When you manage a commercial or retail property, the budgetary process and assessment will be a frequent part of the property performance and monitoring system. An accurate property budget will help you with the overall property performance throughout the year. That being said, the budget that is created for a property needs to be completely accurate and relevant to the local property market.
Here are some tips that can be applied to the compilation of a budget in commercial or retail property management.
- Meet with the landlord of the property before you do anything else. Understand the intentions of the landlord that can have an impact on the property performance. It could be that the landlord intends to sell the property inside the next 12 months. That single factor will have major impact on the compilation of the property budget. Income and expenditure would be handled differently if the property is to be sold verses retained.
- It goes without saying that you should understand the existing tenancy mix and the intentions of the tenants within the property. Meeting with all tenants regularly will help you stay on top of these issues. If a lease is to expire or renew, the cash flow for the property income will need to show those changes.
- Most property budgets are initially prepared on a spreadsheet with due regard to the timing of changes in income and expenditure throughout the year. This then says that the spreadsheet will reflect the monthly changes of property income and property expenditure. You will need to understand the rental escalations, rent reviews, and options as they apply to each lease within the property.
- A good property budget will allow for vacancies to occur in keeping with the prevailing market conditions. Review the local property market to understand the supply and demand of future space in the particular property type. You will also need to set some expectations and assumptions as they apply to the local and regional economy. Part of that process will include an assessment of the local business demographics and expected changes within the community.
- In preparing for a property management budget, look at all the competing properties in the region or general location. Those properties are likely to place pressure on existing vacancies, and prevailing market rentals. An abundance of vacant space in the local area will directly flow through to a reduction in market rental overall, and potentially a similar case in your property.
- The financial history for the property should be gathered for the last two or three years. That history will allow you to understand rental changes, vacancy factors, and expenditure escalations. That information will help you greatly in creating a new property budget.
- A significant part of the expenditure in any commercial or retail property will include uncontrolled outgoings that have a significant impact on property costs. They will normally be in the categories of municipal rates, energy, and insurance. These three factors take up a large percentage of the building outgoings annually. Estimating the escalations in these categories can be difficult so you will firstly need to refer to the appropriate rating bodies, Energy Supply companies, or relevant insurers for an estimate of expenditure change.
- Talk to other property owners and property managers in the local area to compare property outgoings and expenditure costs. Given that the commercial and retail property market is so specialized, the sharing of this information is very common. Without this information it is very hard to compile the property budget.
A commercial or retail property budget is not a difficult thing to compile, however it does take time and a reasonable amount of preparation work. As mentioned earlier, always take notes regards your assumptions as they apply to the budget. During the year you can refer back to your notes when something seems to be out of balance with the property budget.
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