Property managers wear many hats. Part of your job is being the “face” of the property: the one who finds tenants, markets the property, and ensures a successful business. You handle tenant relations, coordinate with management, and ensure everything continues running smoothly. 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. To help you create an effective budget, we have included a CRE office budget template at the end of this article.
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. An effective and accurate budget will help you meet this goal.
- The Skill of Budgeting
- 10 Steps and a Sample Commercial Budget Template
- 1. Determine the Gross Potential Rental Income of the Facility
- 2. Notice Any Pass-Through Income, Expense Reimbursements, or Recoveries
- 3. Subtract Vacancy and Credit Loss Situations from the Gross Potential Rental Income
- 4. Itemize Miscellaneous Income
- 5. Calculate the Effective Gross Income
- 6. Subtract the Facility’s Operating Expenses
- 7. Know the Net Operating Income Formula
- 8. Examine the Property’s Debt Service to Find the Cash Flow
- 9. Find Capital Expenditures, Escrow Accounts, and Reserves
- 10. Keep Detailed Reports and Records for Future Use
- Creating an Effective Commercial Office Facility Budget: Template Below!
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 that gives an accurate picture of operating income, operating expenses, and other financial considerations. 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.
We’ve included a budget template at the end of this post, which you can use as a jumping-off point for your own CRE budgeting needs.
10 Steps and a Sample Commercial Budget Template
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 budget. We’ve also included a budget template 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. 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
In a perfect world, the property you manage would be fully occupied by tenants who pay their rent on time, every month. The gross potential income accounts for that “perfect world” scenario, where every office is full 365 days per year.
In short, it’s the income that a property manager can expect to gain from a single commercial property if all units are occupied. We calculate this by adding together the potential income from the rental fees of all the units or spaces available in the facility. However, the gross potential rental income should also include other sources of potential income, like parking fees, storage fees, vending machine income, and others.
2. Notice Any Pass-Through Income, Expense Reimbursements, or Recoveries
In many commercial leasing agreements, tenants are at least partially responsible for the building’s operating expenses, real estate taxes, and insurance payments. Typically, we add these costs to the monthly or yearly bills of tenants to make up the property’s expenditures. The income collected from these fees 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
While property managers always strive to have zero vacancies, it’s common for properties to sit vacant for weeks or even months. During economic slowdowns like the one many offices are seeing this year, you must consider your occupancy rates when building a budget.
Commercial properties with multiple rental units or offices likely won’t 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, property managers may choose to update the facility’s budget more than once a year.
4. Itemize Miscellaneous Income
A commercial property’s total income 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, miscellaneous income is often inconsistent. Therefore, these sources can be very difficult to forecast and add to the budget on a month-to-month basis.
5. Calculate the Effective Gross Income
Once you’ve determined all of the income sources above, it is possible to calculate the commercial property’s effective gross income. You can then use this figure to determine the property’s overall budget by following this basic formula:
Gross Potential Rental Income + Expense Reimbursements – Vacancy and Credit Loss + Miscellaneous Income = Effective Gross Income
The effective gross income is the amount of money that effectively comes into the commercial property. This figure then helps establish the official facility budget.
6. Subtract the Facility’s Operating Expenses
The effective gross income calculation is just half of the office building budget. Once you have determined the property’s total income, 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 associated with the maintenance and use of the entire property.
For example, you should include the costs for the building’s utilities, including natural gas, oil, electricity, water, Internet, and telephone, in the operating expenses. In addition, the property should estimate the average repair and maintenance costs for the facility. These costs include grounds maintenance, snow removal, trash removal, real estate taxes, insurance, and any other management fees incurred by the office building. Finally, operating expenses should also include the salaries of all property management and operations staff.
7. Know the Net Operating Income Formula
Once you’ve determined the effective gross income and operating expenses, you can then use the net operating income formula to determine NOI.
To find NOI, subtract operating expenses from the effective gross income. A positive NOI indicates that the office building budget is working effectively.
The net operating income formula subtracts 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 maintain ownership. The amount of money left on the mortgage represents the property’s debt service. After you determine NOI by using the net operating income formula, subtract the debt service to determine the facility’s available cash flow.
When we divide cash flow 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 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 affecting the appearance and functionality of the property. These expenditures might include a new heating system or a renovated façade. Capital expenditures are one-time expenses, unlike operating expenses, which are typically ongoing.
Escrow or reserve accounts are similar to savings accounts for a large commercial property. Owners can use these funds for emergency expenses. In addition, owners can use these funds for significant future expenditures, such as new windows for the entire building. It is wise to set aside some money each month into one of these accounts 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. Keep a monthly chart accounting for different types and amounts of income and operating expenses. This both helps with tracking the monetary amounts and 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: Template Below!
By following the 10 steps above, you can create a useful and effective commercial office facility budget. Below we have provided a link to a commercial property budget template in Excel format. You can use this example as a starting point and customize it for your own needs.