Originally Published in Aug. 2020
It is probably fair to say that 2020 didn’t go according to plan for you and your property or business. In fact, it could be said that is the understatement of the year.
One of those plans that was disrupted was probably your budget. Projects may have been deferred or eliminated. Tenants may have gone into bankruptcy, moved out, refused to pay rent, or are in rent deferral. How many bottles of sanitizer, rolls of wipes, and face masks did you buy? Did you fill your property with pandemic signage recommended by the CDC? How many one-time charges did you have that would not be relevant if we were not experiencing a pandemic?
As you are working on your 2021 budget, take a look at your 2020 reforecast if you have prepared one. Notice the changes due to the pandemic. Your janitorial costs may be much lower, your trash removal may have some savings due to lower occupancy in the building, and your utilities and management fees will have decreased. If you use your current year reforecast to start your next year budget, be mindful of these changes to your 2020 budget directly related to COVID-19 and its effect on occupancy.
If you have done this before, you have your favorite ways of compiling information. We all have various deadlines. We have different budget programs – MRI, Kardin, Yardi, Excel, and others. If you’ve recently moved to another company or property, you have a new set of challenges: different account numbers; a new budget program; and possibly a different property type -– (office, retail, industrial, medical, flex, suburban, urban, office parks, work-live-play developments) and more.
It all seems confusing and overwhelming. I have never heard a property manager shout with joy at the beginning of another budget season. It has a reputation of taking time away from our families and making us work long hours. It’s stressful. The COVID-19 pandemic has certainly not made our jobs any easier. During budget season, we know we will be putting in a few extra hours because we have deadlines. And we know those deadlines are not suggestions. Due to the various reviewers that are involved before the final budget, deadlines keep everyone on track and on time. So, no matter what it takes, we make it happen. We become superheroes of then property management world who hone our skills of multi-tasking and stamina.
Is it really that bad? It doesn’t have to be. With a little planning, the process will be less stressful; become more enjoyable (dare I say), and there is that feeling of accomplishment when it’s completed, approved and finalized. You have created the roadmap for another year. We can’t do our jobs effectively without the budget. So let’s make friends with it and the process of creating it.
Here are a few tips to help you through the process.
Start a “Budget” File for the next year: It is helpful to start a file with known expenses for the next budget year as soon as the budget for the previous year is complete and approved. You can start the file on January 1st, but it’s never too late to create one. During your building inspections, keep in mind not only repair and maintenance items that need immediate attention, but also make a list of items that can be done the following year. Make a note and drop it in your budget file either a hard copy or electronic. Did you have items you wanted to complete in the current budget year but were removed during budget review o deferred due to COVID-19? Put it back in the file for next year. In other words – this is your file for those special, out-of-the-ordinary projects. Get pricing as soon as reasonable, and keep them in this file. Going a step further, put the account number on the proposal or note. That way it will be a breeze to drop the number into the budget.
Review your service contracts: Begin reviewing your service contracts well in advance of budget season. Check to see which need to be re-bid, and re-bid them as early as possible so you have the numbers in advance of the budget preparation. Check with providers that may automatically renew, but the increased amount is not clear in the contract. Ask for the charges in writing. Once the increase, if any, is known, prepare amendments to the contract as necessary. Create or update a spreadsheet for your budget file with the vendor contracts including contact information; contract termination dates; monthly, quarterly and annual amounts as specified in the contract; account number it is charged to; and the last time the contract was bid. You will be happy when you are facing a deadline that you have this spreadsheet. You have the amounts, the account numbers and the frequency of the payments all in one place.
Engineers: Engineers must be empowered to contribute to the budget. It is customary the property manager or administrative team enters the information into the budget program, but engineers play a vital role in the preparation. Ask their opinion about the equipment. Give them a copy of the detailed budget pages for repair and maintenance (R & M) accounts from the current budget and ask them to update it for the next year. They can prioritize replacements, repairs, and upgrades. They should solicit preliminary pricing for projects they feel are important for the budget year, and those that can be entered into the 5 or 10-year plan. Engineers can create a spreadsheet with the project description, account number, priority and dollar amount, or simply update the individual general ledger page from the budget. Be efficient and keep it simple. Drop this spreadsheet into your “budget file” and update as projects become known throughout the year with the help of the engineering team. Now you have the special R & M projects with account numbers all in one place and ready to go when you start the budget.
