Aquicore Resource Library
Operational Budgeting for
Commercial Real Estate
Operational Budgeting for Commercial Real Estate
Senior Engagement Manager
Senior Engagement Manger
Senior Engagement Manager
If you’ve managed a property for any length of time, you know that budgeting is hard. It’s also critical to preserving predicted property values and keeping operational planning on track. So how do you maintain a healthy operating budget and a healthy relationship with your tenants? What if something unexpected happens? How do you plan ahead? In the realm of property management, these tasks seem daunting, but we promise, they don’t have to be! With the right data and a proper understanding of all aspects of your property, you’ll be budgeting like a pro in no time.
The Budgeting Process
Before we dive into the specifics of operational budgeting, we’re taking a moment to zoom out and look at the components that make up a property’s entire budget. At its core, budgeting is simply projecting income and expenses for the upcoming year. But how do you actually do that? In part, you will use past data to predict future performance. With the right tools, that’s the easy part. The harder part is setting targets. If your plan is to reduce expenses or increase revenue over the year, how will you accomplish that, and in what timeframe? And don’t forget — you’ll have to report on variance as well. To get a full picture of a property’s budget, there are five main areas you’ll need to project.
- Rents: What kind of assumptions can you make based on existing lease agreements and where the market is headed?
- Expenses: What are the anticipated financial needs for the upcoming year? Ask yourself questions like: Are property taxes being reassessed in the county where your building is located? Are insurance premiums going up? Are property management fees changing?
- Major Maintenance Costs: These are large capital expenditures that fall outside of recurring expenses such as roof replacements, repaving parking lots, or repainting exteriors.
- Major Renovation Expenses: This can include common area renovations or anything that falls under tenant improvement allowances.
- Investor Distributions: When will investors receive distributions and how much will they receive?
It’s no secret that a large portion of your budget is spent on utilities. Understanding the ins and outs of your utility bill is important in order to budget properly. It’s imperative to know whether you’re being charged fairly and if and where you can cut expenses. Luckily for you, we’re here with some pro tips for reading your building’s utility bill, with everything from metrics to overall charges.
Energy companies use the metrics of kW and kWh. But what does that mean, and what’s the difference between them? Put simply, a kW (kilowatt) is a unit of power measuring the energy consumed at a specific moment. On the other hand, a kWh (kilowatt-hour) measures the total energy consumed during a particular time period. Remember that a kWh is not kilowatts-per-hour, but a unit measuring the total energy consumed over time. In other words, kW is the energy demand of your building while kWh is its energy consumption and usually what you will find on your utility bill.
In general, your bill will have four main charges: generation (the actual production of electricity), transmission (the energy’s movement, i.e. from power lines), distribution (the energy’s movement into your building via poles, lines, meters, and workers maintaining them), and surcharges (any additional fees such as taxes). The total kWh consumed per building, multiplied by different energy rates, will provide your energy bill based on those four charges. Recognizing these, you’ll see where your energy is coming from, figure out what is using more or less than it should, and determine what you can do about it.
And what can you do about it? Start by comparing data! Particularly, keep an eye on your meters; they tell you how much energy you’re using, but they also tell the utility company the same thing. If they are faulty, you won’t notice if there is a problem in your building sapping away energy. If they are working properly, there could still be an issue with the data they’re communicating, requiring you to verify all is as it should be and make sure everyone is on the same page about the energy your building consumes. Similarly, with real-time data analytics, you can monitor your overall energy consumption and compare spikes to higher bills, eliminating any surprises. Staying on top of the data, whether it’s monitoring trends or checking to ensure your meters are working properly, can make a big difference in your utility bill, helping you stay on budget and plan for the future.
Property managers are all too familiar with the budget variances that come with monthly expenses. The problem with budgeting is that, no matter how hard you try, you can’t predict every possible outcome. Building occupancy fluctuates unexpectedly, unplanned modifications occur, or major equipment might break down. While there’s nothing you can do about these unexpected events, there is something you can do to make sure your budget is ready and able to handle them.
Budget variance isn’t always so straightforward and easy to account for, like a result of broken equipment, for example, and utilities play a big part in that. What if a budget overage occurs without such a clear-cut reason? How do you explain a seemingly random change in utility consumption from previous months?
For one thing, utilities are traditionally considered to be one of the hardest-to-predict expenses. Their billing periods rarely line up with calendar months, so manual budget calculations are often prone to errors. This is where the right technology makes all the difference. Utility budget management tools shed light on the changes in your utilities causing that seemingly unexplainable variance. With real-time monitoring and access to historical data, you’ll have the knowledge needed, such as if and how the weather or occupancy has affected energy usage, to pinpoint any potential issues and navigate budget variance.
At Aquicore, we’ve also come up with 3 key methods of cost-effective utility budgeting that will be sure to help you keep those pesky costs under wraps. First, understand your load shapes. Real-time data is a great way to visualize the energy consumed, allowing you to pinpoint any problems. Second, use a smart blended rate from your most recent bill, dividing consumption by total cost to estimate your utility spending. From these historical data points, you can more accurately predict where your future spending will fall.
