Next Year’s Budgets: What’s your status?
How are you doing with your property budgets for 2024? Here at Meissner, budget season is coming into the home stretch! If you’re feeling challenged to complete your property budgets, here are some insights, contributed by our experienced team of managers and accountants, that may help you gain the momentum you need!
1. GETTING STARTED: Define the purpose of the budget
It is helpful to start by identifying your goal for both the budget and the subject property or portfolio. This sounds obvious, but sometimes we launch into a complex project such as creating a budget and dive right into the details and mechanics – with great intentions of powering through it – only to find we get bogged down in numerous decisions soon after we begin. When creating a property budget, it’s important to start with the end in mind. What is the purpose of your budget? Who are the users? Are there other investors with specific reporting needs related to property performance and reporting metrics? Or will the budget be mainly used by an internal owner/manager team to guide operational activities and related expenditures?
2. Goals/plans for the property
Once you have identified the purpose for the budget and the needs of its users, define the goal for the property. Is the objective to maximize the cash flow? Or is the goal to create value by investing in improvements now to reap a larger gain upon sale? This will help to prioritize decisions concerning budgeted uses of funds and management resources and will ensure your management of the property supports your objectives and for it.
3. “Piggyback” off of current year actuals with a current year reforecast
Create a reforecast of the current year. A reforecast would include actual income and expenses recorded to date in the current year. Use this reforecast as the first budget draft for the same months in the year to be budgeted. If your property accounting software does not have a function to automate this reforecast, seek a consultant [the word “consultant” could perhaps link to info about MCRES Yardi consulting services] with expertise in your software who can automate this reforecast for you.
4. Start with what is known
There are many items to include in a budget, and looking at an empty software template or Excel workbook can be overwhelming. Start with what is known or is unlikely to vary greatly from historical norms. For rental income, start with non-expiring leases and those highly likely to be renewed, and factor in any scheduled rent increases. For expiring leases, project income through the end of the lease term and consider completing the projection for that space after a separate analysis of new potential lease rates and needed incentives.
Known expenses include utilities, minimum expected repairs and maintenance, property taxes, and insurance premiums — subject to potential rate increases. For tips on actions you can take to help minimize premium increases, click HERE (https://www.linkedin.com/pulse/navigating-rising-commercial-property-insurance-costs-chris-gore%3FtrackingId=b%252FE53VpYRkuhB5ZmtyPFPg%253D%253D/?trackingId=NnEq3cvzSWOvAOgvokEZGA%3D%3D)
For mortgage payments and the related interest expense, refer to the loan amortization schedule or ask for an updated one from your lender.
Once these knowns are complete, this will not only complete a healthy portion of the work, but it will also inform what resources remain to be budgeted for other, discretionary, expenses.
5. Start with a manageable time frame
Start with a one-year property budget before undertaking longer-term projections. You will learn much in the process of creating and finalizing the first-year budget, and these insights will inform future years’ projections. If you tackle future years after completion of the first year, the work required to complete those future years will be less.
6. Document, document, document
Finally, document your assumptions as you go while creating the property budget. Keep supporting documentation and detailed supporting schedules in the budgeting software, the excel spreadsheet, or a document accessible to all who will work on the budget. Having clear and complete documentation will eliminate time spent trying to recall or recreate how a calculation or projection was derived when reviewing or explaining later.
Budget narratives are a key component of documentation and one of the most useful parts of a budget report for anyone reading or analyzing the budget. This can spell out expected fee increases, seasonality, or operational needs that give rise to changes from the prior budget year as well as to monthly changes within the budgeted year. Lastly, they are helpful in understanding variances between actual and budgeted numbers as you progress through the year and analyze performance. Having your narratives housed in your budgeting software for easy reference and reporting is optimal.
7. If you get bogged down
One thing that we see sometimes slows managers down in completing a budget is a fear of getting it wrong. Keep in mind that the purpose of the budget is not to predict the future, but to prepare for it. The budget provides a benchmark so that, if circumstances change – and they almost certainly will – you have a tool to help make informed decisions about what to adjust. Make quality projections based on the best information you have, along with your knowledge and experience, and you’ll have a basis for informative reporting and sound decision making.