Real Estate Investor Magazine South Africa November 2014 | Page 46

STRATEGIES

BY JONATHAN S SMITH

MedicalProperties
Aid
For Commercial

Financial provision for good building health

O

ne of our primary requirements in life is to
obtain the benefits of a sound medical aid,
so we are able to procure the best medical
treatment when we fall seriously ill. Some quip that the
cost of medical care itself is life-threatening - another
sound reason for investing in a medical aid: cushioning
the costs of medical treatment.
Similarly, it is necessary for commercial property
investors to make financial provision for the health
problems that often befall a commercial building.
Health problems
A recent due diligence review of a small shopping
centre, constructed across three levels, provides a prime
example. Our inspection of the lifts within the property
revealed one of the lifts was no longer working, while
the other had stalled 34 times during the preceding
two months – 28 of which with passengers inside!
The incumbent owner had never accrued a sinking
(or savings) fund to cover the million rand required
to replace the critical parts that would keep the lift in
working order.

1. Correct level of insurance
The first precautionary measure property owners
should take against financial loss is obtaining
adequate insurance. The five categories of insurance
required are detailed below.
• Replacement insurance to provide for a disaster
such as fire, flood or other destruction.

FORMULA FOR CALCULATING REPLACEMENT INSURANCE
COST ITEM

VALUATION METHODOLOGY

Demolition and removal costs

(volume of rubble to be
removed) X (removal rate
per square metre)

Construction costs

(proposed size of development) X (construction cost
rate per square metre)

Professional fees

(construction cost) X (professional fee rate, expressed as
a percentage of construction
cost)

Holding costs

(monthly holding costs) X
(number of months during
which the development
shall be unusable prior to
completion)

Finance costs

(interest rate/12) X (number
of months from first drawdown to completion)

Maintaining a medical aid
Maintaining a medical aid for your building requires
strategically funding four aspects.
1. Obtaining the correct level of insurance across five
categories.
2. Managing the risks for which you have taken out
insurance.
3. Establishing a maintenance savings fund.
4. Financial prudence.
46

November 2014 SA Real Estate Investor

www.reimag.co.za