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Prepared by: Carol Eddy, CPM / Eddy Management Group

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1 Prepared by: Carol Eddy, CPM / Eddy Management Group
The Institute of Real Estate Management Los Angeles Chapter #6 Multifamily Budget Workshop PROMO IREM. I have been in property management for over 20 years where I started out as a security guard and progressed through maintenance, leasing, on-site management, supervisor and director. I have prepared more budgets that I could count. I have always depended on my on-site managers to provide their feedback and assist with the budget preparation. Everyone does budgets differently, however there are several basics that most follow. I would like to share them with you today. I may do things slightly different than your company, so please share your ideas – we can all learn from each other. I know the budget process is fast approaching and everyone gets nervous and anxious and can’t wait until they are finished and approved. I hope by spending the morning together I can give you some information to make you more comfortable with the process, so you will enjoy the next few months and learn as much as you can about the finances of your community. This is a very informal session -- Sometimes I assume I am explaining something well enough and I may be missing a step. IF YOU HAVE ANY QUESTIONS TODAY, PLEASE JUST ASK. Some of you may be more familiar with some of the process, so please bare with us while we discuss subjects that may not be familiar to everyone. Again this is a great opportunity for our experts to share and help the group You should be using your handouts to make additional notes and there are several activities we will do throughout the day. Throughout the morning as we complete the various portions of the budget we will use the tools provided to “fill in the blanks”. Got you pencil and calculator ready, than let’s begin. Prepared by: Carol Eddy, CPM / Eddy Management Group Presented by: May Davoudian, CPM & Farzaneh Tofighi, CPM 08/23/07 4/14/2017

2 Purpose of Today’s Presentation
Understand financial process Define budget types Review budget line items Income and Expense Basic budget and financial calculations Renewal / Rent projections NOI / Cash Flow Tools needed to prepare a budget 1. May I have a show of hands for those who are familiar with A. Budgets – B. Preparation C. Financial Statements D. How involved are you currently in the process. show of hands --- not at all minimally extensively What are your expectations of today's session? (flipchart) Tools Provided Today: Copy of the presentation and slides with ability to insert notes Subject property compliments of a great mgmt company Monthly Income Statement Budget Comparison – Cash Flow (Variance Report) Market Survey Rent Roll 2004 Budget Budget Template 4/14/2017

3 On-Site Manager’s Objectives
Generate income Meet budget projections Control expenditures Fulfill owner’s financial goals The budget is a tool which allows manager’s to operate their property and also communicates to the owner expectations going forward. Does the budget meet their objectives? How many of you know your owner’s objectives for your property? Previous company: No one saw the budget, helped prepared, saw the financial statements therefore they never understood the full picture Has anyone ever tried to manage a property without seeing the budget: What happens? - Unable to efficiently operate your property -Not empowered to operate based on the knowledge you receive from the budget. -Often get negative feedback with regard to income or expenses. Perhaps if we knew the expectations we could have successfully achieve their goals. 4/14/2017

4 Financial Flow Budget and financial statements work together. One not effective without the other. Profit and Loss (2) Budget (1) Everything that is should occur on your property is reflected in your budget. (1) Everything that actually occurs on your property is reflected in your Profit and Loss Statement. (2) Also known as Income Statement, Financial Statements The dollar difference between everything that was budgeted to happen and what actually happened is reflected in your Budget Comparison (variance analysis). (3) The narrative report of the differences is the Monthly Variance Report (not shown) (Let’s label your handouts Budget 1, Profit and Loss 2, Variance Analysis 3) We will be using these throughout the day, keep them handy Monthly Variance Report Variance Analysis (3) 4/14/2017

5 Budget Comparison (Variance Analysis)
Financial Process BUDGET Controlled Expenses (Operations, turnover, leasing, payroll, legal, advertising, maintenance, utilities, replacements) Uncontrolled Expenses (Financial, Capital Improvements) Rent Collection (Vacancy, Concessions, Delinquencies) Other Income Income Statement The chart shows the sequence of events in the financial reporting process: Your budget begins the process which includes RENT COLLECTION, move in, move outs, delinquencies, vacancy loss and concessions. It also includes all the Controllable EXPENSES for the property including operations, leasing expense, turnover costs, replacements, maintenance, payroll, taxes etc... Followed by UNCONTROLLED expenses such as mortgage payments, capital improvements and taxes. Once this activity is calculated via rent collections, reports, payables, and reoccurring expenses the inputted figures calculate the Income Statements (financial or P&L statements). This shows everything that actually occurred on your property and compares it to what was projected in the budget in your variance analysis. Following that is a Monthly variance report that is submitted to the owner. Budget Comparison (Variance Analysis) 4/14/2017

