Budgeting as it relates to property management serves several purposes. Projected expenses for the upcoming year gives the property owner an idea of how much it costs to operate their real estate investment, gives an idea of triple-net pricing for new or existing tenants, and creates transparency and boundaries in which to operate the property. If a budget is constructed and maintained correctly throughout the year, it will ensure the triple-net expenses stay in line with other properties in the market.
Budgeting for a vacant property has a different use. Budgets for vacant property let the owner know how much they will spend on the property in the upcoming year. This can be important as some tax provisions allow you to write off building expenses for vacant property. It is important to contact your accountant for more information and options as it relates to property expenses for vacant property.
The process of creating a budget also gives a lens to your performance as a property manager. It combines looking back on the prior year’s expenses and operations with the ability to project and determine what future expenses will be incurred over a years’ time. Tenants and property owners will see the budget and hold you to it. It is imperative that details and attention is paid to each line item.
Leasing is the basis for property performance. A key component of leasing is ensuring expenses are kept in line with comparable properties. This will help fill vacant spaces and prop demand in the market. These budgets will serve as the basis for triple-net projections when drafting leases.
Building an Expense Budget – The Process
For Southern Property Management, budgeting starts around November of each year. By this time, most tax statements have been received, most insurance policies have been renewed and annual expenses have been incurred. This review of the year that has passed is the first step.
Some questions we ask ourselves while looking at the prior year:
- Was this expense for a special purpose or will it recur each year?
- Have utility rates increased?
- Have all annual inspections been accounted for?
- Have all monthly and quarterly maintenance tasks been accounted for?
- Do any outliers throw up red flags?
These questions will help determine if you are indeed looking at a complete picture of the years’ expenses for a given property.
Examples of recurring expenses include scheduled HVAC and plumbing upkeep, janitorial, landscaping, fire systems inspections and maintenance, crane and equipment inspections, security service, kitchen equipment inspections, security service, and management fees.
Non-regular expenses can affect budget reviews and projections. Expenses related to weather, equipment breakdown, accidents, and part deterioration can inflate dollars spent at a property. As a property manager, a proper maintenance plan can help extend the life or parts and systems like pluming and HVAC. However, even systems under rigorous maintenance and overview can wear down and require repair.
After looking back at the year’s expenses, you will be able to see if the property’s expenses were kept in line with the previous budget or projections were exceeded. This will give you a baseline looking ahead to the coming year. Based on your answers to the questions above, you should be able to begin to piece together your new budget.
- First, take all known monthly, quarterly and annual expenses that are easy to predict. If there are cost increase, account for them now.
- Next, account for standard tax and insurance increases. In West Texas, we account for up to a 10% increase for some insurance policies due to the propensity for wind and hail damage.
- Understand how the occupancy of the property will affect your budget. Some expenses are variable related to how full a property is. If you project a property to be only 70% occupied, you can lower some of the projected expenses for the coming year.
- Use your property management experience to determine if any special costs will be incurred in the next year. Some examples are, five-year inspections for equipment or fire systems, HVAC part replacement, capital expenditures of any kind, parking lot sealing or restriping, deep cleans, etc.
Our current portfolio under management includes high-rise office towers, retail centers, and industrial property. Each type of property incurs different types of recurring and special expenses. It is important that you treat each property separately and avoid trying to make too many connections between non-comparable property types. Each property will have it’s own requirements and standards to maximize lease-ability.
Once you have your new budget ready, look at the bottom line to see how it compares to last year while keeping in account one-off expenses and estimated occupancy. Assuming all things are equal, it is not uncommon for the budget to increase slightly each year. Given the price increases for goods and services across the board, property budgets do tend to slightly increase over time.
Property managers can employ some tactics to lower the budget such as shopping utility providers, shopping insurance providers, protesting property taxes, and eliminating some services that are not essential to the property.
Maximizing Value for Your Client and Yourself
If you budget and manage expenses throughout the year, you will maximize the value of the property for your client. Expenses at a property can either boost occupancy or drive vacancies.
A properly maintained budget maximizes the leasing potential of the property and keeps current tenants in place. Providing tenants with a copy of the expense budget will create transparency and trust. This is an important aspect in building relationships that could lead to better tenant relationship and ultimately higher occupancy rates.
Providing a copy of the budget to the property owner gives you another chance to show your worth as a property manager. Properly maintaining even, a single tenant industrial building comes with a list of expenses and liability reduction strategies. Ask the property owner for feedback and address any concerns they may have.
As property managers, protecting the value of real estate is a main goal and service you provide to your client. Expenses are at the core of how NOI is calculated and how well a property can perform over the investment’s lifetime. The budget is a key indicator for this metric that is used across the industry for evaluating asset performance.