The property manager of any commercial office building should prepare a budget at least on an annual basis. This budget is based on projected income and expenses for the property, including both operating and capital figures, and is used as a means to organize the property’s value and performance. In addition, annual budgeting allows the property manager to discover trends in expenses, notice recurring or unusual items, and create realistic future performance projections.
Through these steps, a property manager can create a commercial office facility budget:
1. Determine the gross potential rental income of the facility.
This is the maximum amount of income that a property manager can expect to gain from a single commercial property. This is calculated by adding together the potential income from the rental fees of all the units or spaces available in the facility. All of these aspects of potential income must be included in the gross potential rental income number.
2. Notice any pass-through income, expense reimbursements, or recoveries associated with the property.
In connection with many commercial properties, tenants can be responsible for some or all of the property’s operating expenses, real estate taxes, and insurance payments. These additional but necessary costs can be added to the monthly or yearly bills of tenants to make up the property’s expenditures. 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.
Commercial properties with multiple rental units or offices for tenants may not 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 vacancy and credit loss issues are not easily predicted, it may be advisable that property managers update the facility’s budget more frequently than just once a year.
4. Itemize instances of miscellaneous income.
The total income of a commercial property 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. These extra sources are known as miscellaneous income. Unfortunately, these causes are often not consistent incomes, and they can be very difficult to forecast and add to the budget on a month-to-month or even yearly basis.
5. Calculate the facility’s effective gross income.
Once all of these determinations are in place, it is possible to calculate the commercial property’s effective gross income that can be used for the overall budget by following this basic formula:
Gross potential rental income + expense reimbursements – vacancy and credit loss + miscellaneous income = effective gross income
This is the amount of money that effectively comes into the commercial property and that can be used in the official facility budget.
6. Take into account the facility’s operating expenses.
The effective gross income calculation is just half of the office building budget. Once the total income for the property is known, 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 that are associated with the maintenance and use of the entire property. For example, the costs for the building’s utilities, including natural gas, oil, electricity, water, Internet, and telephone, should all be included. In addition, the property manager must try to estimate the average repair and maintenance costs for the facility. This includes grounds maintenance, snow removal, trash removal, real estate taxes, insurance, and any other management fees incurred by the office building. Finally, expenditures associated with the administration and payroll of those who handle the entire commercial property must be taken into consideration.
7. Determine the commercial facility’s net operating income.
Once the property manager has overall calculations for the effective gross income and operating expenses, it is possible to find the net operating income, also known as NOI. The NOI is calculated by subtracting the operating expenses from the effective gross income. A positive NOI indicates that the office building budget is working effectively.
8. Examine the property’s debt service to find the cash flow.
Many commercial properties are purchased through a mortgage, and regular payments must be made in order to keep the building under current ownership. The amount of money left on the mortgage represents the property’s debt service. By taking the NOI and subtracting the debt service, a property manager can determine the facility’s available cash flow. The cash flow figure is important because when it is divided by the initial cash investment in the property, it demonstrates 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 the facility’s 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 that will affect the appearance and functionality of the property, such as a new heating system or a renovated façade. These are one-time expenses, unlike operating expenses. Escrow or reserve accounts are similar to savings accounts for a large commercial property. These funds can be used for emergency expenses or for large expenditures that will be needed in the future, such as planning for new windows for the entire building. It is advisable that some money be put away into one of these accounts each month 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. A chart for accounts should be kept each month that itemizes the different types and amounts of income and operating expenses. Not only will this help with tracking the monetary amounts, but it will also make it clear 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.
By following these careful steps, a property manager can complete a useful and effective commercial office building budget. If you would like a commercial facility property management budget template to begin with, we have provided one as an example in Excel format here: Commercial Property Manager Budget Template.