The Essential Piece of the Pie: Property Managers and Budgeting

Since there have been commercial buildings there has been a need to manage them and measure their profitability – hence, the occupations of property managers and property accountants. In the commercial real estate industry it's no secret that accounting for property managers can be a daunting, yet necessary key to running a successful property for the owners. Here are few tips to help shed some light on how to assimilate the information necessary to build a plan, a budget, and the parts these play in the financial statements.


1.  Create an Annual Plan
Creating an annual plan is a strategy that includes a clear financial picture of where your property currently stands and anticipates going during the coming year.  It enables you to concentrate resources on improving profits, reducing costs and increasing returns on investment. An annual plan is also beneficial to have when communicating the overall goals of the property to everyone involved in maintaining it. When creating an annual business plan you should include the following:

• Outlines of expected changes
• Potential changes to the market, customers, and competition
• Yearly goals and objectives of the owner
• Key performance indicators (KPI's)
• Operational changes
• Any issues or set backs
• Past financial performance and forecasts
• Details of investment in the property

2. Create A Budget
Creating a budget will allow the property manager to allocate resources where they are needed. You will need to create a list of projects, upgrades, and maintenance items required for the upcoming year along with any other property cost.  When creating the budget be sure to review the prior year financial performance (both budgeted and actual) to determine appropriate budgeting amounts. Start to establish your budget by asking these questions:

• What are the projected revenues – rents and other tenant charges?
• What are the direct costs of those revenues – commissions, tenant improvements?
• What are the fixed and variable costs to run the property?
• What capital expenditures are necessary to maintain the property?
• What cash flow does the owner expect to receive?

3.  Use Budgets to Measure Performance
Once a budget has been reviewed and approved by the owner, this becomes the document by which the property’s performance is measured. It allows the property manager to explain variances to both budget and prior year’s performance. Key items will stand out in monitoring rent (and the timely collection), operating costs, and cash flow.

Budgets need to be reviewed monthly, and not less than quarterly, to make any necessary reforecasts based on performance and outside influences to that performance. Meeting with the property owner is essential to make sure that have been no changes in expectations with regard to annual goals and cash flow of the property.

Contributor:

Barb McKinney
Controller
Block Real Estate Services