The months of March to May in each year are typically the months for commercial and retail property managers to do their budgets for investment properties and buildings.
Given that most investment properties operate on a financial year, the preparation of the budget has to be well underway and approved by the landlord prior to the change of financial year. You can add to this fact the requirement of providing budged outgoings statements to some tenants under the terms of their leases and the property related legislation.
A lot of property managers have trouble with budget calculation and establishment in March or April given that the current financial year is not yet finished; to solve the problem some adjustments, projections, and expectations need to be made in the various expenditure categories of the commercial or retail property.
The information that you will require for the budget process should normally involve research and evidence from the market and the property previous or current financial year. Here are some handy points of research to gather as part of the budgetary process.
- Details of all rates and taxes that have been charged to the property during the current year.
- Approach the local council and the rating bodies to understand if any rate increases are planned or known to be occurring in the new financial year. If that is the case you will need to budget for them.
- Speak to the contractor's in the building to understand if any escalations are expected within the maintenance categories disciplines. As part of this process it may be necessary to tender some of the maintenance contracts in preparation for the new financial period.
- Look at existing maintenance contracts to understand if any renewals are expected in the new financial year. If that is the case, you will need to establish an understanding of price escalation expectations.
- It is worth looking at the outgoings performance for the property over the last three years. The process will give you an understanding of previous budgetary increases.
- Study properties of similar type in the local area to see what levels of expenditure and budget performance that they are operating at. It is normal for professional property managers to share this information. Your property should be equal to or better than the outgoings levels experienced with other properties.
- If the subject property is getting older, it is reasonable to assume that expenditure will increase. You may need comments from the landlords engineering experts to understand the elements of expected maintenance changes within the building.
- Items of a capital expenditure nature should not normally be in the maintenance expenditure category; look through your property expenditure to ensure that you did not misapply capital expenditure items to maintenance codes. Capital items should be removed from the buildings expenditure budget as the cost has a direct flow through to the property outgoings applied to the tenancy mix. Capital items are normally addressed in a separate part of property cash flow for taxation purposes.
- Review all the leases within the property to see if any maintenance requirements are mandated in the coming financial year by the landlord. Some leases place obligations on the landlord to undertake certain works each year.
- Ensure that you have recovered all appropriate expenditure from the tenants in the building given the terms of their leases. You may need to do reconciliation for this purpose.
The creation of a property budget in the first year of the building management can be quite difficult given that you have not gotten a lot of information to work with. Subsequent years became much easier given that you would normally have your notes and research from the previous financial period.
When building a property budget, always keep records and notes of your assumptions. These can be used when the budget is challenged or questioned by the tenant or the landlord.