6 Money Flows Gross Potential Vacancy/delinquency/collection loss
= Total Projected Income + Total Other Income = Effective Gross Income -Total Operating Expenses = Net Operating Income -Finance Expense -Capital Reserves = Cash flow / Profit This is a brief description of how money flows through your property. Throughout the day you will become more comfortable with the cash flow process. There are different titles for various equations, lets review your budget total to get a better understanding. Gross Potential / Rental Income Less – vacancy Less – delinquency Less -- concessions Plus other income = Effective Gross Income / Total Revenue Less – Total all operating expense = Net Operating Income (NOI) / Operating Profit or Loss Less -- Financial Expenses Less Capital Improvements = Cash Flow / Names may vary 4/14/2017

Institute of Real Estate Management Definition An itemized estimate of income and expenses over a specific time period for a particular property, project, or institution. Key is that this is an estimate – budgets are not exact. OTHER DEFINITIONS OF BUDGET WEBSTER’S DEFINITION: “A plan adjusting expenses to income for a certain period of time. ” This says that a budget “ADJUSTS EXPENSES TO INCOME”. I think it is important to remember that you can’t spend more that the income allows. This is typically where the budget revision process begins Others: 1. The establishment of goals, making comparison of actual results with those goals as results are known. (variance) 2. Establishes believable financial goals for the property and provides guidelines for accomplishing them. (assumptions and accurate projections) 3. Directly related to planning. (pre planning process – owner’s objectives) This illustrates how your budget (ties into your financial statement in THAT YOU COMPARE RESULTS OF THE GOALS TO THE ACTUAL RESULTS ONCE THEY ARE KNOWN. 4/14/2017

8 Budget Types Annual Long Range Rent up 4/14/2017
Annual Budget covers 12 months Long Range covers three to five years. Rent up is often used in lease up properties 4/14/2017

9 Purpose of a budget Provides a measuring tool for management
Provides banks and investors the tool to monitor the operating results of a property Allows the on-site staff the tool to monitor and track their individual progress and goals PLUS Gives on-site staff the parameters for both income and spending expectations Indicates whether operations are efficient Monitor achievement of owners’ cash-flow requirements Management can measure the progress of the property. Is the property heading in the right direction? Is the on-site manager or the management company heading in the right direction? Banks need to know what the goals and objectives are for the property based on projections. This could be for loans, re-financing, selling or acquiring a building. Also shows the financial strength of a property. Managers need to know what the expectations are for them and the staff. Give the manager an opportunity to monitor their performance based on the budget. This also gives the managers a tool and empowers them to operate their property based on the budgeted line items. Various calculations such as net operating income, cost per unit and expenses compared to Gross Potential Income provides a gage for measuring efficiency. This is what banks, owners and supervisors look at – SO SHOULD YOU! Owner’s require specific cash flow requirements – a budget assists with this process through future income and expense projections. 4/14/2017

10 Review Budget Sample Typically cover one year Five basic components
Annual figures averaged Actual expenses incurred not averaged Monthly and total columns Assumptions There are five basics to a budget (today we will focus on the first two) Income / Revenue (Rent, fees and other income) Operating / Maintenance Expense (Expenses such as maintenance, payroll, advertising and taxes) Financing expenses (mortgage, loans for equipment or furniture)– Below the line – since this example did not have a debt, I left as is. However it should go below the line and not a cost of operations. I adjusted for the budget template. capital improvements. (Capital Items) Most companies policy on Capital Improvements is for major expenditures only. Such as: Building a/c replacement (not units), pool resurface, paint the building, replace hallway carpet. Your individual capital improvements will be determined by your supervisors, with your recommendations. Capital Improvements are not part of your budget and therefore you are not responsible for the expense of this category. Such items like unit carpet, vinyl and blinds fall under your authority and are not considered capital improvements. Cash flow / profit – cash at the end to distribute to owners Frequently you will see equal amounts for each month, which is typically an average of the annual amount divided equally over a 12 month period. You do not know when you will incur this expense, for example advertising, telephone or decorating contract. Contrary to this is when you know you will incur an expense such as fire alarm contract or various one time expenses that you budget for the coming year such as tree trimming or color change. The total cost is placed in the month you expect to pay for the service. Cost per unit shows how much each exp category or income compares to the number of apts. you have. Annual amount for each budget category div. By the # of apts. This is helpful when comparing your line item cost year to year and determining the efficiently of the building operation. There are industry standards on a cost per unit based on size of building, age and amenities, all will affect expenses. For PCS Property Management the CPU on expense gage is: Premiere = Court = $3500 Places = $3,000 Parks = $2500 Karen anything else you would like to add? 5. Percentage of Gross Income - Gives you the true efficiency of your operations. This is the % of income used for expenses. Total All Expense div by Potential Rent 4/14/2017

