Capex Prioritizer

Debt Terms

Capital Budget

Projects

For each project:

Other

Process

Step 1: Capital Prioritization Framework

Define the scoring methodology:

• Primary financial criterion: unlevered IRR and NPV per project, discounted at the property's (or portfolio's) unlevered cost of capital
• Interaction effect methodology: evaluate projects both standalone and as bundles. Identify complementary projects (bundle IRR > sum of standalone) and conflicting projects (competing for same contractor/window)
• "Do nothing" methodology: for every project, model the explicit cost of doing nothing for 1, 2, and 3 years
• Covenant escalation rule: any project whose deferral breaches DSCR/LTV covenants automatically becomes Tier 1

Step 2: Project Evaluation Table

Build a comprehensive table with these columns:

Property | Project | Cost | System | IRR | NPV | Residual Value Ratio | DSCR Delta | LTV Delta | Repl. Cost Benchmark | Interaction Group | Priority Score | Tier | Timeline

Per-project IRR/NPV: Build a standalone cash flow schedule for each project:

• Year 0: upfront cost
• Years 1-N: incremental NOI (rent premium, expense savings, avoided loss)
• Terminal year: residual value contribution at planned disposition
• Solve for IRR; compute NPV at the unlevered cost of capital

Residual Value Ratio: For each project, calculate residual useful life remaining at exit:

• Residual life = useful_life_years - hold_period
• Residual value ratio = residual_life / useful_life_years
• Express as cents of residual value per capex dollar invested
• Example: 25-year roof in Year 1 of a 5-year hold = 20/25 = 80% residual = high value; cosmetic reno with 5-year life in Year 1 of 5-year hold = 0% residual

DSCR/LTV Delta: Compute DSCR and LTV before and after each project:

• Flag projects whose deferral causes covenant breach
• Flag projects whose execution improves DSCR/LTV enough to unlock refinancing

Replacement Cost Benchmark: Compare proposed cost to RS Means or Marshall & Swift data on a $/SF or $/unit basis:

• Flag outliers >15% above benchmark (overpaying)
• Flag outliers >15% below benchmark (scope gaps in bid)
• If RS Means unavailable, use industry rule-of-thumb ranges per system category

Step 3: Reserve Adequacy Analysis

Engineering Method: physical inspection, remaining useful life per component, replacement cost estimate for each major system.

Actuarial Method: historical repair frequency, cost escalation at 3% annual default, probability-weighted expected annual expenditure.

Funded Ratio: current reserve balance / present value of expected expenditures over hold period.

Reserve-to-Valuation Ratio: reserves as % of property value. Benchmarks: 0.5-1.0% Class A, 1.0-2.0% Class B, 2.0-3.0% Class C. Flag below benchmark.

Lender Reserve Mapping: map each project against lender-mandated reserves. Identify projects where deferral triggers lender intervention (forced reserves, cash sweeps, default events).

Step 4: "Do Nothing" Cost of Deferral

For every project, model the cost of doing nothing for 1, 2, and 3 years:

• Increased emergency repair probability (annualized expected cost)
• Tenant loss probability (rent at risk x probability of loss)
• Insurance premium impact
• Code violation risk and fines
• Accelerated deterioration of adjacent systems
• Express as a "deferral penalty" in NPV terms

Compare deferral NPV penalty against project NPV. If deferral penalty > project cost, the project is a no-brainer.

Step 5: Interaction Effect Analysis

Build an interaction matrix for interdependent projects:

• Complementary: lobby renovation + elevator modernization yield a premium beyond either alone. Compute bundle IRR and compare to sum of standalone IRRs.
• Conflicting: two projects competing for the same contractor window or tenant disruption period.
• Sequential: project B only makes sense after project A completes.

For portfolios with >15 projects, limit bundle evaluation to same-property or flagged-dependent projects.

Step 6: Three-Tier Funding Recommendations

Tier 1 -- Must Fund:

• Projects whose deferral breaches DSCR/LTV covenants
• Life safety and code compliance
• Revenue protection (preventing tenant loss)
• Projects with deferral penalty > project cost

Tier 2 -- Should Fund:

• Strong IRR/NPV projects that fit within remaining budget
• Interaction premium projects (bundle creates value beyond standalone)
• Projects with high residual value ratio at exit

Tier 3 -- Defer:

• Acceptable deferral cost for 1-2 years
• Cycle-timing candidates (defer to capture contractor cost savings)
• Projects with low residual value at exit
• Cosmetic improvements that do not drive rent premium

Budget Reconciliation: Tier 1 + Tier 2 total vs. approved budget. If shortfall, identify financing options or scope reductions. If surplus, pull highest-IRR Tier 3 projects forward.

Step 7: Risk Analysis

For each project and the portfolio as a whole:

• Per-project "do nothing" cost at 1/2/3 year horizons
• Interaction risk from breaking apart recommended bundles
• Covenant breach probability timeline (when does DSCR/LTV cross threshold?)
• Contractor pricing risk (peak vs. trough cycle)

Step 8: Implementation Roadmap

Quarterly phasing adjusted for:

• Construction cycle position (cycle multiplier on costs)
• Seasonal factors (roofing in summer, interior work in winter)
• Lease expiration coordination (TI work during vacancy)
• Contractor availability and lead times

Flag projects that could be deferred 6-12 months to capture 10-20% cost savings in a softer contractor market, or projects that must proceed despite peak pricing.

Output Format

1. Capital Prioritization Framework -- methodology, interaction effects, covenant rules
2. Project Evaluation Table -- all projects with IRR, NPV, residual value, DSCR/LTV delta, benchmarks
3. Reserve Adequacy Analysis -- engineering + actuarial methods, funded ratio, lender mapping
4. Three-Tier Funding Recommendations -- Must Fund / Should Fund / Defer with budget reconciliation
5. Risk Analysis -- deferral costs, interaction risk, covenant timeline, contractor pricing
6. Implementation Roadmap -- quarterly phasing with cycle and seasonal adjustments

Red Flags & Failure Modes

• Subjective scoring: never rank projects by "importance" without financial quantification. IRR/NPV is the primary criterion.
• Ignoring deferral cost: "we can wait" is only valid if the cost of waiting is quantified and acceptable.
• Missing covenant impact: a project that prevents a DSCR breach is Tier 1 regardless of its standalone IRR.
• Benchmark-free bidding: never approve a project cost without checking it against replacement cost benchmarks. Outliers need explanation.
• Bundle blindness: evaluating projects only in isolation misses complementary value. Always check interaction effects for same-property projects.
• Cycle-ignorant timing: spending at peak contractor pricing when the project could safely defer 12 months wastes 10-20% of capex budget.

Chain Notes

• Upstream: deal-underwriting-assistant provides valuation and NOI. market-memo-generator provides cycle position.
• Downstream: rent-optimization-planner uses capex-driven rent premiums. lease-compliance-auditor identifies compliance-triggered capex.
• Peer: tenant-delinquency-workout -- vacancy from eviction changes capex priority (TI readiness).