Guidelines to help with the upcoming budget season

A well-developed budget must adhere to the owner’s goals and objectives, while also being accurate and efficient.
David Hewett

David W. Hewett, BOMA International Fellow
Executive managing director,
Olive Real Estate Management Services

For some, budgets are the biggest dread of the year. Others may ask why bother and, believe it or not, some just don’t. Each property owner has his specific reasons and needs when it comes to budgets. For property managers, knowing your owner is the most important task when it comes to budgeting. A slip of the numbers can be a painful event, for both you and your owner.

Why make budgets? Budgets are the baseline wisdom of a property. The budget is the financial plan that is the partner to the business plan or strategic plan of the property. They go hand in hand to create the ultimate value of the property and safeguard the property as a financial asset.

A well-developed budget will first adhere to the company’s or owner’s goals and objectives for the property and, at the same time, be accurate and efficient. It should contain all the necessary information for decision making.

A secondary, but also important, function of a budget is that is begins the process that works to avoid fraud and helps in the enforcement of a company’s policies and procedures. It is the framework for accountability.

Timing. If you are working for some institutional owners, you already may have begun your budget season … some weeks ago. And some of you may work year-round on quarterly updates that are as demanding as the annual budgets others work on.

No matter when you begin, the first step is to ensure you know your owner’s goals and objectives. While it is easy to say “I had that conversation,” it is vital to ensure it was recent, because things change for owners, whether they are individuals or major corporations. Budget season is a great time to have that discussion to ensure you know the true direction of the owner.

Tools. Specialty programs and software or just old-fashioned Excel seem to rule the day when it comes to budgets. You may be overflowing with files filled with calculations, bids and other reams of information. A few thoughts on how to keep it all organized.

Microsoft One Note is a tool I have used many times in my career. I believe it is the most underused of all the Microsoft tools. You can easily set up a file for all budgets or one for each property. Draft and final budgets, spreadsheets, bids, letters, emails and photos can be in one easy-to-find place. You already have it in your suite of Office products if you are working on a Microsoft/Outlook computer.

Many of you will have a special form or program that is expected to be used. Of course that is what you need for a starting point. If not available on that program, have a special file folder on your computer or server that is everything related to budgets.

Some of the key items you will want to have available and stored in this file for current and year-round use include bid and contract forms, statement of work samples, contacts at the city and county (and maybe state) for utility rates and planned increases, property tax assessments and mill rates.

When budgeting income, use your brokers. They should be one of your best friends all year, but they are especially helpful as you prepare the income side of the budget. What are the appropriate lease rates for the current vacancies and the upcoming ones? This is when it is critical to know your market. Your broker is your best partner in developing an accurate forecast of where your property will be over the course of the next year. This can be the key to your whole year, especially in a challenging market.

Also, you must know your leases! Is the property billed out on a triple-net basis, gross lease or modified gross lease? Are there caps or limits on the controllable expenses? Answer these questions up front to ensure you have the right format and billing. Every detail must be remembered. Keep the budget file and notes front of mind during budget development.

Techniques. One of the first questions about the budget is whether it will be on a cash or accrual accounting methodology. Most likely this has been predetermined for years by the current owner. If this is a new property to you, it becomes an important question to start the budget conversation with the owner.

The next big question is how do you look at the overall process? Are you expected to start from scratch, sometimes called zero-based budgeting? Do you look at the most recent budget and simply make increases on a percentage basis based for anticipated cost increases, or is everything based on new bids by current and potential contractors? Most likely you will end up with a combination of all three of these methods.

The most important technique I can suggest is make budgeting a year-round event. Do not wait until the last minute to get details and get bids and gather information. Do it on a well-planned year-round basis. Take on different contracts at appropriate times of the year and bid throughout the year so you have it ready to go. Consider bidding large items at times the contractors have their off-season so the they are focused and available. Be sure to give them the time frames of expected start and stop dates.

When the announcements are made by counties and cities for rate changes throughout the year, add them to you bid file. Note industry news concerning changes or increases to specific trades.

What are the anticipated capital costs for you building? Ask your broker and your go-to contractor for estimates to use as you consider the cost of tenant improvements and other capital projects. Have you been waiting for a new heating, ventilation and air-conditioning replacement and now is the year? Get your bids in now for replacing large capital items. Work the timing for when the vendors have extra time, potentially the fall or winter.

What expenses do you have that relate to the owner, not the tenants? Costs like travel, tenant parties and other nontenant reimbursable items. Also, make sure you have the latest mortgage information and are aware of any change in rates or the amortization schedule.

Finally, have a five- to 10-year budget forecast that shows these capital items and anticipated cost. Let your owner know the future (the best you can) and provide a forecast of potential upcoming capital cost. This might include the roof, parking lot, energy-saving projects, windows, mechanical equipment and other major building systems and components.

Looking to give proof and validity to your numbers? The Building Owners and Managers Association International produces an annual report called the Experience Exchange Report. It is a line-by-line review of income and operating expenses in most major markets with the detail of what other buildings are spending on their building. It is a great way to compare your costs and gives you the ammunition you need to show your owner that you are in line with others in your marketplace.

Seemingly simple, but for some, the approvals and schedule of those who “need to know” seems endless. You have to make your list and check it twice.

Implement. Reading numbers and more numbers can become mind numbing. Owners and asset managers need to understand the story ­– the reasons behind the numbers. Develop your story and ensure you have a cover page and outline that give the reasons and the backup for your numbers. The more you say (efficiently), the easier it is to agree with the numbers. Make sure you show the readers the return on investment for all capital items. Make the story about the annual net operating income and how it compares to last year and today’s marketplace.

And then once it’s sent to the owner – sit back, relax and work your magic for another year!


Featured in CREJ’s October 2019 Property Management Quarterly

Edited by the Colorado Real Estate Journal staff.