Property managers wear many hats. Part of your job is being the face of the property. As a result, you’re the one who handles tenant relations. On top of that, you need to know how to create and read financial and performance reports, handle billing, and generally be the owner’s representative and liaison.
As a property manager, creating an accurate budget is crucial to success. In many ways, a property’s budget reveals the health of the commercial asset. Regardless of the property’s size or complexity, it is very important to be able to plan ahead for income and expenses. As a result, a budget will help you do this.
- The Skill of Budgeting
- 10 Steps and a Sample Commercial Facility Office Budget
- 1. Determine the gross potential rental income of the facility
- 2. Notice any pass-through income, expense reimbursements, or recoveries associated with the property
- 3. Subtract vacancy and credit loss situations from the gross potential rental income
- 4. Itemize instances of miscellaneous income
- 5. Calculate the facility’s effective gross income
- 6. Take into account the facility’s operating expenses
- 7. Determine the commercial facility’s net operating income
- 8. Examine the property’s debt service to find the cash flow
- 9. Find the facility’s capital expenditures, escrow accounts, and reserves
- 10. Keep detailed reports and records for future use
- Creating an Effective Commercial Office Facility Budget
The Skill of Budgeting
Without a doubt, any commercial property manager who’s in charge of an office building should know how to prepare and manage a budget. At the very least, a property manager should make an annual budget. Additionally, annual budgeting lets property managers discover trends in expenses, make note of recurring or unusual items, and also make realistic projections for the property’s future performance.
10 Steps and a Sample Commercial Facility Office Budget
In this article, we offer 10 steps to prepare a commercial office facility budget. By using these steps, a property manager can create a practical, useful commercial office facility budget. On top of that, we’ve included a template at the end of this post to help you create your own budget. This example budget is based on projected income and expenses for a sample property. In it, you’ll find both operating and capital figures. Specifically, property managers use a budget like this to gauge the property’s value and performance.
1. Determine the gross potential rental income of the facility
This is the maximum amount of income that a property manager can expect to gain from a single commercial property. We calculate this by adding together the potential income from the rental fees of all the units or spaces available in the facility. Also, we must included all of these aspects of potential income in the gross potential rental income number.
2. Notice any pass-through income, expense reimbursements, or recoveries associated with the property
In connection with many commercial properties, tenants can be responsible for some or all of the property’s operating expenses, real estate taxes, and insurance payments. Specifically, we can add these additional but necessary costs to the monthly or yearly bills of tenants to make up the property’s expenditures. These types of costs associated with running the building are known as pass-through incomes, expense reimbursements, and recoveries.
These types of costs associated with running the building are known as pass-through incomes, expense reimbursements, and recoveries.
3. Subtract vacancy and credit loss situations from the gross potential rental income
Commercial properties with multiple rental units or offices for tenants may not be renting at full capacity at all times. This means that there may be vacant rental units throughout the year, each representing a loss of potential income. In addition, some tenants may not fulfill their rental obligations, resulting in even less property income.
These situations represent vacancy and credit loss issues that reduce the overall income of a commercial facility. Therefore, these missing incomes must be subtracted from the gross potential rental income. Since it is difficult to predict vacancy and credit loss issues, it may be advisable that property managers update the facility’s budget more than once a year.
4. Itemize instances of miscellaneous income
The total income of a commercial property typically includes more than just the rental fees associated with tenant space. In order to get a complete picture of the total income of a commercial facility, other sources, such as parking fees, vending machines or other services, late fees, and exterior advertisements must be added. We know these extra sources as miscellaneous income. Unfortunately, these causes are often not consistent incomes, and they can be very difficult to forecast and add to the budget on a month-to-month or even yearly basis.
5. Calculate the facility’s effective gross income
Once all of these determinations are in place, it is possible to calculate the commercial property’s effective gross income that can be used for the overall budget by following this basic formula:
Gross Potential Rental Income + Expense Reimbursements – Vacancy and Credit Loss + Miscellaneous Income = Effective Gross Income
This is the amount of money that effectively comes into the commercial property and that can be used in the official facility budget.
6. Take into account the facility’s operating expenses
The effective gross income calculation is just half of the office building budget. Once the total income for the property is known, it is time to take the expenditures into account. The property manager should begin with the basic operating expenses for the facility. These are all the costs that are associated with the maintenance and use of the entire property.
For example, the costs for the building’s utilities, including natural gas, oil, electricity, water, Internet, and telephone, should all be included. In addition, the property manager must try to estimate the average repair and maintenance costs for the facility. This includes grounds maintenance, snow removal, trash removal, real estate taxes, insurance, and any other management fees incurred by the office building. Finally, expenditures associated with the administration and payroll of those who handle the entire commercial property must be taken into consideration.
7. Determine the commercial facility’s net operating income
Once the property manager has overall calculations for the effective gross income and operating expenses, it is possible to find the net operating income, also known as NOI. The NOI is calculated by subtracting the operating expenses from the effective gross income. A positive NOI indicates that the office building budget is working effectively.
The NOI is calculated by subtracting the operating expenses from the effective gross income.
8. Examine the property’s debt service to find the cash flow
When purchasing commercial properties through a mortgage, owners must make regular payments in order to keep the building under current ownership. The amount of money left on the mortgage represents the property’s debt service. By taking the NOI and subtracting the debt service, a property manager can determine the facility’s available cash flow. The cash flow figure is important because when we divide it by the initial cash investment in the property, we see the building owner’s return on investment, or ROI. The ROI shows potential investors whether the commercial site is worth purchasing in the future.
9. Find the facility’s capital expenditures, escrow accounts, and reserves
Other important areas to include in the property’s budget are capital expenditures, escrow accounts, and reserves. Capital expenditures are costs associated with improvements that will affect the appearance and functionality of the property, such as a new heating system or a renovated façade. These are one-time expenses, unlike operating expenses. Escrow or reserve accounts are similar to savings accounts for a large commercial property. In general, owners can use these funds for emergency expenses. Or owners can use them for large, future expenditures such as planning for new windows for the entire building. It is advisable that some money be put away into one of these accounts each month as a type of security system.
10. Keep detailed reports and records for future use
An effective property manager keeps meticulous records for the current and future budgetary needs of the commercial property. A chart for accounts should be kept each month that itemizes the different types and amounts of income and operating expenses. This helps with tracking the monetary amounts. But it also clarifies when income needs to be increased or expenses cut. The property manager should also maintain a monthly operating statement that demonstrates the month’s actual income and operating expenses in a side-by-side comparison to the projected budget.
Creating an Effective Commercial Office Facility Budget
If you follow the 10 steps above, you can create a useful and effective commercial office facility budget. Below we have provided a link to a commercial facility property management budget template in Excel format. You can use this example as a starting point and customize it for your own needs.