If you manage or lease commercial or retail property, the compilation of a budget for the property each 12 months will be a standard and essential process and part of your property management duties. The budget will allow you to track the income and the expenditure activities within the property for the property owner. You will also be able to identify any shifts or changes in the property market that will have impact on the property.
A good budget compilation takes some days if not weeks to create. A lot will depend on the size of the property and the requirements of the landlord. After the budget is created, the landlord should be suitably briefed on the strategy behind the budget and how the property will operate over the next 12 months. In most circumstances, the property owner should approve the budget before it is applied to the property and the tenancy mix.
Always keep comprehensive notes from the compilation of the budget. This will help you during the year as you analyse property performance and refer back to the benchmarks of the existing budget. It is quite common to adjust budgetary performance monthly or quarterly, when you have identified a significant change in the property market or the property itself. That is why the budget is so important as a management tool assisting the landlords that you act for. Accuracy in the budget is paramount, given that the property performance will be benchmarked against it for the 12 month period.
An inaccurate property budget that is poorly prepared will show the weaknesses in the property manager and the management company. It is likely that you are managing a property using a computer based lease management and trust accounts system. The approved property budget will need to integrate with these software programs. After the approval of the budget, the information should be entered into the appropriate software program.
Each week you can then monitor the activities of actual income and expenditure in the property, versus the established and approved budget. Here are some of the important categories and considerations to structure into your property budgeting process.
- The income for the property over the forthcoming financial year should be assessed and estimated. As part of that process you should check all of the leases relating to the tenants within the tenancy mix. Estimates will be required for the rent reviews and lease expiry dates for each tenancy. The estimates will be entered into the property budget.
- It is wise to get an up to date profile of the prevailing property market locally. Third party information from a property valuer is useful in this situation. They can advise you regards levels of current market rental, together with estimates of market rental change in the upcoming 12 month period.
- The expenditure in a property will cover a lot of different categories. To review the expenditure effectively, you will need a financial history of the property over the last few years so you can see the financial results and expenditure escalations as they occurred.
- Property performance will change seasonally in income based on the rental escalations in the property leases, and the expected vacancies as they occur. For this very reason, you need to understand the tenancy mix and the property leases. You will also need to establish expectations and assumptions as they relate to lease occupancy.
- The local property market will have factors of change including the supply and demand for occupied space. Research your local property market totally and comprehensively for this very reason.
- If you are working with or managing older properties, allowances will need to be made in the budget regards refurbishment and renovation. Renovation activity usually creates rental reduction whilst the renovation is underway. This assumption should be entered into the property budget.
- The vacancies will occur in a property from time to time. The expiration of a lease will be a trigger a vacancy. Understanding the local property market will help you allow for the vacancy downtime and loss of rental. Build into your budget the loss of rental factor that will apply.
- There is a difference between normal property expenditure and capital works expenditure. Any items of a capital nature will usually be large and the cost of these items will be handled differently in the budgetary process. Talk to the maintenance contractors for the building to understand the major items of plant and equipment that are likely to need replacement during the upcoming financial year. These items will normally be inserted into the budget as capital expenditure and separate to the ordinary expenditure.
- Allow for the landlord costs and expenses to be incurred in the leasing in any vacant premises. Those expenses would normally include legal costs, leasing commissions, incentives, and landlord Capital Works.
These and other items will impact the creation of your property budget. For this very reason, property managers need to prepare for the budget well in advance and work through the property operational factors as part of the budgetary process.