Sunday, August 12, 2012

Keys to Budget Creation in Commercial Property Performance

two wrenches joined together
Maintenance costs are a big part of the property budget.

A budget in commercial and retail property management helps keep the property to an expected level of financial performance in both income and expenditure.  That being said, it can be a challenge to establish a budget with a property that you have just taken over.  It is hard to establish a property budget for the landlord when you do not have the financial history of the property over the last few years.

To prepare for a property management budget process in a commercial or retail property, the following information will help you greatly:

  1. Get copies of the property financial records over the last few years.  That will include the income activity on a tenant by tenant basis broken down into a monthly separation.  You should check to ensure that all of the rent reviews and rental escalations were correctly charged at the right time.
  2. The income for the property is not just the base rental.  There are many other income issues that can occur on and with each of the separate leases.  They may be for factors such as outgoings recovery, storage rental, car parking, licensed areas, energy, cleaning, and special activities approved by the landlord.  On that basis every lease should be checked as part of the preparation for the budget process.  Ensure that you have been charging all of the appropriate rentals and outgoings recoveries.  It is not unusual to find elements of income that have been overlooked during the previous financial year.
  3. The expenditure for the property for the previous financial year should be reconciled to remove any errors or omissions.  In this way you will know that you will have a base of accurate expenditure to work from in establishing a new budget.  Expenditure can be broken down into a number of different things; this should be done so that you can differentiate between costs which escalate at different rates.  It may be that the municipal council rates are expected to escalate in the next year at a different rate than everything else.
  4. Look for any items of a capital nature that were included in the property expenditure in the last 12 months.  They are not normally to be considered as recoverable when it comes to a property budget.  Capital items are normally removed to a separate expenditure category.
  5. The property should be inspected to ensure that any immediate items of repair or replacement are known.  It is wise to have a discussion with the maintenance contractor's for the building as part of the preparation for the property budget.  They can assist you with estimates of operational costs and operational replacement.

There are many other items that can be added to the list subject to your local area and your specialised property type.  Importantly the budget process should be correctly prepared for and comprehensively worked through.