An annual operating budget for your income property is one of the many tools available for monitoring the income and expense of the asset, measuring its viability and success.
A “best practice” of property management companies is preparation and presentation of an operating budget for owner approval prior to the beginning of each calendar or fiscal year. A zero based budget, practical for reoccurring vended services, is most accurate. To begin the process, property managers request bids from several vendors for each clearly defined scope of services. This scope allows evaluation of bids/costs on an apples to apples comparison. Fluctuating costs such as utilities and non-reoccurring expenses such as plumbing or electrical repairs are based upon historical operations.
Income/Revenue may have several components; rent, expense recapture or CAM and perhaps tenant’s contribution toward marketing or tenant improvements. Owners differ in their desired reporting formats, many are satisfied with simply a Rent income line item, others (and TRI’s preference) is to report the Gross Potential Rent (actual rental income for the occupied space plus a market rate for the vacant space) followed by Vacancy and Free Rent then subtotaled as Total Collected Rent. This more descriptive approach to forecasting Income requires assumptions on roll-over of existing leases, new leasing activity, market lease rates and free rent terms. It also makes management and ownership aware of upside in improved occupancy and associated costs such as leasing commissions and tenant improvements.
Another component of Income is Expense Recapture under full service office leases and Common Area Maintenance or CAM’s under triple net retail and industrial gross leases. These are an estimate of the tenant’s proportionate share of operating expenses (defined by the lease) reimbursed to the landlord/owner. TRI has found many properties that we’ve taken over management leaving significant dollars on the table due to poor lease administration and collection of CAM’s.
Once Total Income and Total Operating Expenses are defined, the Net Operating Income (NOI) is the difference. Net Cash Flow may also be calculated by subtracting debt service from NOI. Further, capital improvements such as Tenant Improvements, major repairs, commissions, etc., can be forecasted and included in the annual budget.
This budget, once approved by the owner, is entered into the financial software and used as a comparison to actual monthly income and expenses for identification and explanation of significant variances.
Planning and measuring the success of your asset’s financial operations is one of the many services provided by TRI Property Management.
President, TRI Property Management