11 Budgeting Process Pre-budgeting process Tools to prepare the budget
Step by step process Data, trends and equations Methods to arrive at figures Budget assumptions Revisions Pre-budgeting process begins with your wish list. It should include everything that you feel should be in the budget. Bids and pricing should be readily available prior to preparing your budget. It is a good idea to discuss what the company and supervisor would like to have in the budget as you will probably do some of the leg work for their wish list also. Obtain bids from vendors for capital or scheduled maintenance. (service a/c units, painting, capital improvements) Contact vendors providing service contracts, utility companies, rental magazines and ask for anticipated increases for the coming year. Anticipate and address the age of the building and potential life expectancy on major equipment and budget accordingly. Know your industry standards and actually go shop properties that compare, to see what they are renting for and if any improvements have been made. Prepare a survey to review for rent increases. Also you need to know when your current leases expire by month for the following year as well as data on move out history. Know what is going in your market or neighborhood: New business, lay-offs, new competition etc. Data, trends and equations and methods will be addressed separately 3. Assumptions is a narrative that explains how you arrived at certain line items as well as explaining when projects will be done over and above normal. (See your attached Budget Assumption report and review – look at rent, vacancy). Revisions – Expect them and anticipate them. You are doing the preliminary work – once it is forwarded to your supervisor, they are expected to revise and in most cases cut the budget to generate more cash flow. Again, you do not know the circumstances of the financing or costs which may require more cash, perhaps a balloon loan payment is due this year totaling $500,000. DON’T TAKE IT PERSONALLY. 4/14/2017

12 Tools to Prepare the Budget
Budget template Rent Roll Current Market Survey YTD General ledger Financial Statement Variance Report Previous years budget with assumptions Budget template can be used throughout the year to make notes for particular categories as well as during the budget process. Use a clean version once you have all your figures in place as this is typically what is forwarded to the main office where your budget it input NOTE: The next three reports must be for the exact same time period. For example we are working with everything through July 31. You cannot use different period for these reports. The best report to have is year to date up to point you are preparing the budget. 2. General ledger (year to date) shows your income and disbursements by category and must be reviewed for errors in miscoding invoices as well as determining if certain expenditures or income was a one time occurrence and not to be part of the next year budget. For example a major plumbing project would be deducted from that category before you average the total for the coming year. Other examples may be expenditures to repair a central a/c unit if that unit was replaced this year – next year you would not incur that expense. General ledger records all accounting transactions to the appropriate chart of account. The expense indicates check numbers and date of disbursement. This is where coding your invoices is so important. This report is heavily used when preparing a budget. Inaccurate coding impacts the report and future budgets. Error in coding or accounting errors requires a journal entry to transfer to the appropriate account. Review general ledger monthly and have it corrected so you don’t have to do so at budget time. 3. Financial statements should be used in cooperation with your general ledger report to analyze the actual income and expenses. When reviewing historical figures for the budget use actual figures not budgeted figures. Variance Report is imperative to see how this years budget compares to the actual figures. If your current year figures have very large variances either way (favorable or unfavorable) you must determine why the current budget is off so much. This may require you to do several things: 1. Determine how you arrived at that figure? 2. Was there unusual circumstances for this year only – if so you will have to justify increasing your budget line item for the coming year Adjust for next year, however, you will probably need to cut in another area. Previous budget and assumptions is used as a reference tool and double check each line item as you prepare the budget to insure everything is included in the next years budget as well. 4/14/2017

