Planning for the future in dollars & cents.

The need for capital replacement planning is as certain as the future gets. Some basic guidelines.

Capital planning, or creating a capital financing plan, is a disciplined effort at assessing the current and projected physical needs of a property, establishing the costs of maintaining or modernizing it, and creating a strategic plan for addressing those needs within financial constraints. It asks and answers a series of basic questions: What is the state of the physical plant, what will wear out, and when? What will be the costs of these repairs and replacements, and how will the overall expenditures for these things relate to existing and future resources?

A capital plan begins with a comprehensive and detailed inventory of the existing physical plant - not just the big-ticket items, but everything: number of windows, BTUs in the boiler system, square yards of asphalt in the parking lot - along with the make, model and size of mechanical equipment. It gets very specific. When you look at windows, for instance, you also look at lintels and the caulk. You ask what condition each system is in and its remaining useful life.

This information can be found in standardized tables that have been published, such as those On-Site Insight developed for Fannie Mae. But you have to tailor this information to your particular facility by factoring in the quality of the original materials, their state of maintenance, the effects of resident-based wear and tear, the weather and even the environment in general.

Unless you have an unusually talented staff, with complete architecture and engineering expertise as well as computer skills and a lot of time to devote to the task, you might be over-matched on this step. A third party that offers technical, costing and strategic planning skills might be the most cost-efficient way to go. That third party will also be able to see things with a fresh eye, allowing a rigorous and objective analysis. In turn, any consulting third party you work with must interact with your staff on a regular basis to get a true understanding of your specific circumstances.

Capital planning aside, developing such an assessment is a useful exercise in its own right. It can make you smarter about the complexities of running your own building, while at the same time demystifying the process; you realize that the procedure isn't exactly as complicated as rocket science.

Such an analysis can help you to optimize your capital spending by improving maintenance or lowering utility costs. For instance, we've seen facilities where the air-return system atop the building had been turned off years before, and no current maintenance person knew why. It meant that there was no way to return the air that had been removed from the building, so the windows sucked in air and left the rooms feeling drafty. Thus, the perceived problem had a solution completely different from window replacement.

We have seen some facilities that get assessments and just put them on a shelf, but others that use them on a quarterly basis to fine-tune their operations. We helped one nursing facility determine where to move a central laundry so as to reduce the demand for hot water and, in the process, address the problem of boiler overcapacity. We also helped in the relocation of a kitchen, so as to make better use of bakery and dishwashing functions, in the process reducing utility costs.

A facility's next step after an overall physical plant assessment is to decide whether it will eventually replace a failed system in kind or do it differently, and ascribe some kind of cost to and time frame for that replacement. For instance, do you replace an oil-fired boiler with another oil-fired one, or go to gas or to a dual system?

There are several third-party cost estimation resources, such as R. S. Means or Marshall and Swift, that can help you cost this out. They are deficient, however, in one respect: It is up to you to factor in the cost of demolishing the existing system - a whole different set of figures from the new-construction figures offered by many third parties.

A final point: Plan future work so as to make sure it is appropriately timed. If you need substantial HVAC rooftop work, for instance, you might wish to coordinate that installation with any reroofing needed, so that invasive HVAC procedures do not invalidate roofing warranties.

Taken altogether, these factors will let you create a capital funding plan. All future physical plant needs and their financial ramifications can be pulled together into a presentation that shows you your future needs on a spreadsheet, allowing for inflation and balanced against your projected revenues. On-Site Insight, for example, offers a spreadsheet that allows facilities to create a plan that will work over a 10- to 20-year horizon (although, obviously, in four to five years your staffing resources or your market competitiveness might have changed, calling for another needs analysis).

The final step in creating a capital funding plan is perhaps the biggest one, and it is one that few long-term care facilities are addressing consistently. You must think about future funding in a disciplined manner so as to allow you to create a replacement reserve. This is more than just maintaining a depreciation account or putting a percentage of your budget into a reserve, as many facilities are now doing. Instead, you have to be able to estimate your actual replacement needs and determine ways to set aside enough money to be able to meet them.

Long-term care facilities must learn to embrace a rigorous capital planning reserve strategy. Having one that is based on a thorough capital needs assessment and a capital funding plan is not only vital for future planning, but it also has other important uses: It is away to document the efficiency of your operation to regulators, and it will be helpful when documenting funding or refinancing requests for private lenders or the government.

David Whiston is a senior associate and director of marketing for On-Site Insight, helping clients develop financing solutions to capital problems. For more information, phone [phone]; fax [phone], or visit On-Site Insight's Web site at www.on-site-insight.com.