What are the steps to creating a budget for a commercial property?

1 Define your goals and objectives

The first step to creating a budget for a commercial property is to define your goals and objectives for your property. What are you trying to achieve with your property? How do you measure your success? What are the key performance indicators (KPIs) that you use to track your progress? Your goals and objectives should be specific, measurable, achievable, relevant, and time-bound (SMART). For example, you may want to increase your occupancy rate, reduce your vacancy loss, improve your tenant retention, or enhance your property's curb appeal. Your goals and objectives will help you align your budget with your vision and strategy for your property.

2 Gather and analyze data

The next step to creating a budget for a commercial property is to gather and analyze data related to your property's income and expenses. You will need to collect historical data from your property's financial statements, such as rent rolls, income statements, balance sheets, and cash flow statements. You will also need to gather market data from sources such as brokers, appraisers, industry reports, and online databases. You will use this data to evaluate your property's current performance, identify trends and patterns, and benchmark your property against similar properties in your market. You will also use this data to project your future income and expenses based on various assumptions and scenarios.

3 Estimate your income

The third step to creating a budget for a commercial property is to estimate your income for the upcoming period. Your income consists of the rent that you collect from your tenants, as well as any other fees or charges that you may impose, such as parking fees, late fees, or service fees. To estimate your income, you will need to consider factors such as your occupancy rate, your vacancy rate, your lease terms, your rent escalations, your tenant mix, and your market demand. You will also need to account for any potential income loss due to vacancies, concessions, delinquencies, or bad debts. You may use different methods to estimate your income, such as the market approach, the income approach, or the cost approach.

4 Estimate your expenses

The fourth step to creating a budget for a commercial property is to estimate your expenses for the upcoming period. Your expenses include the costs that you incur to operate and maintain your property, such as utilities, repairs, maintenance, insurance, taxes, management fees, and marketing costs. To estimate your expenses, you will need to consider factors such as your property's age, condition, size, location, type, and amenities. You will also need to account for any capital expenditures or improvements that you plan to make to your property, such as replacing the roof, upgrading the HVAC system, or renovating the lobby. You may use different methods to estimate your expenses, such as the percentage of income method, the per unit method, or the per square foot method.

5 Calculate your net operating income and cash flow

The fifth step to creating a budget for a commercial property is to calculate your net operating income (NOI) and cash flow for the upcoming period. Your NOI is the difference between your income and your expenses, excluding any debt service or financing costs. Your NOI reflects the profitability of your property before paying any interest or principal on your loan. Your cash flow is the difference between your income and your expenses, including any debt service or financing costs. Your cash flow reflects the amount of money that you have left over after paying all your obligations. You may use different formulas to calculate your NOI and cash flow, such as the direct capitalization method, the discounted cash flow method, or the internal rate of return method.

6 Review and revise your budget

The final step to creating a budget for a commercial property is to review and revise your budget regularly. Your budget is not a static document, but a dynamic tool that you can use to monitor and manage your property's financial performance. You should compare your actual results with your budgeted figures on a monthly, quarterly, or annual basis, and identify any variances or discrepancies. You should also update your budget based on any changes in your market conditions, tenant situation, or property condition. You should also use your budget to evaluate your performance against your goals and objectives, and adjust your strategies accordingly.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?