13 Step by Step Process Step 1: Compare Step 2: Take corrective measures
Step 3: Analyze Step 4: Adjust projections Step 5: Prepare the budget Step 1: Compare the budgeted income and expense items with actual income and expenses, working account by account. Part of the pre-budgeting process includes determining where you are currently in accordance with the current budget. (Use your budget variance) Step 2: Take corrective measures if needed. It is important to take time to review your current financial statements and budget variance report to determine what areas need to be adjusted for the next year or what was incorrectly done for the current budget. For major variances, you may want to review how you actually arrived at that figure. This may also include consolidating accounts or creating new accounts to reflect any new activity. Step 3: Analyze the actual income and expense for the period. Step 4: Adjust projections for the various accounts, based on past performance and actual figures. In some cases you may not have completed a full year of activity. Therefore when reviewing data you may need to project activity through the remainder of the year. Step 5: This is typically done at the corporate office, based on the data you provide. Expect revisions. We will go more in depth shortly 4/14/2017

14 Data, Trends & Equations
Data: Values of budget entries substantiated by specific known information Trends: Rate or direction that something has been moving Equations: Algebraic descriptions of the relationship among budget items These are some of the techniques used when determining budget items. A budget is not going to be exact as it is an estimate of income and expenses for a certain time period Therefore this is the starting point to budget preparation Data: Example would be specific cost for projects with bid, anticipated rent increases, salaries with known increase, taxes, insurance, utilities with verified increase, cost of doing something that was done before. Data does not have to be certain to be used. If you speak to a vendor and give you an estimated increase that is sufficient to use. Trends: Use trends when you don’t have the data to support your budget item. For instance if for three years you experienced higher vacancy rates from Mar - Jun, that is a trend and should be budgeted accordingly. There may be seasonal trends, for instance our utility bills may be higher in the summer when we use a/c to cool the hallways. Gas may be higher in the winter months or you may be experiencing more appliance replacements over the past three years. This may be a result of the age of the building. It is important to understand that trends don’t always last forever. When using trends to quantify a budget amount it may be necessary to average the amounts over the years of the trend. For example: Mar - Jun you experience higher vacancy rates, which may require concession. You may take the last three years of concessions for those months and average them to come up with an estimate for your summer months of concessions. You must question trends as they are not definite and don’t always continue. Equations: This may be used to calculate the cost to turn your apartments, charge app fees, cleaning fees etc. based on the projected number of move-outs. This will be addressed in methods to arrive at budget calculations. 4/14/2017

15 Methods to Arrive at Budget Figures
Averages Historical data to projections Actual figures Percent increase or decrease Let’s review the easy ones first… we will do averages and historical next. Actual figures are used for service contracts, purchases you expect to make and when you have definite cost and month that you will purchase. This would also include tree trimming, color change, tax preparation fees, fire equipment service, insurance, taxes, code enforcement income and expenses as well city or county fees which don’t typically change. A % increase or decrease in a line item may used for utility which typically increase annually. It may also be necessary to adjust rental income by a %. Example: year to date utilities – you called re: increases What is the increase? What is the new YTD figure and what would the budget be monthly for each category? What tools do we use to get arrive at the new figure? YTD Budget Comparison / YTD General Ledger (confirm 7 months are included) electric $10,562 expect 3% = $10,879 (1,554) water/sewer $3,930. expect 5% = $4,126 (590) gas $6837 expect 4% = $ (1016) Hint: Think about how much data we have..what would you divide this by? 4/14/2017

16 Averages Total relevant budget category
Eliminate extraordinary income/expense Review general ledger Deduct one time purchases or repair Deduct items not part of future budget equation Divide by number of months data accumulated Some averages may require additional data Example: Through July 2005 Total Decorating Contract #65207 = $1,260 Extraordinary – Paint Laundry/ext = Total Budget Category $570 Divided by 7 months of data = $ 82 (per mos) It is very common to use averages to obtain budget figures. This involves adding up all expenditures for a particular budget category and dividing by the number of months of data. In most cases, you would review the general ledger/check register from the past year for each line item, eliminate any one time expenditures that will not be carried over to the next year and than divide by the number of months. In our example you are doing your budget in October, you will typically have the data through September, In some cases if your current data is not sufficient, you will need to use 2 – 3 years of past history. 4/14/2017

