The kids are back in school and fall is around the corner . . . which means the commercial property budget season is officially upon us.
Preparing a solid operating budget for your commercial properties is a critical part of successful operations. Well-planned budgets allow property managers to assess controllable operating expenses and analyze revenues while working to increase their properties’ NOI, keep tenants happy and attract new ones.
While there are many components to preparing a good commercial property budget, in this blog we’re going to share a few helpful tips to prepare for the budgeting process, including property inspections, tenant surveys, ownership discussions, and creating RFPs for bidding on both standard maintenance projects and capital expenses. These pre-budget activities will support your strategic and financial plans so they make sense in the context of the bigger picture of NOI and asset value.
Here are four helpful activities that may better prepare you for budget season and assist in successful property operations.
Formal Commercial Property Inspection
It goes without saying that you need a comprehensive checklist in order to carry out a proper inspection of your assets. While speaking with maintenance teams and tenants about any problems and doing regular visual inspections are valuable, failure to complete a thorough property inspection with a comprehensive checklist can often lead to unplanned expenses that don’t make it into your budget. It is important to do a thorough inspection of all building areas and mechanical items that seem to be working perfectly fine in addition to those that have known issues. Doing a complete property inspection with a guided property inspection checklist will not only allow you to budget for immediate needs, but can also be helpful in budgeting for 5-year capital expense items such as parking lot repaving, bathroom updates, common area paint projects and many more.
While the checklist can differ depending on the type of commercial building you’re managing (retail shopping centers, office buildings, industrial parks, mixed-use, etc.), many elements of a checklist can remain consistent amongst property types including:
- Electrical systems
- Mechanical systems, including any elevators
- Interior and exterior surfaces (paint, window seals, masonry cracks, etc.)
- Frame structure and other indicators of structural problems
- Fire safety equipment
- ADA-related additions or improvements
- Paving and landscaping (including sprinklers and drainage)
- Plumbing and water conduits (for leakage)
- HVAC and ventilation systems
- Common area facilities—restrooms, lobbies, vending areas, etc.
- Parking areas
Any existing or potential problems identified should be documented thoroughly with pictures where possible. Proper documentation is helpful when having conversations with property ownership and vendors during the bid request process. Detailed documentation can guide the budgeting process and help determine which items are a priority.
Many commercial property assets do not have on-site staff, and managers often oversee multiple properties within their portfolio. When it comes to these commercial assets without on-site staff, tenants can be valuable resources for learning about issues that need to be addressed. Sending out a tenant survey at the beginning of the budget season is a great opportunity to get the voice of your tenant and learn about any property needs that may not have been detected during the scheduled property inspection. Surveys are easy to put together with services such as Survey Monkey, and many are free. In addition to helping gather information on possible property needs, these surveys also make tenants feel heard and valued, fostering a better tenant relationship and increased tenant retention.
Discussion with Ownership
Having an open line of communication with your property owners is an important component of successful property management. Budget season is a great time to check in with your property owners and review their investment goals for each managed asset. Ownership’s long and short-term plans for each asset naturally have significant implications on the decisions you make when budgeting for next year’s expenses. Understanding your property owner’s investment goals for each asset allows you to manage the property in a way that maximizes their return on investment.
In addition to serving as a check-in with your owners regarding their investment goals, the pre-budget ownership discussion allows you to be mindful of any budget items that owners may have knowledge of such as insurance premium renewals or direct requests from leasing agents, tenants, property neighbors or others.
You can utilize your property inspection and tenant survey results as a guide for discussions with ownership and present your recommended budget projects. These discussions can aid not only in the creation of next year’s operating budget but your 5-year cap ex budget as well. Clear and open communication with property ownership can help expedite owner approval on expenses and set clear expectations while working towards investment return goals.
Creation of RFPs
Once you have identified projects that need to be rebid and are pivotal to include in your budget or service agreements, it’s a great idea to create formal requests for proposals (RFPs) to send out to vendors.
It is a best practice to get at least three bids on most projects, though there will be occasions when fewer or more than three bids are necessary. It is a good idea to solicit bids from new contractors and contractors you may use less frequently. Getting competitive bids from multiple companies results in more competitive pricing and often better services that add value to the asset’s bottom line. Contractors can become complacent and less competitive on pricing when service agreements are not frequently reviewed or rebid. Property managers have an ethical responsibility to obtain the best services at the best price for both the property owner and tenants, as these budget expenses are often passed back to tenants through CAM charges.
When drafting an RFP, be very specific about the materials, design and quality level of the projects for which you are wishing to obtain pricing. Where possible, use industry-standard codes and materials language. It is a good practice to include any known timelines as well, particularly if the projects will involve inconvenience to tenants. You might even build in incentives and disincentives to help ensure your timetable is honored.
Depending on the structure of your company, you may find potential conflicts of interest. For example, a person who serves as a property manager or sits on the board might also have an interest (or friend) in a construction company. There can also be close relationships (and even incentives for recommendations) between contractors of different types who pull in one another for projects. Be attuned to these relationships and very clear to all involved that projects are to be awarded based exclusively on price, quality and schedule. Blind bidding can be a big help in this area.
Utilizing some of these pre-budget planning suggestions can help deliver exceptional commercial property management that maximizes asset value, controls operating expenses for your tenants and helps meet your property owners’ investment goals. Budget season is a complex time of year. Follow the guidelines above and you’ll be off to a good start as you prepare for 2022!