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The Institute of Real Estate Management Los Angeles Chapter #6Multifamily Budget Workshop

Prepared by: Carol Eddy, CPM / Eddy Management GroupPresented by: May Davoudian, CPM & Farzaneh Tofighi, CPM

08/23/07

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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

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On-Site Manager’s Objectives

Generate incomeMeet budget projectionsControl expendituresFulfill owner’s financial goals

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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

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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)

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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

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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.

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Budget Types

AnnualLong Range Rent up

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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

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Review Budget Sample

Typically cover one year Five basic components Annual figures averaged Actual expenses incurred not averaged Monthly and total columns Assumptions

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Budgeting Process

1. Pre-budgeting process2. Tools to prepare the budget3. Step by step process 4. Data, trends and equations5. Methods to arrive at figures6. Budget assumptions7. Revisions

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Tools to Prepare the Budget

•Budget template•Rent Roll •Current Market Survey•YTD General ledger•Financial Statement•Variance Report•Previous years budget with assumptions

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Step by Step Process

Step 1: Compare Step 2: Take corrective measuresStep 3: AnalyzeStep 4: Adjust projectionsStep 5: Prepare the budget

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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

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Methods to Arrive at Budget Figures

1. Averages2. Historical data to projections3. Actual figures4. Percent increase or decrease

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AveragesTotal relevant budget categoryEliminate extraordinary income/expense

Review general ledgerDeduct one time purchases or repairDeduct items not part of future budget equation

Divide by number of months data accumulatedSome averages may require additional data

Example: Through July 2005Total Decorating Contract #65207 = $1,260Extraordinary – Paint Laundry/ext = - 690Total Budget Category $570Divided by 7 months of data = $ 82 (per mos)

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Historical Data to Projection

Historical informationQuantify projectionsEquations to determine budget category

Example: Anticipate 15 unit turnovers/1.25 per month

Average cost to turn apartments:Painting $ 425Cleaning $ 65Shampoo $ 75

What would you budget monthly in rent-up expenses?

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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

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Gross Potential Rent Calculation

Assume you currently have the following:Occupied Units20 one bedroom @ 500 each = $18 two bedrooms @ 625 each = $3 one bedroom @ 650 each = $5 two bedrooms @ 675 each = $_____

Vacant Units @ Market Rate2 one bedroom @ 675 each = $2 two bedroom @ 700 each = $_____GROSS POTENTIAL RENT = $

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What is your Occupancy

Rate?

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Physical Occupancy

Defined: All occupied apartments

Calculating Occupancy Rate (Physical)

Example:Total occupied apartments 43

Total number of apartments ÷44PHYSICAL OCCUPANCY __%

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Economic Occupancy

Defined: Physical occupancy less:1. Units leased but not producing rent (delinquencies)2. Apartments used for office, models or for storage3. 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 ______?

÷

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Turnover/Revenue

1. Turnover

2. Revenuea. Potential rentsb. Vacancy lossc. Occupancy rated. Delinquency

1. Other income

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Budget Rent Potential1. 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 rent2. Implement a renewal plan for each anticipated

3. Project market rent increase1. Current Market Survey 2. Know market and neighborhood condition3. Historical increases

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Lease Renewal Projections

Step 1: Review the rent roll – determine potential rentStep 2: Determine the market rent @ 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 decision1. This should be monthly2. Based on the number of renewals3. Anticipate not everyone will renew

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Lease Renewal Projection

Step 1: Rent RollWhat is the Gross Potential Rent?

Step 2: Market Rent @ 100%What is the Total Market Rent?

Step 3: Below Market ConditionWhat is average below market rent for each size?

Step 4: What is the average difference (per size) between market and potential rent?

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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

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Controllable Expense

A cost or expense that can be changed by the action of a manager at a given level of management

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Uncontrollable Expense

A cost or expense that cannot be affected by the action of a manager at a given level of management

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Budgeting Expenses

•Historical averages or trends•Predicted behavior•Research•Industry Standards•Contract/fixed pricing

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Other Calculations and Terms

Cost per unitManagement feeNet operating incomeCash flow

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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

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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)

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Cash Flow

Periodic amounts available to an equity investor/owner after deducting all periodic cash payments from rental income.

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Sample NOI/Cash FlowMoney Flow

Potential Rent $ 196,703Less: Vacancies/collections - 5,655Add: Misc.. Income + 2,452

Total Revenue $ 193,500Less Operating expenses - 103,093

NET OPERATING INCOME $ 90,407Less: Principle/interest - 000Less: Capital improvements 000Less: Owner’s Distribution $ 82,950CASH FLOW $ 7,457

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Property Performance

How do you compare properties performance in Income CategoriesExpense Categories

The Institute of Real Estate Management (IREM)

Income and Expense Analysis

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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