Determine the financial feasibility of your project
If you’re planning a seismic strengthening project, you’ll need to work out the financial impact of the work on your building.
Often the best way to start the financial feasibility process is to prepare a spreadsheet that:
- states your starting point - an estimate of the current rental income, operating costs, yield/return, and value of your building
- states the cost of each option you are considering
- outlines the value of each upgrade option - the income, operating expenses and yield/return
- shows whether the increase in value for each upgrade option is sufficient to offset the cost of works for that option
- records the assumptions you have made.
A record like this allows you to review your position as more information comes in, especially cost information as you get more detail on your engineering solution.
It allows you to quickly exclude unfeasible options, and be better informed when seeking formal advice.
What you’ll need to consider
- Is the current use of the building the best use? Does it best use the buildings location and other characteristics?
- A strengthening project might be an opportunity to change building use to one that occupiers find more attractive.
- The best use is usually (but not always) the use that attracts the greatest rental.
- Is your building fire-safe and mobility-friendly? A change in use often requires improvement to you fire systems. And your design may also require improved access to and mobility inside the building.
- Can your tenants remain in the building while strengthening work goes ahead? If not, you’ll need to coordinate your project with the expiry of leases. And you won’t earn rental income during the project.
- If you are an owner occupier, you may have to cover the cost of relocating to another premises during the project.
- Consider how you will attract tenants to your building.
- Can you secure tenant commitment before you finish work? Many lenders require evidence of some pre-leasing to reduce their risk.
- Some tenants – particularly those with a nation-wide presence – prefer buildings rated at or above 67% NBS.
- When you analyse options for your upgrade, consider how usable you want the building to be after a moderate earthquake. Will it be safe to use for its intended purpose?
- A least-cost solution for earthquake-prone buildings is likely to protect people in the event of a moderate earthquake. But the lower the target strength (%NBS), the more likely the building will be unusable immediately after a moderate earthquake.
- A least-cost solution that seeks compliance alone may not be the best option for the longer term.
- You can often achieve economies of scale if you do other building works at the same time. For example, you may be able to reduce building operating costs by improving energy efficiency and replacing high-maintenance end-of-life elements such as air conditioning and glazing.
- A registered property valuer can give you more certainty on the financial implications for each of your options. Your lender may also require a valuer’s report.
- Talk to a local real estate agent to find out rental rates and yields (cap rates) for similar strengthened buildings.
- Some seismic upgrade projects provide value through intangible benefits to building owners rather than by directly increasing the value of the upgraded building. Many owners are motivated by civic pride, and some by the challenge of completing a successful project.