Budget time in commercial property management is something that requires accuracy and planning. Mistakes can be made when it comes to setting the budgets that apply to income and expenditure in an investment property. Many property managers understand the key issues to focus on when it comes to budget establishment.
Essentially a budget of this type involves complete review of the income possibilities for the building given the existing tenancy mix and the prevailing property market. Assumptions have to be made given the known facts and the targets of the landlord.
The history of the property will have some important indicators to merge into the ongoing property budget. You can learn a lot through reviewing the timed income and expenditure over the period of the last few years.
In this audio recording John Highman talks about the strategies behind the commercial and retail property management budgeting process. Understand the key factors that apply, and then merge them into your business plan for the asset.
Some office investment properties struggle from time to time both financially and physically. If you can predict and adjust to that change, then you can build a good average property performance over time.
So why does this change happen?
Many local property issues can be driving change and placing pressures on the property performance thereby impacting the investment.
You can adjust to the changes.
So to improve a commercial property, you should assess where things are now.
Here are some of the bigger things to help you get started:
Before you get too far into things, define ‘Property Performance’ and what it means to you and or your client – You can’t improve something unless you define it and assess it. Then you can compare the property to others locally and regionally. It should be said that some properties are so special that you could be making comparisons and assessments with other buildings far afield.
Look at the property from different aspects – In understanding a property there are a few key indicators or categories of activity to review. Here are some of the bigger ones to help you get started – Financial, Physical, Lease Documentation, Tenant Mix, Vacancy factors, Occupancy costs, Net Income, and Maintenance. There will be strengths and weaknesses in each category. When you drill down into the separate categories you can see what you have to work with and any problems that may need resolving. Some adjustments take months if not years to resolve. The larger the property, the greater the variations of things to look into.
Do a SWOT assessment – There will be unique issues in any property that could be impacting property performance. It is valuable to do a SWOT test for the property.
Implementing a tenant plan – Some tenants will be better than others when you consider property performance over time. Understand how you can keep your good tenants and what you should do in preparation of any pending lease termination. Rents and incentives should be set as a target point for any priority tenants.
Implementing a budget – A budget of income and expenditure will help you stay on task during the financial year for the asset. A budget also makes you look at the variables of property performance that you can see coming up.
Review lease documentation – Some leases will be better than others from a landlord perspective. A standard lease for the asset can be set for targeted rent strategies, lease occupancy, incentive offerings, and fit out standards.
Capital works programs – There will be big issues in property maintenance that fall outside of normal repairs and maintenance. For example you may have to purchase a large piece of plant and machinery. That high cost component could be structured into the timed expenditure budget for the property.
Regular property maintenance – Stagger the preventative maintenance routines into the property performance budget. The contractors will have plenty to say about what they believe should be done and when those works should occur.
Rates and taxes – One of the biggest drains on property expenditure will be rates and taxes. At certain times of the year these big accounts will need to be paid. A budget will help you plan how you can the payment of those larger accounts.
Better quality leases – Generic leases are a big waste of time for a landlord when it comes to any high quality property. Remember that the leases in a property reflect the cash flow and the investment strength of the asset. Get special leases prepared that reflect the investment targets of the client (Landlord). Every tenant will want to lease premises on their terms and conditions, but the landlord owns the property and deserves a reasonable lease document to support the investment.
Renovation plans – Understand how factors of ‘wear and tear’ impact the property. As the property ages, you will need to establish renovation plans of the common areas including car parks, entrances, foyers, and building surrounds. It is hard to drive a reasonable level of rent in the property if the presentation issues are not kept up to scratch.
Better tenants – There will always be some good tenants locally that you can influence in entering your property on a long term lease. Create a lease of targeted tenants that you will call on when vacancies are seen to be occurring. Track lease expiry dates with those special tenants that could move into your property. Offer the right deals at the right time.
Improved market rent – Are the local rents going up or are they stable? Rents can be escalated if the lease document supports the defined landlord investment targets. Be careful with market rents that are too aggressive; you want your tenants to run viable businesses for the long term.
Outgoings costs review – Compare your outgoings costs to similar buildings in the same location. Rates and taxes will always be a variable given that they are structured on property values, however you can look at the averages and determine where your property sits by comparison.
Third income streams – Look for extra income from extra occupancy strategies such as storage, signage, and change of premises, licenced areas, antennas, and increasing of lettable space.
So there are some good things that you can do here when you want to boost property performance and income potential. Are you ready to make some positive changes?
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