17 Historical Data to Projection
Historical information Quantify projections Equations to determine budget category Example: Anticipate 15 unit turnovers/1.25 per month Average cost to turn apartments: Painting $ 425 Cleaning $ 65 Shampoo $ 75 What would you budget monthly in rent-up expenses? Historical data to projections is reviewing the history of such things as turnover, gross potential, rent-up expenses and quantifying those budget categories. For instance if your history has shown that in years past your average annual turnover is 34% or 15 apartments annually you can project the following categories Turnover expense EXAMPLE: Total cost per unit = $___ x ___ = Painting = 425 x 15 = $6,375 Cleaning = $65 x 15 = $975 Shampoo = $75 x 15 = $1125 $8,475 / 12 = $706 (Note: You will also factor in carpet replacement based on allotment or need, thereby possibly adjusting even further) Turnover – this can be quantified even more by tracking the number of move-outs per month and budgeting accordingly. Potential rent (by projecting which size apts will vacate and your anticipated increase to market on those units) Vacancy loss by taking your average rental rate and multiplying by the number of anticipated move outs. Concession (determine the average monthly concession) App fees (both income and expense), cleaning fees, 4/14/2017

18 Potential Rent Definition
Total rental amount that includes all existing residents at their current rental rate plus any vacant apartments at market rate. (May also be called: Total Revenue, Gross Potential Rent, Gross Scheduled Rent or Income, Rental Income or Apartment Rent IREM definition of Gross Potential Income is the maximum rent that can be derived from 100 percent occupancy and 100% collection of rents over the course of a financial period. In my opinion the definition listed may be more realistic as most buildings are never 100% occupied therefore the market rate is used vs. what previous resident was paying. 4/14/2017

19 Gross Potential Rent Calculation
Assume you currently have the following: Occupied Units 20 one 500 each = $ 18 two 625 each = $ 3 one bedroom @ each = $ 5 two bedrooms @ 675 each = $_____ Vacant Market Rate 2 one bedroom @ 675 each = $ 2 two 700 each = $_____ GROSS POTENTIAL RENT = $ Most buildings are not this simple as there are several floor plans and several rent schedules. Therefore you have to look at each of your floor plans and list what each person is paying. You also have to have a solid market rate for each floor plan to allocate for vacancies. 20 x500 = $10,000 18 x 625 = 11,250 3 x 650 = 1,950 5 x 675 = $3375 = $26,575 VACANT 2 x 675 = $1,350 2 x 700 = $1400 = $2,750 GROSS POTENTIAL: $29,325 Let’s calculate the Gross Potential on our example property: Using the rent roll, which column would we total? (Rent) Occupied units $28,408 Vacant at Market $750 Gross Potential $29,158 Any questions? 4/14/2017

20 What is your Occupancy Rate? 4/14/2017
Ask everyone in the room what their occupancy rate is at their property? Write it on a flip chart. 4/14/2017

21 Defined: All occupied apartments
Physical Occupancy Defined: All occupied apartments Calculating Occupancy Rate (Physical) Example: Total occupied apartments 43 Total number of apartments ÷44 PHYSICAL OCCUPANCY __% The actual number of occupied apartments divided by the total number of apartments at the property. 43 / 44 = 98% To calculate the vacancy rate divide the number of vacant apartments by the total number of apartment Example here: 1 / 44 = 2% vacancy rate This is the occupancy rate we see each week when we do our weekly report. But that is not the true occupancy rate. Anyone know the difference between Physical Occupancy Rate and Economic Occupancy Rate? Ask students what the difference is? Those that do, ask what their economic occupancy rate is…. Start with your occupancy rate: What do you think may adjust your current occupancy rate? (delinquencies, down units, model apartments, office instead of apartment) Why? (because if you are not collecting the rent, it is as good as vacant. 4/14/2017

