The object of a budget in a commercial or retail building is to track and control income and expenditure. Every month and quarter through the year the budget can be compared to actual money earned in rent and spent in outgoings. Adjustments are then made to ensure that the landlord doesn’t experience any unknown financial pressures to disrupt building performance.
Even the smallest of investment properties should have a budget and that is the job of the property manager. Take for example an industrial warehouse. In a property of that type, there will be little complexity to the cash flow given that most of the outgoings will be in the form of rates and taxes and the rental will be quite basic. The repairs and maintenance will not be significant to run the property given that it is a basic industrial warehouse. Of course the outgoings for the tenancy or building could have been off-loaded to the tenant through the terms of the lease by way of a net rent; that is an investment strategy and is all quite good from a leasing and investment perspective. The point of all this is that you still should have a budget from a property management perspective for the property, just so you know when the bigger issues of expenditure are coming up. The tenant and the landlord can prepare for the costs to run the property.
Here are some tips to help you establish a budget for income and expenditure in a managed commercial property:
- Review all the leases so you can relate to the timing of upcoming rent reviews, lease expires, and options. You will also need to assume events and increases of rent as applicable in each case. Those numbers will be based on tenant, size of premises, market conditions, and pressures within the tenancy mix.
- When looking at income from any lease or the tenants in a building have due regard to the particular lease terms and how outgoings are paid and recovered. It is likely that you should have an allowance for recoverable outgoings in your property budget.
- Understand the market rentals for the property type in the area so you can compare them to your property; also consider the vacancy factors that could have an impact on your retention of tenants or letting periods and incentives such as rent frees. Assume a vacancy downtime if necessary in your income cash flow.
- In reviewing expenditure you are likely to have the benefit of the last year’s actual figures to start with; they will be useful as a base of facts and will also give you an idea as to timing of costs. From those numbers you can assess maintenance requirements in the property for the coming year and the escalations in rates and taxes.
- You may need to re-tender maintenance contracts or shift the timing of repairs on major plant and equipment to spread the expenditure impact on the property income. That is why you do a budget and get it approved by the landlord.
- Capital Items will be handled differently in the property to provide for local taxation rules and depreciation. Most capital works are a planned process.
This topic can open up into many decisions and budgetary decisions for the property. The budget is discussed with the landlord so that it can be approved before the start of the financial year, and from that point onward it is monitored monthly.