When you manage commercial real estate, the outgoings within the property will require focus and financial control. When the property market slows or gets tougher, managing the outgoings is really important; the outgoings form part of the financial strategy for the landlord and will impact the net income for the property. If the outgoings get too high, the property will be hard to lease and hard to sell.
Set Some Rules
You can split the outgoings into a number of categories and this is normally done to identify and track the cash flow by expense streams. Most importantly there are two sides to the outgoings equation. Some of the items will be controllable and others will be uncontrollable. This means that the landlord can exercise control on only some of the outgoings.
The uncontrollable outgoings are those which are imposed on the property and have to be paid without any opportunity for cost savings, adjustments, or budgeting. Those uncontrollable items are normally council rates, land tax, and water rates. To a degree, insurance and energy costs will also fall into that category although some cost controls are possible with these items.
To manage the property outgoings effectively it pays to adopt a process similar to the following:
- Create a budget for the property prior to the commencement of financial year
- Track your expenditure to budget monthly. Adjust expenditure when you see a need and reason; early adjustment prevents bigger blowouts.
- Look at the history of the property expenditure over the last few years to identify any excessive spending or items that are beyond the averages in the local area. The history of the property will allow you to adjust your budgets and cash flow expectations.
- Make sure that you have removed the capital expense items from the normal repairs and maintenance for the property.
- Talk to the owners of comparable properties in the same area. The outgoings between your property and their property should be similar. If not, you need to know why and take steps to fix that. Share information of outgoings costs with other similar property owners for this very reason.
- Monitor the annual valuations for rating purposes. When these valuations are done, you will soon see the statutory charges and council rates rise soon after. It is not unusual for landlords and property managers to dispute the valuation in an effort to keep the statutory charges at a lower rate.
In preparing an expenditure budget for the property, you should time the expenditure so that the larger costs are expected; hence ensuring that the cash flow is suitably adjusted in preparation.
The controllable outgoings are those that the landlord can exercise decision and timing. Normal items of repairs and maintenance together with the contractor maintenance will fall within this category. If the landlord chooses to delay the expenditure with the controllable outgoings, then they can spread the impact of those items on the net monthly income from the property.
In summary, the property manager working on behalf of the landlord should exercise due care and diligence in the budgetary process for property expenditure. A well-managed landlord cash flow in an investment property is a correct balance of income against expenditure given the tenancy mix pressures on the building and the existing vacancy factors.
The commercial property management industry is highly specialized in many different ways. It takes time to understand the elements of the industry and the requirements of professional services supplied to landlords and tenants. The same can be said as it applies to retail property leasing and shopping center management.
If you are considering a career in commercial or retail property management and or leasing, here are some tips to help you with establishing your skills and growing your professional services.
You will need to know about the current property market in many different ways. Typically you will need to understand the market rentals, vacancy factors, property types, new developments, and landlord investment requirements. All of these things will help you with lease negotiations and the services that you provide to your landlord clients.
The different property types require different levels of property management involvement. Industrial property is relatively simple and basic from the management perspective given that you usually have only one tenant to monitor within one lease and one property. When you move your property management skills to an office property or a retail shopping centre you will normally be dealing with multiple tenants and variable lease conditions. On that basis you will need to know the standards of lease occupancy, property legislation applying to leasing, and the physical attributes of the landlord and tenant negotiation.
From every lease occupancy there will be issues to monitor and optimize involving rental income, property expenditure, risk and liability, and tenancy placement. Each month it is normal to provide a landlord with a comprehensive property report relating to current investment performance, property maintenance, vacancy and leasing factors, together with projections from the prevailing market conditions.
Most landlord clients will have a number of specific targets relating to their investments. Those targets will be shaped by the age of the property, the tenancy mix, redevelopment requirements, and the local business community. To serve your clients well, take the time to understand their investment requirements and intentions relating to the asset.
With the larger properties, there will usually be a budget of relates to rental income recovery, and expenditure activity. That budget will be established prior to the beginning of a financial year and then loaded into the business plan for the property for the coming 12 months. Every month every quarter or budgeting process will be checked and changed depending on prevailing market conditions.
Professional property managers are specialists in many different ways. Some will specialize in a single property type in their town or city. In that way they can bring specific knowledge and information together with high levels of skills to the clients that they serve.
The tenancy schedule is the tool of choice for a property manager or leasing manager in a commercial or retail property investment. It is the tenancy schedule that will keep the property manager up to task on forthcoming events and dates.
Often you find that the tenancy schedule is not up to date, so if anyone gives you such a document, treat it with the caution it deserves, and check it out completely before you act on the information contained therein.
So let’s say that you have a great tenancy schedule that you know is totally accurate. I get many questions about what I would want to see in a tenancy schedule. Here are my main priorities:
- Details of the tenant name, lease, and full contact detail for emergencies
- Tenancy identifier or suite reference that comes from the plan for the property
- The area of the tenancy in m2 or ft2 (depending on your unit of measurement)
- The % of the tenant area to the building net lettable area
- The rent $’s per annum, per month, and per unit of measurement (m2 or ft2)
- Lease start date
- Rent start date
- Lease end date
- Term of lease
- Option term of lease
- Anniversary dates and reminders for rent reviews, options, expires, renewals, renovations, and make good obligations
- Outgoings charges for each tenant on the basis of area and monthly charge
- Outgoings budget for the building
- Total outgoings recoveries for the property on a currency and % basis
- Types of outgoings to be charged to the tenants
- Insurance obligations of the tenant
- Rental guarantee details or bonds held
- Provision for critical dates relating to any important lease term or condition
- Maintenance obligation details of the tenants
This list is not finite and you can add your own extra priorities, I would however make sure that it is totally correct and maintain it to the highest level of accuracy. When you do this you can stay on top of important upcoming events that will impact the occupancy or rental of the property.
Whilst you can buy ‘off the shelf’ software programs that display this above information, that can be quite expensive for those commercial and retail property managers that are first entering this type of property. The alternative is to create some simple spread sheet that contains the data; in saying that, it is essential that great care is taken to maintain the spread sheet that you create. Any errors in the tenancy schedule can destroy your landlord, your business, your tenant, your reputation, and the property. Accuracy is paramount.