22 Economic Occupancy Calculating Occupancy Rate (Economic)
Defined: Physical occupancy less: Units leased but not producing rent (delinquencies) Apartments used for office, models or for storage Apartments provided to staff as part of compensation. Calculating Occupancy Rate (Economic) Total occupied apartments 43 Total number of apartments 44 PHYSICAL OCCUPANCY 98% Delinquent apartments = 2 Model apartment = 0 Employee unit = 1 ECONOMIC OCCUPANCY ______? 91 Economic occupancy is a very important item to remember from the stand point that manager’s you have to factor in the loss of revenue due to delinquency. This definition includes loss to rental income due to office, model or storage as well as employee units. These are uncontrollable expenses we incur and are the cost of doing business in multifamily housing. What manager’s have control over is: DELINQUENCIES. In this example if we did not have any model or employee units the economic occupancy would be 91% economic occupancy. It can be extremely high and greatly impact rental income, if you are not firm in your rent collection policies and processes. (Sun Village when I took over with 563 apartments was 89% occupied (500 occupied units). There were $68,000 in monthly delinquencies which totaled approximately 85 apartments for an economic occupancy of: 74% (500 – 85 = 415) HIGH DELINQUENCIES CAN BE VERY DETRIMENTAL TO A PROPERTY. Once we started to evict the legal bills were outrageous to evict 85 apartments. The economic occupancy is what you are actually collecting in rent. Remember that when asked your occupancy rate. Think about who has not paid and how that affects profit. 4/14/2017

23 Turnover/Revenue 1. Turnover 2. Revenue a. Potential rents
Vacancy loss Occupancy rate d. Delinquency Other income General Discussion on the following: Turnover projections are done on a monthly basis by estimating how many apartments will vacate each month. You will usually follow historical data to arrive at this figure. Anticipated number of annual move outs div. by total number of units. Average turnover rate in our example is 32% or 3% monthly. This case: $5655 in vacancy loss / $196,703 = 3% loss or 8 move outs through July (32% turnover rate). You should also factor in forecasting due to current market conditions, new competition, extraordinary items such as building construction or major rent increases. Revenue – Rent, misc. income and any other fees that are collected less vacancies, concessions, delinquencies. See the budget for review Potential Rent discussed separately Vacancy loss is based on the projected number of vacant units multiplied (8) by the average rental rate ($718). (Physical vs. economical occupancy addressed separately.) Delinquencies are typically budgeted at a pre-determined percentage of income. In this budget it is not presented, but should be. It is the manager’s responsibility to collect the rents and not exceed the % to income. Most often there is an industry standard to the delinquency factor. Other Income is typically averaged figures or exact figures, such as parking fees, storage fees or utility reimbursements. 4/14/2017

24 Budget Rent Potential Pre-budget – Lease audit Expiration dates
a. charted monthly for next year Move outs past year(s) Charted monthly for next year Projections - lease renewal increase (Rent roll) Average rent difference between market/actual rent Implement a renewal plan for each anticipated Project market rent increase Current Market Survey Know market and neighborhood condition Historical increases There are several methods and processes to determining rent potential. This is the process I use. Lease audit: We maintained a lease audit so that at a glance we knew the number of lease expirations and move outs per month. These are the two categories that will affect your potential rent. One of my goals was to always get lease renewals to market. Therefore I always reviewed the rent roll to determine what everyone was paying vs. market if their was just a narrow gap I closed the gap without hesitation and anticipated rent increases may be higher. If there was a large gap, I worked at closing the gap over the next year. Either way we always had a renewal plan in place for getting everyone to market. (We’ll review in the next slide) Based on the industry standard, market conditions and historically how we increased market and renewals, we projected the potential market increase for next year. 4/14/2017

25 Lease Renewal Projections
Step 1: Review the rent roll – determine potential rent Step 2: Determine the market 100% Step 3: What is the below market rent (averaged) for each size? Step 4: What is the averaged difference between market rent & potential – for each size? Step 5: Decision making: 1. Raise everyone to market? 2. Determine another plan of action? Step 6: Budget should reflect your decision 1. This should be monthly 2. Based on the number of renewals 3. Anticipate not everyone will renew 4/14/2017

26 Lease Renewal Projection
Step 1: Rent Roll What is the Gross Potential Rent? Step 2: Market 100% What is the Total Market Rent? Step 3: Below Market Condition What is average below market rent for each size? Step 4: What is the average difference (per size) between market and potential rent? 4/14/2017

27 Operating Expense Consists of all regular expenditures made for the operation and maintenance of the property, including fixed costs such as taxes, insurance and professional services In reviewing our budget expense categories, you will see: payroll, insurance, general office, professional fees, advertising, rent-up expense, maintenance for buildings and ground, utilities, other operating expense which includes property insurance and real estate taxes. ALL THE MONEY TO PAY YOUR PROPERTY EXPENSES MUST COME FROM THE INCOME YOUR PROPERTY GENERATES. IT IS IMPORTANT THAT WE HAVE MONEY COMING IN IF WE HAVE BILLS TO PAY. There are two types of expenses: 4/14/2017

