It’s hard enough to budget the correct amount of money for Christmas gifts, let alone for an entire operating year in the multifamily housing industry. While it may not be a major crisis if the Justin Bieber poster you promised your daughter for her bedroom wall is five percent more expensive than you anticipated, it is a serious problem if a community’s budget goes over by that amount— potentially putting your company more than $1 million in the red.
Consequently, it is imperative that apartment management companies have a firm grasp on the budgeting process and deliver the revenue promised to the owner at the start of the year. At the end of the day, if the owner isn’t happy, nobody is happy.
Following are tips and strategies that Nick Alicastro, Vice President of Business Development for Western National Property Management, uses to create an effective annual budget.
1. Start Early
In early spring, Alicastro’sIrvine,Calif.based team, which manages 24,000 units, begins the budgeting process for the coming year. The capital expense team, regional managers and vice presidents tour every community to determine the upcoming or immediate needs from a capital perspective. Additionally, every apartment is walked by the onsite team and regional manager, who evaluate the condition of the flooring, appliances, counter surfaces, cabinets and A/C units.
The purpose, Alicastro says, is to obtain an accurate assessment of each apartment home in order to determine probable turnover costs. An extensive exterior review of each community is conducted to identify additional deficiencies.
After such assessments are complete, Alicastro’s team determines the capital dollars needed for each community during the next five years. “The process is with much thought and provides an exceptionally accurate idea of the condition of each occupied apartment as well as a full understanding of short-term and long-term capital needs,” says Alicastro. “The necessity of providing ownership with an accurate representation of anticipated cash flow in the short and long term is crucial to the approval and completion of the anticipated capital projects. Accurate findings and estimations will give the owner the ability to make decisions now that may impact cash flow and distributions in the future. At the end of the day that’s what they care about—a consistent and accurate projection of returns and cash flow, with very few surprises.”
2. Do Your Research
After all buildings are walked, the team collects and solidifies hard bids from vendors, suppliers, contractors and service providers for items that need to be addressed in the coming year. Alicastro says companies should not assume a project or service will be priced the same the following year.
At the end of the summer, the team begins to load current-year operating numbers. At this point, a great deal of time is spent forecasting the balance for the rest of the year, and by October, a precise picture of the financial situation for the remaining months is evident.
“It’s imperative that we accurately express year-over-year revenue growth assumptions to our owner,” Alicastro says. “If a management company under- or over-projects current year performance, the year-over-year figures are not accurate and mean less to the owner.”
3. Understand Your Market
During the budgeting process for the future year, Alicastro’s team relies on economic indicators, such as housing starts, new multifamily development and renovations on existing multifamily communities, employment statistics and new industrial and retail construction. Western National also hires economic consultants who use a variety of macro and micro metrics to determine growth expectations for the coming year.
Alicastro says it is also important to network with industry partners to develop relationships and understand their current and future projects.
“A property management company must know the conditions of current markets and consider other competing communities’ current and future goals or plans to enhance their own communities,” Alicastro says. “A new lease-up or a change in leasing velocity within the market could substantially reduce a community’s revenue.”
4. Pick up the Phone
When determining the coming year’s budget, Alicastro says his team thoroughly investigates property tax fluctuations, anticipated property insurance costs, salary adjustments and utility increases. Western National personally contacts the utility companies to determine what increases may be anticipated for the upcoming year. “A commonly known mistake is to calculate a three percent inflationary cost against actual numbers, however, it generally doesn’t reflect true numbers,” he says.
5. Sometimes, You Can’t Cut Corners
When considering total operating expenses, Alicastro says payroll, insurance, utilities and taxes are cost-drivers that may impact future needs of the community. “These are fairly consistent numbers that don’t deviate very much year-to-year and aren’t areas where you’re going to save a great deal of money,” he says. “There’s very little mobility up or down.”
However, Alicastro says a careful review of these line items sometimes can yield gains. Changing insurance companies or coverage, reducing staff, combining staff with other communities, negotiating a new term with utility companies, implementing green solutions and appealing property taxes are ways in which favorable savings may be obtained.
Alicastro says with proper research, insurance and taxes are easy to accurately budget. Payroll isn’t difficult, either, because Western National Property Management budgets for base payroll, overtime, commissions, renewals, health insurance, taxes and workers’ compensation. When budgeting for payroll, Alicastro’s team reviews last year’s approved budget and compares it to the new proposed budget. He says there should only be a modest increase based on the market rate salary increase, assuming no change in the number of employees budgeted for that community.
“Usually, large year-over-year (actual versus budget) variances reflect open positions in the previous year that could negatively offset the year-over-year numbers, in addition to overtime, commissions and health insurance,” Alicastro says. “All deviations should be understood and explained to ownership. It may look like you are asking for a 20 percent increase in payroll, when in reality you had an open position or positions that are creating a false sense of savings.”
To avoid major budget discrepancies, Alicastro says the company has an internal analyst whose sole responsibility is reviewing utilities, normalizing them and projecting costs for the following year.
6. Be Realistic and Hit Your Target
If Western National Property Management is 1 percent or 2 percent under or over its budget each year, Alicastro says the team may not have done enough accurate homework. “That may not seem like a big deviation, but when you’re dealing with a $20 million to $40 million business, 1 percent makes a big difference,” he says. While his team never wants to exceed budget, Alicastro says that if his company is significantly under budget, they risk being accused by their owners of “sandbagging” their numbers or being incompetent property managers.
“A good explanation should be prepared for any variance at the end of the fiscal year to create an operating budget that is aggressive but attainable,” he says.
7. More Eyes – More Accurate
Once the team has reviewed a plethora of reports that compare the portfolio’s
communities and created an accurate forecast, Alicastro says the proposed budget is sent to the regional vice president followed by the vice president and president. Ownership gives final approval by the end of November. Just in time to start worrying about holiday presents.
Lauren Boston is NAA’s Staff Writer. She can be reached at [email protected] or (703) 797-0678. Reprinted with permission.