprises about 15% of the total cost of a building over its 40 year lifespan. The remaining 85% is made up of the building’s OPERATIONS and MAINTENANCE COSTS.”
So…what costs more….the initial cost…or the cost after you occupy? I think the numbers speak for themselves. So…do we invest the same amount of time and energy in planning our operational costs as we did when we developed our master plans and floor plans? Why do we get all in a tiff about an architect charging 8% instead of 5%…or the construction partner charging 10% instead of 6%? The fees that encompass only 3% of the total cost of ownership feel so important at the time we hire them….but the decisions, direction, means and methods that this team suggests and implements will be with you for the life of your buildings. Do we have our eyes on the REAL cost of facility ownership?
If Facility Stewardship is really about being wise stewards of all God has entrusted, then I think it is fair to say that most of us have our priorities upside down. Facility Stewardship must include:
1. Purposeful Facility Planning…taking the time to really evaluate the DNA of the church, reviewing the vision, determining IF facilities are needed to accomplish the vision and mission of the church in addition to evaluating the potential financial implications
2. Proper Facility Development…This is not just about construction….but also encompasses the financial stewarding of the resources God has entrusted, planning facilities that meet the ministry objectives….AND…that do not bankrupt the church in the future with operational costs. As seen above…most of your long term cost of facility ownership WILL BE established based on the planning during this phase of any project
3. Proactive Facility Management and long Term Care….this is where we too often fall grossly short in our Facility Stewardship Initiative.
Think about it….then do something about it.