28 Controllable Expense A cost or expense that can be changed by the action of a manager at a given level of management NOTE: These expenses are considered controllable expenses or controllable costs. How can we control these: Bad debt (collect money before you have to write it off) Office supplies (only buy what you need) Postage and delivery – Prepare reports in time so they can be mailed regular Telephone – No personal phone calls, insure you are getting the best rate for long distance Unlawful Detainer – Adequately screen residents and don’t wait too long to start proceedings. Advertising – Do off site marketing to promote property. Insure you are getting the best traffic from your advertising source. Track your traffic accurately Rent-up Expenses – Minimize unnecessary repairs and replacements at turnover. Is there a way to do it for less money. Good Customer service keeps them there. Pool resources with sister properties for reduced cost from vendors / suppliers Building Maintenance and grounds (Strong Prev. Maint program to prevent costly repairs and deferred maintenance Utilities – Insure all lights are turned off in vacant apt., a.c., use timers for common area lights such as rest rooms, use energy efficient bulbs and appliances. Timers on t-stats for common areas. Water grounds more efficiently and in the evening hours so you can water less. Repair any water or gas leaks immediately Property Insurance – Walk the property often and prevent risks from liability claims. As claims go up so does your premium. 4/14/2017

29 Uncontrollable Expense
A cost or expense that cannot be affected by the action of a manager at a given level of management Your action or inaction will not affect uncontrollable expenses. Examples are capital improvements (major expenditures), financing, loan fees, bank charges or property taxes While you do not have control of these expenses, they can impact your budget. If uncontrollable expenses are high, you may have to reduce cost in other areas to compensate. They do impact the bottom line. 4/14/2017

30 Budgeting Expenses Historical averages or trends Predicted behavior
Research Industry Standards Contract/fixed pricing KNOW YOUR BUILDING AND DEPEND ON THE PEOPLE WHO KNOW THE MECHANICAL SIDE OF THE BUISINESS FOR ASSITANCE. THIS INCLUDES: Maintenance Supervisor, Maintenance Technicians, vendors, plumbers, electricians. Pick their brain often to get the details of your building and possibly what is needed in the future. Historical averages or trends may include anticipated replacements based on the age of the building and the number of past repairs or replacements. Most everything has a life expectancy (ie – carpet, appliances, hvac). It is good to know when items were replaced and anticipate the next replacement. Replacement log for each apartment. Predicted behavior is knowing your building and the historical data of the apartments. If an apartment is going to vacate, it is good to know ahead of time what it will take to make that unit rent ready. Makes it easier for budgeting purposed if you have a replacement history of each apartment. Research – Includes a thorough inspection of all common areas, occupied apartments, and maintenance areas to know what will most likely require attention or replacement. Also part of the research process is to determine what your options are: repair vs. replacement There are common industry standards that we learn about all the time. For instance I am sure that once the city started their code enforcement – expense budgets increased industry wide. Know what the current norms or standards are and keep your ears open for new ones. Contract or fixed pricing is just that: know what it costs to paint, clean and shampoo your units. Know what the exterminator charge. Your standard contracts should have a fixed price. 4/14/2017

31 Cost per unit Management fee Net operating income Cash flow
Other Calculations and Terms Cost per unit Management fee Net operating income Cash flow Cost per Unit is the annual amount for each income and expense category divided by the number of apartments. This is a benchmark from year to year and determines the efficiency of operations. Management fee is typically a % of Income: This property pays 4% of Total Revenue less manager’s rent free unit: 193,500 – 6,400 = $187,100 x 4% = $7,484 Net operating income and Cash Flow: Already discussed, but as a refresher 4/14/2017

32 Net Operating Income (NOI)
Income from a property or business after operating expenses have been deducted and before debt The formula is: Total Income - Total Operating Expense Net Operating Income Net Operating Income is typically what the on-site manager is responsible for and is a guide for how efficient the property runs. It takes into account all the rental income and other income less the total operating expenses. The Importance of NOI NOI is the remaining income from operation that is available to pay the property loans or debt service as well as make capital improvement and provide a profit for the owner or investor. It is also used to estimate the value of a property. It also shows how well a property meets day to day operating expenses. As well as highlighting managements effectiveness. This is typically where your responsibility ends …. Let’s look at your budget – Review all the way down. IT IS IMPORTANT TO SEE THERE ARE OTHER ITEMS THAT FOLLOW NOI, WHICH IMPACTS PROFIT. In this case the debt has been paid, but the owner’s still want their distribution which causes negative cash flow. It is not uncommon for some owner’s may say they do want a negative and the budget needs to be cut $34,000 to net 0. You either reduce expenses or generate more revenue. 4/14/2017

