Once a year it is necessary to create an outgoings budget for any commercial investment property under management. After the budget has been created, the outgoings should be checked and managed to the budget over time; that is the job of the property manager. An outgoings audit will help establish an efficient and relevant budget for the asset given the size of the building, the age of the property, and the complexity of the tenancy mix. Over time that helps the landlord achieve the financial results that they seek.
Research The Facts for an Outgoings Audit
Here are some ideas to help you undertake an outgoings audit in a commercial or retail investment property:
- Understanding cash flow – The history of the property will give you some valuable information relating to cash flow. Over the last few years there will be patterns to property costs and maintenance. There will also be costs to be identified and tracked with rates and taxes. Rates and taxes will usually take up at least one third of your building expenditure budget and those numbers will be uncontrollable. Look at the averages for the area, and understand how rates and taxes have been escalating over recent time; undertake an estimate of what could happen to those figures in the current and future financial year.
- Finding expenditure savings – The idea of the outgoings audit is to achieve savings and create financial control. In analysing the outgoings for any investment property will see that the rates and taxes component will be the largest of categories. It will be quite rare for any savings to be achieved in rates and taxes; they always go up. On that basis you will need to identify savings within other categories of maintenance in the property. Control will be a focus of the outgoings budget and the spending patterns.
- Links to rental types – The outgoings categories and expenditure issues will have an impact on the rental for the property. The net income will be impacted by the recovery of outgoings. Understand the average costs that apply to expenditure within the building type. Ensure that your property is within the averages when it comes to occupancy costs. If your property is above the mark when it comes to occupancy costs, you will have some difficulty in leasing vacant premises. The tenants of today understand exactly what they should be paying when it comes to rental and outgoings.
- Vacancy pressures and non-recovery – Look for the factors of outgoings non-recovery due to vacancies. In a property with vacancy volatility, it pays to allow for some component of landlord outgoings contribution. In some properties, you will never achieve full occupancy within the tenancy mix, no matter how successful you may think your leasing program may be. On that basis the allowance for extra outgoings attributable to the vacancy factor is quite normal.
- Categories of outgoings – Always split your outgoings into categories so that you can see escalations as they arise within expenditure groups. In an older building, you will see escalations in repairs and maintenance and capital expenditure. Understand how those escalations can impact your expenditure budget over time.
- Volatility and Risk – There are factors of volatility and risk when it comes to the recovery of outgoings. The volatility factor will be driven from changes in the tenancy mix and the success or otherwise of individual tenants. Keep close to all of your tenants as part of a regular tenant contact program. Identify any occupancy threats or potential vacancy factors as early as possible. Risk is a slightly different factor when it comes to expenditure. Risk will occur as a result of locational factors and business volatility in the region. The suggestion here is that some locational factor beyond your control is likely to impact property occupancy and or occupancy costs. That could be through changes to local government policy, changes to roads, infrastructure changes, and natural environmental issues.
- Plant and Equipment – The age of the property and the associated plant and equipment will impact expenditure. Some older building control systems and ageing air conditioning plants can be quite expensive to run. That will then have an impact on energy consumption, and plant efficiencies. Any downtime in operational plant can impact tenant occupancy and the ability to trade. There is a fine balance between spending money on plant and equipment versus saving money in operational expenditure.
- Maintenance Contractors – The maintenance contractors involved in the property can help you significantly when it comes to understanding critical components within the building and essential factors of plant and equipment performance. They can also give you a good working knowledge of plant history and plant performance. They can tell you the strengths and weaknesses of the equipment within the building allowing for both age and existing condition. Importantly those maintenance contractors have to retain efficient performance within the plant and equipment whilst ensuring that the building complies with building occupational and safety codes. Work continually with the maintenance contractors within your investment building, and certainly do so very closely at times of outgoings analysis and budgetary performance.
- Capital expenditure items – In any commercial investment property you will find some factors of maintenance of a capital nature. That expenditure category will usually be for the larger pieces of plant and equipment that need to be replaced rather than repaired.
- Sinking fund – It is common to have a sinking fund in an investment property where certain monies can be set aside for larger expected matters of building and property maintenance and repair. Capital expenditure items may also be considered as part of the sinking fund although the monies retained within the sinking fund should always be split between capital items and repair items.
- Renovation and refurbishment – Most investment properties will get to a point in time where renovation and refurbishment is required. That being the case, a project management approach should occur in parallel with the outgoings maintenance budget. In that way the renovation project can be staged to fit within expected changes to the tenancy mix, established rental income expectations, the known property performance, and the current or upcoming financial year.
- Establishing a budget of control – The idea with the property budget and particularly that part relating to outgoings is to control the expenditure profile for the property so that you can remove risk and volatility from the net income. In that way the landlord can be prepared for known changes and upcoming property maintenance requirements.
So there are plenty of things that you can consider and work through as part of undertaking an outgoings audit. That audit will allow you to set the right targets and parameters relating to the tenancy mix and the lease strategy for the landlord.
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