Administrative Expenses: As with R & M expenses, involve your administrative team if possible. Do you need to replace office equipment such as a copier or computers? If so – these items take a little while to competitively price. Start early. Do you need to adjust tenant event dollars if your occupancy increased? The 2020 budget year most likely eliminated all tenant events and gatherings. Get new pricing from your event vendors. Take inventory of office equipment and plan to replace aging computers, copiers, etc. Will employees attend additional training? Check the options from BOMA or other relevant programs.
Capital: As you go through the year, review your five-year capital plan, update it and discuss items for next year’s budget with your asset manager and engineering team. List the cosmetic and mechanical priorities and begin to solicit pricing so it is ready when you begin budget input. Be sure to check Lender requirements, or items noted in a Property Condition Report and include those items in the year suggested. Drop this information into the budget file.
Income: Each time a lease is signed for a new tenant, an expansion, or renewal, drop the abstract into your budget file. At budget time, you won’t have to search for changes.
So now you have the information in one place that you’ve been gathering for several months. It’s time to create your budget.
First thing, relax. You are well prepared to do this because you have the budget file.
The main components of a budget are income, operating expenses non-operating expenses, debt service and capital expenses. Break it down, and the process does not seem as overwhelming.
Income: Correct Rent Roll and Input Updated Leasing Projections: First, use your current rent roll and check that all tenant spaces listed in the budget match the rent roll. You may have had some tenants that terminated their leases early due to COVID-19. Update that information. Perhaps they subleased their space. Identify the changes for those tenants. Leasing projections may be less than in previous years. Check square footage, lease commencement and expiration dates, current rent and rent increases, operating expense base years (or triple net, or modified), any operating expense cap amounts, etc. Does the tenant have a monthly storage charge, parking charge or other income that needs to be included? Make changes and modifications as necessary utilizing your budget file where you have all of the abstracts and information needed at your fingertips! Next, input the leasing projections from your leasing team or asset manager. Update leasing commissions, and tenant improvements according to the lease projections. Check your CAM pools and Controllable Expense Cap amounts if you use your budget program to calculate estimated operating expenses for the upcoming budget year.
Operating Expenses: Start with the budget file. You have been keeping track of your contract amounts and your special project costs for months. Now is the pay off. You can enter accurate numbers without much anxiety this year. Sit down with your engineer and discuss any budget changes from the mechanical projects that were recommended and priced earlier. (Hint: I always add a contingency to the larger projects, and I include any Construction Management fees if allowed by the management agreement for large R & M projects). Compare your operating budget expense portion with the previous year to double-check that all necessary monthly expenses have been included that may not be a specific contract, especially administrative and nonrecoverable. If your budget program has a feature to adjust certain costs automatically based on connected parameters and occupancy fluctuations, such as janitorial costs, utilities, paper supplies, trash removal, occupancy, income, andmanagement fees, input those formulas now. Be mindful that during COVID-19, certain operating expenses for 2020 were much less – janitorial, trash removal, paper products, utilities, etc., as an example. Use the 2020 budget rather than a 2020 reforecast to estimate these expenses for 2021.
Check previous years’ averages to input the cost per square foot as if your leases spaces were fully occupied. While the expectation is that occupancy may not get back to “normal” until sometime next year, it would be better to assume the expenses as if the tenants have returned to their space. Kardin has a feature to automatically calculate the variance in these types of expenses based on income and occupancy. As the leasing team updates their projections, it saves time from manually inputting certain operating cost updates. This is a real time saver.
Capital Expenses: Begin with the 5-year plan. Start by inputting the projects already earmarked for the budget year. Then, update with any additional projects you identified earlier in the year and have already priced. Input the information. Again, add in contingencies and CM fees as appropriate. Owners may request additional reports including market information, stacking plans, multi-year expense history, etc. That information should be readily available or included in your budget package as required.
Finally, run a comparison between the current year budget, current year reforecast and the 2021 budget. Note any significant variances and check your numbers again. Explanations may be required between large variances from one year to the next. With COVID-19 during 2020, the variances from reforecast 2020 income and expenses and 2021 projected income and expenses in occupancy driven and income categories will be significant. Check all the CAM estimates, base years, pro-rata shares, etc. If you are required to write a business plan for the upcoming year, this is a good time to complete that.
Once you have thoroughly reviewed your budget and you are satisfied that the information is accurate, prepare a professional package for your review team and ownership. Ensure all items required are included.