Money Makes the World Go Round (CRE Edition)

As property managers, you will have varying involvement in the financial aspects of running the property. For this article, I am assuming that you a good deal of financial responsibility. 

We are going to focus on setting a yearly budget, common budget items, and some tips on setting a healthy budget.

Setting the yearly budget.

Commercial properties operate like a business, you will need to spend money to make money, but if you spend too much money, you won't have enough left over to turn a profit.

A strong budget is a great way to visualize your expenses and will serve as a framework for discussion about capital expenses, repairs, and marketing. 

Sometime near the end of each year, you will need to review the prior year's expenditures and establish a budget for the coming year. 

Here are a number of common budget items and a brief explanation 

• Rental Revenue- this may be broken down into office space and other revenue sources, for example, if you have storage units or rent out conference rooms. Another source of revenue is direct billed work for tenants and late fees.
• CAM Revenue- this is revenue that is generated by billing tenants for their share in the common expenses.
• Utility Revenue- Each building will have a different system, but as a landlord, you will typically collect a utility/electric payment from your tenants.
• Real Estate Taxes- The local government taxes almost all real estate. This line item can swing from year to year as assessments that change the tax burden of your property happens on an ongoing basis.
• Mortgage - If your building was purchased with financing, you would need to make sure you have enough money to pay the mortgage.
• Insurance- You need insurance to protect you from liability and loss. Insurance is another large budget line item.
• Utilities- As a building owner, you will most likely be responsible for paying the building electric/utility bill. A portion may be billed to tenants, but the accounts and responsibility for the bill will typically sit with the landlord.
• Cleaning- day porters, night cleaning, and waste removal are all significant expenses to the property
• Landscape and Snow Removal- you will need to keep your property looking good and accessible and safe in inclement weather. Snow and landscaping services are some of the most expensive line items you will encounter in property management. 
• Security- Many buildings have security officers. Security could range from a 9-5 concierge up to a multi-person 24 hour a day security team. 
• Repairs and Maintenance- this may include payroll for onsite staff, costs of parts, and labor. The most expensive parts of the building, like the roof, HVAC, elevators, etc. may get their own budget line items.
• HVAC- this part of the budget includes service contracts and expensive parts and repairs that will be typically performed by outside contractors.
• Elevators- similar to HVAC, there are line items for service contracts, emergency phone lines, and inspections.
• Roof- Commercial low rise buildings tend to have a proportionally large roof; your budget will account for repairs, inspections, and replacements.
• Electrical- this line item will often account for services specific to commercial electric systems such as switchgear maintenance, IR scans, and arc testing.
• Extermination- Many properties maintain year-round traps that keep your property pest-free. You may also need the services of an exterminator for unusual or seasonal situations like removing bee's nests, termites, or geese that invade your property.
• Plumbing- Leaky pipes, broken toilets, and stuffed sinks all need to be fixed.
• Fire & Life Safety - you will have to account for service contracts, replacing fire panels, sprinkler maintenance, and other safety-related expenses. 
• Interior Building- These are expenses related to maintaining the interior of the building like swapping light bulbs, cleaning common area carpets, window washing, painting stairwells, and other items that don't fit neatly into other categories. 
• Parking Lots- fixing potholes, re-striping, seal coating, parking lot lights, repairing curbs, and other parking-related expenses. 
• Office Expenses- printer, toner, software licenses, etc. if you use it, it costs money.
• Management Fees- depending on the ownership and management structure, there may be management or asset management fees that need to be included in your budget. 
• Professional Fees- These are not insignificant expenses related to hiring attorneys to deal with leases and other tenant issues, architects for space planning and leasing commissions and fees to other pro's who help you get the job done.
• Marketing- You need to keep your Loopnet listings up-to-date, host events for tenants, create marketing material for the property, you gotta spend money to make money.
• Cafeteria- many office buildings have some food service operation. There are costs associated with maintaining this amenity, for example, buying or replacing equipment.
• Misc- There are other budget items like depreciation and other recoverable items that will vary widely between buildings.

I am sure there are items I missed, feel free to weigh in, and let me know about budget items you have come across. If you have a budget best practice- feel free to share with me at joe@wearep3.com.