Capital Financing
Options = Opportunity
FERN’s financing options translate into an opportunity to advance your project objectives by providing funding. Discover how different funding options can help get your project off the ground.
Below you will find a "Private Sector Capital Planning Model"
Decision Making and Cost-Benefit Analysis
Stakeholders should consider making informed capital investment decisions on projects that consider all the factors of evaluation.
1. Impacts on Cost
- Pavement Life Cycle Costs
- Design Requirements
- Construction Cost Escalation
- Financing
– Equity (Assessments/Available Cash Payments)
– Cost of Borrowing/Borrowing Options (Debit Service)
– Tax Shelter (Special Circumstances-Commercial Realty Ownership)
– Cost of Capital
– Opportunity Costs
– Risk-Free Rates
2. Asset Timeline Ownership (How long will you benefit from the investment)
Establishing the proper balance can save money and improve the final condition of the asset.
Tax Shelter (Special Circumstances-Commercial Realty Ownership)
Consult with your Accountant– In some circumstances for some commercial property, the cost of interest reduces your taxable profit and, therefore, reduces your tax expense.
Pavement Life Cycle Costs
Life Cycle Costs refers to all costs which are involved in the preservation of a pavement during its complete life including, costs associated with initial construction and future maintenance and rehabilitation. The life cycle starts when the project is initiated and opened to traffic and ends when the initial pavement structure is no longer serviceable, and reconstruction is necessary. LCCA is an economic method to compare alternatives that satisfy a need to determine the lowest cost alternative. Most projects wait until the asset has reached the end of its service life before acting. This approach results in a more costly outcome when compared to an ongoing maintenance approach.
To account for the cost related to future activities, the time value of money must be considered. In LCCA, the discount rate is used. The discount rate is defined as the difference between interest and inflation rates. Historically, this value has ranged from 2% to 5%; for LCCA purposes, a value of 4% will be used. The discount rate accounts not only for the increased cost associated with performing an activity in the future but also for the economic benefit the organization would receive if those funds were instead invested in an interest-bearing account (sometimes referred to as opportunity costs).
Consider Maintenance Costs
A 10,000 square foot parking lot that consist of 4” of pavement will cost approximately $370,000 to reconstruct. On average over a 30-year period, it costs stakeholders $3,375 annually to maintain a parking lot with the bulk of the maintenance costs at the second-half of the pavement life (roughly 14 cents per sq. ft. to 16 cents per sq. ft. on a four-year preventive maintenance cycle).
Escalation
Stakeholders gain the ability to better time their procurement decisions. They can negotiate contracts early and wait for the completion of construction documents for trades that are expected to remain steady or decrease. Some items that impact escalation are:
- General Inflation
- The increased demand for work (seasonally impacted)
- Material Escalation (Typically a clause is carried in the contractor’s terms and conditions). However, material costs can be mitigated by timing a commodity like liquid asphalt prices.
Financing
Many stakeholders are reluctant to consider borrowing options for Capital Asset Funding. There are criteria that banks typically use when deciding whether to make a loan to a building or association. Among these factors are the number of delinquent unit owners and how much money is in arrears; a reasonable ratio of the amount being loaned to the market value of the unit; and the impact of debt service payments on unit owners’ ability to make their regular monthly maintenance payments.
Financing Consideration
5-year Loan (Rate 9%) on $370,000 commercial paving project with 20 property owners. The total monthly payment is approximately $7,700, or approx. $13/day per each of the twenty (20) owners for the 5-year term of the loan.
Assessment Consideration
$18,500 each for twenty (20) owners. (Opportunity costs of assessment over the same period based on risk-free rate of 4% is $4,000).