33 Budget Variance Degree of change or difference. Compares month to date budget to month to date actual figures (A variance can be favorable or unfavorable) Do you prepare variance reports? This is a very important tool as a manager, because it allows them to track the budget and forces them to review the financial statements each month. Let’s look at the Budget Comparison Cash Flow Shows: Actual Budget $ Var. Fav.(unfav) % Variance for both the current month and year to date. In this case through June 30th. Favorable Variance: A variance that reflects income received over the budgeted amount or expenses under budgeted amount. Favorable variance raises the NOI (See example on report = Vacancies is positive for both month and year) Unfavorable Variance: A variance that reflects income received under the budgeted amount or expenses that over the budgeted amount. See that unfavorable variances are shown with a –(minus) around the variance amt & %. Unfavorable variance decreases the NOI. Look at Repairs & Damages, July has an unfav variance both monthly & ytd is favorable. It is important to always look at ytd – which can sometimes be a timing issue. Also you will see the % on both current and year to date total. That shows the % over or under the budgeted amount. Take the variance amount and divide it by the budgeted amount to get this percentage. Using budget variances as management tools Determine the reason for the difference between actual and forecast amounts. Revise budgets, goals and plans – make notes for next years budget Check on forecasting techniques used Your budget variances can be a useful tool when preparing your budget as it gives you insight as to how you budgeted in the previous year and making future projections 4/14/2017

34 Cash Flow Periodic amounts available to an equity investor/owner after deducting all periodic cash payments from rental income. This is what we call the bottom line. It is after all operating expenses, financing, reserves, and capital improvements are deducted from the income. This is the profit or loss… 4/14/2017

35 Sample NOI/Cash Flow Money Flow
Potential Rent $ 196,703 Less: Vacancies/collections ,655 Add: Misc.. Income ,452 Total Revenue $ 193,500 Less Operating expenses ,093 NET OPERATING INCOME $ 90,407 Less: Principle/interest Less: Capital improvements 000 Less: Owner’s Distribution $ 82,950 CASH FLOW $ ,457 This ties everything together. Let Review the Variance Report. Review each: monthly and ytd Let’s see how we did through June and year to date: Revenue -Expense NOI Stop here: Let’s look at our NOI, you see how much cash there is, but it doesn’t stop here. When we proceed to the cash flow row you will see how much cash has reduced. - Total financing & capital improvements Cash Flow See there are often items that we as manager’s don’t know about, but they still affect the bottom line. This is reason why there are revisions, budget cuts, income expectations. 4/14/2017

36 Property Performance How do you compare properties performance in
Income Categories Expense Categories The Institute of Real Estate Management (IREM) Income and Expense Analysis Median Income and expense figures reported are expressed in the following ways: As a percentage of Gross Possible Income (% of GPI) In Dollars per square foot of rentable area per year ($/Sq. Ft) In Dollars per unit year ($/Unit) For example: As a % of Gross Possible Income Total Operating & Maintenance $24,059 / 193,500 = 12% Of the 45 buildings that reported show: Low 6.2% Median 5.9% High 7.5% If you are an IREM Member the book is discounted to $185 or $365 for non members. All of you can get a free book if you submit the data from your property. Log onto to complete the form. 4/14/2017

37 Summary Provide understanding of budget/financial flow
Introduce financial terms and calculations Utilize the tools available to you Practice and successfully complete a budget Have fun and learn during the process Summary I hope that today Provided you a better understanding of budget/financial flow Realize your role and the role of the owner are different. Introduction of financial terms and calculations Will give you a basic understanding – entice you to venture further in the big picture of property management. Realize the tools available to you and utilize them to succeed in this business. Practice and take steps to successfully complete a budget It takes time, but when you do it on your own, you will feel the accomplishment. Have fun and learn during the entire process – I know every time I do a budget, I learn something new. If time allows, we will go over some budget items, if you would like. Anything we did not cover or questions with regard to the process? 4/14/2017

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