Presentation on theme: "5/4/2015 1 The Institute of Real Estate Management Los Angeles Chapter #6 Multifamily Budget Workshop Prepared by: Carol Eddy, CPM / Eddy Management Group."— Presentation transcript:
5/4/ The Institute of Real Estate Management Los Angeles Chapter #6 Multifamily Budget Workshop Prepared by: Carol Eddy, CPM / Eddy Management Group Presented by : May Davoudian, CPM & Farzaneh Tofighi, CPM 08/23/07
5/4/ 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
5/4/ On-Site Manager’s Objectives Generate income Meet budget projections Control expenditures Fulfill owner’s financial goals
5/4/ Financial Flow Budget and financial statements work together. One not effective without the other. Budget (1) Profit and Loss (2) Variance Analysis (3) Monthly Variance Report
5/4/ Financial Process BUDGET Income Statement Rent Collection (Vacancy, Concessions, Delinquencies) Other Income Controlled Expenses (Operations, turnover, leasing, payroll, legal, advertising, maintenance, utilities, replacements) Uncontrolled Expenses (Financial, Capital Improvements) Budget Comparison (Variance Analysis)
5/4/ 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
5/4/ Budget 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.
5/4/ Budget Types Annual Long Range Rent up
5/4/ 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
5/4/ Review Budget Sample Typically cover one year Five basic components Annual figures averaged Actual expenses incurred not averaged Monthly and total columns Assumptions
5/4/ Budgeting Process 1.Pre-budgeting process 2.Tools to prepare the budget 3.Step by step process 4.Data, trends and equations 5.Methods to arrive at figures 6.Budget assumptions 7.Revisions
5/4/ Tools to Prepare the Budget Budget template Rent Roll Current Market Survey YTD General ledger Financial Statement Variance Report Previous years budget with assumptions
5/4/ Step by Step Process Step 1: Compare Step 2: Take corrective measures Step 3: Analyze Step 4: Adjust projections Step 5: Prepare the budget
5/4/ 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
5/4/ Methods to Arrive at Budget Figures 1.Averages 2.Historical data to projections 3.Actual figures 4.Percent increase or decrease
5/4/ 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=- 690 Total Budget Category$570 Divided by 7 months of data = $ 82 (per mos)
5/4/ 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?
5/4/ 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 Potential Rent Definition
5/4/ Gross Potential Rent Calculation Assume you currently have the following: Occupied Units 20 one 500 each= $ 18 two 625 each =$ 3 one 650 each =$ 5 two 675 each=$_____ Vacant Market Rate 2 one 675 each=$ 2 two 700 each=$_____ GROSS POTENTIAL RENT =$
5/4/ What is your Occupancy Rate?
5/4/ Physical Occupancy Defined: All occupied apartments Calculating Occupancy Rate (Physical) Example: Total occupied apartments 43 Total number of apartments ÷44 PHYSICAL OCCUPANCY__%
5/4/ Economic Occupancy Defined: Physical occupancy less: 1.Units leased but not producing rent (delinquencies) 2.Apartments used for office, models or for storage 3.Apartments provided to staff as part of compensation. Calculating Occupancy Rate (Economic) Total occupied apartments43 Total number of apartments 44 PHYSICAL OCCUPANCY98% Delinquent apartments = 2 Model apartment = 0 Employee unit = 1 ECONOMIC OCCUPANCY______? ÷
5/4/ Turnover/Revenue 1. Turnover 2. Revenue a. Potential rents b.Vacancy loss c.Occupancy rate d. Delinquency 1.Other income
5/4/ Budget Rent Potential 1.Pre-budget – Lease audit 1.Expiration dates a. charted monthly for next year 2.Move outs past year(s) a.Charted monthly for next year 2.Projections - lease renewal increase (Rent roll) 1.Average rent difference between market/actual rent 2.Implement a renewal plan for each anticipated 3.Project market rent increase 1.Current Market Survey 2.Know market and neighborhood condition 3.Historical increases
5/4/ 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
5/4/ 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?
5/4/ 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
5/4/ Controllable Expense A cost or expense that can be changed by the action of a manager at a given level of management
5/4/ Uncontrollable Expense A cost or expense that cannot be affected by the action of a manager at a given level of management
5/4/ Budgeting Expenses Historical averages or trends Predicted behavior Research Industry Standards Contract/fixed pricing
5/4/ Other Calculations and Terms Cost per unit Management fee Net operating income Cash flow
5/4/ 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
5/4/ 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)
5/4/ Cash Flow Periodic amounts available to an equity investor/owner after deducting all periodic cash payments from rental income.
5/4/ Property Performance How do you compare properties performance in Income Categories Expense Categories The Institute of Real Estate Management (IREM) Income and Expense Analysis
5/4/ 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