How to Create a 5-Year Capital Plan

Long-term financial planning

A 5-year capital plan extends your planning horizon beyond annual budgeting, providing the visibility needed to manage major investments strategically. It helps you sequence projects appropriately, manage cash flow, and communicate capital needs to stakeholders. This guide walks through creating a practical multi-year plan for commercial real estate portfolios.

Why Plan Five Years Out

Annual budgets are necessary but insufficient. They focus on immediate needs without considering:

Major projects requiring advance planning: Some improvements take years from conception to completion
Cash flow management: Spreading large investments prevents funding crunches
Strategic sequencing: Some projects should precede or follow others
Stakeholder alignment: Investors, lenders, and partners need forward visibility
Deferred maintenance: Without long-term view, important work keeps getting pushed

A 5-year plan provides the framework for disciplined capital management.

The 5-Year Planning Process

Step 1: Establish Planning Foundation

Before building the plan, align on fundamentals.

Define planning parameters:

What properties are included?
What's the hold period for each asset?
What are portfolio-level capital constraints?
Who are the key stakeholders and their needs?

Gather baseline information:

Current property condition assessments
Existing reserve studies
Historical capital spending patterns
Known upcoming requirements
Strategic plans affecting capital needs

Set planning assumptions:

Cost escalation rate (typically 3-5% annually)
Available funding by year
Contingency percentages by project type
Approval thresholds and processes

Document these explicitly—they'll inform every subsequent decision.

Step 2: Compile the Project Universe

Create a comprehensive list of potential capital projects across the planning horizon.

Sources for project identification:

Building condition assessments
Reserve study projections
Equipment age and replacement schedules
Regulatory and compliance requirements
Tenant improvement needs
Strategic repositioning plans
Energy and sustainability initiatives
Deferred maintenance backlog

For each potential project, document:

Property and location
System/component affected
Project description
Current condition rating
Estimated cost (current dollars)
Urgency/priority level
Dependencies on other projects
Business case/justification

Cast a wide net—you'll prioritize later. Missing projects creates gaps in the plan.

Step 3: Prioritize Projects

With the universe compiled, apply systematic prioritization.

Priority framework categories:

Critical (must do):

Life safety issues
Regulatory compliance requirements
Imminent system failures
Contractual obligations

High (should do soon):

Significant revenue or cost impact
Accelerating deterioration if deferred
High tenant/resident visibility
Strategic importance

Medium (plan for):

End-of-life replacements on schedule
Modernization and efficiency improvements
Competitive positioning

Low (consider):

Nice-to-have enhancements
Proactive replacements ahead of failure
Aspirational improvements

Score and rank: Create a scoring matrix using criteria relevant to your portfolio. Common factors include:

Health/safety/compliance
Revenue protection/enhancement
Asset preservation
Operating cost impact
Strategic alignment
Tenant satisfaction

Scoring creates an objective ranking that removes politics from decisions.

Step 4: Estimate Costs by Year

Convert current-dollar estimates to year-of-expenditure dollars.

Apply escalation:

Year 2 Cost = Current Estimate × (1 + escalation rate)¹
Year 3 Cost = Current Estimate × (1 + escalation rate)²
...and so on

Apply appropriate contingency:

Year 1: 10-15% (better-defined scope)
Years 2-3: 15-20%
Years 4-5: 20-30% (more uncertainty)

Include all costs:

Hard construction costs
Soft costs (design, permits, management)
Owner costs (furniture, moving, business interruption)
Financing costs if applicable

Step 5: Map to Timeline

Assign projects to years based on priority and constraints.

Mapping considerations:

Priority-driven:

Critical projects go in Year 1
High-priority fills remaining Year 1-2 capacity
Medium and low spread across later years

Constraint-driven:

Annual funding limits
Contractor/resource capacity
Business cycle considerations
Lease expiration timing

Sequencing logic:

Dependencies (project B requires project A first)
Bundling opportunities (do related work together)
Disruption management (don't hit same property repeatedly)

Iterate until feasible:

Initial mapping often exceeds constraints
Adjust timing, defer projects, or seek additional funding
Document decisions and trade-offs

Step 6: Validate Funding

Confirm the plan is financially viable.

Annual funding analysis:

What funding is available each year?
How does planned spending compare?
Are there shortfall years?

Funding sources to consider:

Operating cash flow
Reserve fund draws
Investor capital calls
Debt financing
Asset sale proceeds

Address gaps:

Defer lower-priority projects
Phase larger projects across years
Seek additional funding sources
Adjust reserve contribution rates

A plan that can't be funded isn't a plan—it's a wish list.

Step 7: Document and Present

Create a clear, usable plan document.

Executive summary:

Total capital investment over 5 years
Key projects by year
Funding requirements and sources
Major risks and assumptions

Detailed schedules:

Year-by-year project list
Property-by-property breakdown
System/category summary
Cash flow projection

Supporting detail:

Project descriptions and justifications
Cost estimate backup
Prioritization scoring
Assumptions and methodology

Presentation for stakeholders:

Board/investor version (strategic, summary)
Operations version (detailed, actionable)
Property-level versions (specific to each asset)

Maintaining the 5-Year Plan

Regular Updates

A static plan becomes obsolete quickly. Build in regular updates.

Quarterly reviews:

Track actual vs. planned spending
Update Year 1 for changes
Identify emerging issues

Annual refresh:

Roll forward (add new Year 5)
Update all cost estimates
Reprioritize based on new information
Validate funding assumptions

Trigger-based updates:

Property acquisition or disposition
Major condition changes
Strategy shifts
Market condition changes

Connecting to Annual Budgets

The 5-year plan informs annual capital budgets.

Each budget cycle:

Year 1 of 5-year plan becomes the starting point for annual budget
Refine estimates with current pricing
Finalize scope and timing
Seek formal approvals

Alignment check:

Does annual budget match 5-year plan?
If different, update the 5-year plan
Document variances and reasons

Performance Tracking

Track how well the plan predicts reality.

Metrics to monitor:

Actual spending vs. planned by year
Project completion vs. scheduled
Cost estimate accuracy
Scope changes and reasons

Use for improvement:

Identify systematic biases (always over/under?)
Improve estimation methods
Refine prioritization criteria
Adjust contingency levels

Common 5-Year Planning Mistakes

Over-precision: Years 4-5 don't need the same detail as Year 1. Match precision to practical usefulness.

Under-funding deferrals: Pushed projects don't disappear. Track deferrals and ensure they get scheduled.

Ignoring dependencies: Projects that must precede others need identification and scheduling.

Static documents: Plans created once and never updated lose value quickly.

Missing stakeholder needs: Different stakeholders need different views. Create appropriate versions.

Optimistic timing: Projects take longer than expected. Build in realistic timing buffers.

Frequently Asked Questions

What if my hold period is less than 5 years?

Adjust the planning horizon to match. A 3-year hold needs a 3-year plan. Focus on projects that will complete before sale, capital that affects sale price, and transfer of information to buyers.

How do I handle uncertain projects?

Include them with probability weighting or as separate scenarios. "We might do this $500K project in Year 3" can show as $500K with 50% probability, or as an alternate scenario.

Who should own the 5-year plan?

Typically asset management owns the plan at portfolio level. Property management provides input. Finance validates funding. Clear ownership prevents plans that nobody maintains.

How detailed should Year 5 estimates be?

Order of magnitude (±30-40%). Detailed estimates for Year 5 waste effort—they'll be revised multiple times before becoming actionable.