Saturday, May 11, 2013

Budget Tips in Commercial Property Management Today

commercial real estate manager looking over files
Set your budget with all quality managed properties

In managing and leasing a retail shopping centre, you need a budget to support the landlord with their plans and targets.  The budget for the property should be part of the annual business plan and incorporate the strategies behind the tenant retention plan, any renovations or refurbishments, and the landlord’s investment targets.

A property budget will also help the manager or leasing executive for the property stay on track when it comes to income and expenditure performance.  That being said, the budget should be created with due regard to prevailing market conditions, property improvements, customer visitations, sales, and competing properties.

Here are some rules to help you with establishing and tracking the income and expenditure budget for a retail shopping centre:

1.       The best time to create a budget in draft form will be between the months of March and April in each financial year.  This assumes that the overall property financial analysis is set to a financial year.  The draft budget that is created during this March to April time can be shaped and approved by the landlord in preparation for the upcoming change of financial year.  In the months of March and April you will also have sufficient history from the earlier part of the year to understand the trends relating to income and expenditure.
2.       When putting together a budget, use the history of the property from previous years, the current year, and the prevailing market conditions to set your assumptions.  A spreadsheet will be useful tool in putting together the analysis.  Given that you will be analyzing the income and expenditure in many separate categories, put your assumptions and comments on the same spreadsheet for later reference.  This simple process will help you each year when it comes to setting another budget, and seeing what you did when last considering property performance.
3.       To analyze the income for the property, you will need to look at each individual lease with due regard for rent reviews, options, vacancies, and occupancy changes.  Those lease issues will need to be written into the income part of your budgetary process.  When you have a lot of tenants and leases to work with, this matter can be quite complex and on that basis your notes will need to be well maintained for future reference.
4.       A tenant may have a rental change at a certain time during the year, so you will need to set your own assumptions relative to the increase when it comes to the consumer price index, the rent review process, and the market conditions.  When it comes to formulating your assumptions and putting together an income budget it pays to err on the side of conservatism.
5.       In a larger property, allow for a certain percentage of vacancy within the cash flow across the tenancy mix.  That will be based on the prevailing market conditions, new property developments, and tenancy movements.  It is not wise to assume a fully occupied property for the whole year.
6.       When it comes to leasing a vacancy, there will be incentives to consider.  Those incentives and perhaps any rental rebates or rental reductions will need to be written into the property budget.  These rebates and reductions will reduce the income potential for the property whilst the incentive is active.
7.       The expenditure for the property will largely be based on previous history to which you can add assumptions on increases in statutory costs, insurances, energy, repairs and maintenance, and capital items.  In making this assessment, have due regard for similar properties in the same location and how they may be tracking when it comes to operating costs and expenditure.  Keep your budget expectations of expenditure within industry standards.
8.       Any capital items should be removed to the appropriate expense category outside of recoverable outgoings.  Capital items are usually handled separately from a taxation position.  Get advice from the client’s solicitor or accountant in this regard.  It is a well-known problem that some clients may choose to apply capital items to the operational expenditure; this can be quite disruptive to the cash flow and technically wrong.  The reconciliation of expenditure will find and highlight this discrepancy.

In taking these facts into account, a budgetary process is quite specialized and specific.  Accuracy is required in all respects and records need to be kept in case the budget is challenged or needs to be reshaped.
If you set the income and expenditure budget by the end of April in each financial year, you are ready for the upcoming financial period and can exercise the necessary expenditure notices and reconciliation to all the tenants as the financial year changes.  You will also be well prepared for those critical dates relating to rental with each tenant in the coming period of 12 months.

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