How to Do a Commercial Property Income and Expediture Budget for Landlords

If you manage or lease commercial or retail property, the compilation of a budget for the property every 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 impact the property.

A good budget compilation takes some days, if not weeks, to create. A lot will depend on the property’s size and the landlord’s requirements.

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 applying it to the property and the tenancy mix.

Keep Your Property Budget File Notes

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 you act for. 

Accuracy in the budget is paramount, given that the property performance will be benchmarked against it for the 12-month period.

Budgeting

An inaccurate property budget that is poorly prepared will show the weaknesses in the property manager and the management company.

So where do you start with this? You are likely 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 budget is approved, 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.

The Budget Performance Process

Here are some of the important categories and considerations to structure into your property budgeting process.

1. 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.
2. It is wise to get an up-to-date profile of the local property market. That will include facts about customer base changes and competing properties. Third-party information from a property valuer is helpful in this situation. They can advise you regarding levels of current market rental, together with estimates of market rental change in the upcoming 12-month period.
3. The expenditure on the property will cover a lot of different categories. To review the expenditure effectively, you will need financial history of the property over the last few years to see the financial results and expenditure escalations as they occurred.
4. Comparisons of property performance should be made. It is always interesting to compare previous years actual income and expenditure results to the current budget. Look for changes in the bigger property categories, such as rates and taxes, energy, insurance, and maintenance (plus subcategories).
5. Property performance will change seasonally in income based on the rental escalations in the property leases, and the known or 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 relating to lease occupancy.
6. 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.
7. 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 reduces rental costs while the renovation is underway. This assumption should be entered into the property budget.
8. 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.
9. There is a difference between normal property maintenance 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 and taxation 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 fiscal year. These items will normally be inserted into the budget as capital expenditure and separate to the ordinary expenditure.
10. Allow for the landlord costs and expenses to be incurred in the leasing of any vacant premises. Those expenses would generally 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.