And what about air quality? With all this focus on utilities, the actual product could become an afterthought, but property managers should keep it in mind when considering budgets. Tenants can fall ill both mentally and physically due to poor air quality in buildings, suffering such ailments as lethargy or even respiratory illnesses. That’s why it’s important to heed any complaints tenants have concerning the air, even if those boil down to simple discomfort. Pollutants such as smoke, mold and mildew, biological contaminants like rodent droppings or insects, and many others like carbon dioxide and carbon monoxide weaken air quality. How do you ensure your building’s air is safe for tenants? Luckily, we’ve made a checklist! With regular cleaning and maintenance of your HVAC units and other equipment alongside monitoring and using proper filters and cleaning supplies, your tenants will remain happy and healthy, the most important aspect of commercial real estate.
Navigating Budget Season
Once you’ve accounted for utilities and air quality, it’s a good idea to give the same amount of focus to every other aspect of your budget. This process can be so exhaustive, it’s even earned its own name: Budget Season. To help you out, we’ve got some expert tips about surviving budget season to ensure you’re as ready as possible to face the upcoming year.
The kicker? Time. To stay on top of budgeting, you’ll want to give yourself plenty of time to work on it—some property managers begin working in earnest as early as July, but remember that it’s a year-long process! Make yourself a schedule and track expenses and any changes throughout the year. Making use of various technology platforms is a great way to maximize efficiency.
Another thing to look out for when budgeting is the changing trends in real estate. With the rise of concepts like coworking, the way tenants occupy buildings has changed. Two companies sharing a building might have different needs and even operating hours from one another, with these changes alongside many others affecting the costs of managing a building. Consider the tenant footprints of your buildings and determine which aspect of your budget to put more focus on.
Similarly, consider cybersecurity aspects in your budget. As the world and businesses become more and more entrenched in technology, cyberattacks could threaten an ordinary power grid at any moment. Given its ties to and dependence on energy usage, that puts commercial real estate at an especially high risk. What does that mean for CRE leaders? In this case, knowledge is the best weapon! Microgrids are an increasingly popular strategy of mitigation against grid disruption. Are they a worthy investment for your building, though? Determine whether microgrids are a viable and necessary option for your buildings, something that comes down to your tenants and companies themselves, and base your allocation of funds upon this knowledge.
We know you can’t account for everything in advance. In the midst of various disasters and uncertainties or potential cyberattack threats, maintaining a healthy operating budget becomes quite the challenge. Because of this, we’ve also come up with some tips to help you get through an atypical budget season. A budget is a balance of income and output, so one thing to be wary of is your general spending. Would adjusting building operations help you cut down? Small changes can make a big difference in your bottom line and will help you save for any necessary budget allocations, aspects especially important when things are a little—or a lot—abnormal. In that vein, plan for non-routine adjustments, changes in occupancy and operations, and other aspects you normally wouldn’t consider. Staying on top of things as much as possible will help you understand what is going on and, furthermore, keep you engaged with your tenants so everyone is on the same page and ready to face whatever comes.
For more tips and tricks, check out Aquicore’s Budgeting Essentials! We’ll give you everything you need to know about planning for and staying on budget, rounded up in a convenient little package to keep on hand or pass around the office. And don’t forget, while a large aspect, utilities are not the only thing to consider within an operating budget. Operations include all your revenue, expenses, and various other costs. By ensuring your utilities are under control, you’ll be able to devote more time to those variables that also need it, helping you keep your tenants happy and healthy and the company prosperous.
Using Operations to Your Advantage
Speaking of variables, what if your budget needs a little bit of help in the upcoming season? What can you change to bolster it? Here’s an interesting trick: a French company called Qarnot Computing alongside many others like it, while selling computing power, is using waste heat from its computers to warm its customers, likely cutting down on overall utility costs in the process. Of course, it doesn’t have to be so complex. Small operational changes such as simply unplugging unused electronics can also significantly lower operating expenses whilst raising asset value. Consider your building and its tenants and decide what you can do to aid your budget. When even a small change can have a large impact, what’s stopping you?
Going Green Helps, Too
Not only will you be helping the environment, but considering green alternatives to your energy-consuming habits can save you money in the long run.
As a property manager and commercial real estate professional, you are in a unique position to directly impact the environment and save money, and that’s no small feat! For instance, you could implement nighttime setbacks to your HVAC system, saving energy overnight as heating and cooling are reduced and subsequently lowering energy bills. You could install water-efficient toilets and achieve the same effects on your water bill. Of course, not every change will work for your building. That’s why one of the best things to do is engage your tenants in green efforts as well. Not only could they help to conserve energy and protect the environment, but their engagement is an important part of maintaining a relationship of trust. Taken further, you could even consider entering a green lease with those tenants and gain a leg up on the energy- and money-saving path of going green.
Not to mention, being eco-friendly often raises the value of your building itself, as well. In a world increasingly conscious of its own health, green office spaces are a growing trend, and making the leap toward such changes leaves you with a desirable space tenants will be happy to fill.
To Sum Up
Buildings are unique, and not every solution will be right for yours. That doesn’t mean you can’t take budgeting into your own hands and master it, though! With careful planning and understanding, you’ll be on your way to consistent billing and a mastery of your budget.
Ready to go beyond the “just-add-3%” rule? We’ve rounded up all our best practices and strategies for conquering budget season. The result? One authoritative resource on budgeting for CRE pros.
Our guide to tenant billing is your comprehensive primer to billing back tenants for their actual utility consumption, with practical steps that walk you through the process.