Budgeting Guide

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BUDGETING GUIDE

2015-16 Edition

Purpose: Tutorial to aid all parties involved in the budgeting process from start to finish in order to develop a complete and reliable budget. Includes:

· Schedule and Deadline Management Aid

· Budgeting Checklist

· Budgeting Theory

· Explanation of Budgeting Components

· Direction to Resources for Further Assistance

Budgeting Schedule

Going forward, budgets will be produced quarterly on a 12-month rolling basis. There will continue to be an Annual Budget produced for the calendar year (Jan-Dec), however every quarter a new Rolling Forecast will supersede the calendar year Annual Budget, essentially becoming the new Annual Budget. As such, budgeting will become a constant, evolutionary process. Transitioning to this rolling 12-month format will provide a constant projection of future property performance, a more accurate and up-to-date outlook, and will also help save time while drafting the Annual Budget since you’ll have had more active hands-on experience with the budget throughout the year.

On January 1st, the Jan-Dec Annual Budget will go live. At the same time, the forecast template for April through the following March will become available for modification. Over the course of the quarter, you will update and polish the April-March forecast template, touching it as frequently as daily. For example, updates should be made as you negotiate new contracts or renegotiate old contracts. This will allow you to spread the bulk of the updates over the course of the quarter rather than all at once. The Rolling Forecast will overwrite the Annual Budget starting on April 1st. Once each Rolling Forecast goes live, it becomes the new annual budget.

Below is a timeline of progression targets for both the Annual Budget and Rolling Forecast budgets:

Item

Annual Budget Jan-Dec

Apr-Mar

Rolling Forecast

July-June Rolling Forecast

Oct-Sept Rolling Forecast

1st Draft Due to Regional

October 15th

March 1st

June 1st

September 1st

Final Draft Due to Regional

October 31st

March 10th

June 10th

September 10th

Partner Review

November 15th

As Needed

As Needed

As Needed

Final Approval

December 5th

March 15th

June 15th

September 15th

Go Live Date

January 1st

April 1st

July 1st

October 1st

Below are things to remember as you prepare your first draft:

  • Become a market expert
    • Supply Outlook
      • Any planned renovations or changes in management?
      • Any new competition being built?
    • Demand Outlook
      • What is the projection for the local economy and population/enrollment growth?
  • Build income projections for upcoming year
    • Market Rent and GPR growth
    • Vacancy
    • Bad Debt
    • Concessions
    • Other Income
  • Review of contracts
    • Revise contracts with existing vendors
    • Solicit bids from new vendors
  • Submit annual marketing proposal to Graham
  • Deliver list of capital needs to Asset Management
    • Asset Preservation initiatives
    • Value Add initiatives

Budgeting Checklist

Below is a checklist of all major budget line items. Unless otherwise stated, the initial draft of each line item will be completed by the Property Manager and approved by the Regional Manager.

Rental Income

<tbody>

Section

Item

Responsible Parties

Draft Complete?

Approved?

1.1

Market Rent

Drafted by: Property Manager

Approved by: Regional Manager

1.2

GPR

Drafted by: Property Manager

Approved by: Regional Manager

1.3

Vacancy Loss

Drafted by: Property Manager

Approved by: Regional Manager

1.4

Bad Debt

Drafted by: Property Manager & Account Manager

Approved by: Regional Manager

1.5

Loss to Models

Drafted by: Property Manager

Approved by: Regional Manager

1.6

Rent Concessions

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager

1.7

Cash Back Rewards

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager

Other Income

Section

Item

Responsible Parties

Draft Complete?

Approved?

2.1

Utility Reimbursements

Drafted by: Property Manager

Approved by: Regional Manager

2.2

Bad Debt Recovery and Collection Fees

Drafted by: Property Manager & Account Manager

Approved by: Regional Manager

2.3

Standard Reoccurring Other Income Items

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager

2.4

Transactional Other Income Items

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager

Administrative Expenses

Section

Item

Responsible Parties

Draft Complete?

Approved?

3.1

Manager Compensation

Drafted by: Property Manager

Approved by: Regional Manager

3.2

IT Consultant, Marketing and Training Salaries

Drafted by: Corporate Accounting

Approved by: Regional Manager & Corporate Accounting

3.3

Other Salaries

Drafted by: Property Manager

Approved by: Regional Manager

3.4

Admin Commissions and Bonuses

Drafted by: Property Manager

Approved by: Regional Manager

3.5

Payroll Taxes

Drafted by: Corporate Accounting via RMI

Approved by: Regional Manager & Corporate Accounting

3.6

Medical Insurance and Workers Comp

Drafted by: Corporate Accounting via RMI

Approved by: Regional Manager & Corporate Accounting

3.7

Rent Allowances and Discounts

Drafted by: Property Manager

Approved by: Regional Manager

3.8

Management Fee

Drafted by: Property Manager

Approved by: Regional Manager & Corporate Accounting

3.9

Permits and Fees

Drafted by: Property Manager, Account Manager, & Maintenance Supervisor

Approved by: Regional Manager

3.10

Contracts in Admin Expense

Drafted by: Property Manager, Account Manager, & Maintenance Supervisor

Approved by: Regional Manager

3.11

Shuttle Bus (if applicable)

Drafted by: Property Manager & Maintenance Supervisor

Approved by: Regional Manager

3.12

Other Admin Expenses

Drafted by: Property Manager

Approved by: Regional Manager

Marketing and Retention Expenses

Section

Item

Responsible Parties

Draft Complete?

Approved?

4.1

Variable Cost Sources

Drafted by: Property Manager, Leasing Manager, & Corporate Marketing

Approved by: Regional Manager & Corporate Marketing

4.2

Fixed Cost Sources

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager & Corporate Marketing

4.3

Corporate Marketing Initiatives

Drafted by: Corporate Marketing

Approved by: Regional Manager, Property Manager, & Leasing Manager

4.4

Events

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager & Corporate Marketing

4.5

Creative and Collateral

Drafted by: Property Manager & Leasing Manager

Approved by: Regional Manager & Corporate Marketing

Maintenance Expenses

Section

Item

Responsible Parties

Draft Complete?

Approved?

5.1

Maintenance Salaries

Drafted by: Property Manager

Approved by: Regional Manager

5.2

Maintenance Bonuses

Drafted by: Property Manager

Approved by: Regional Manager

5.3

Non-contract Expenses

Drafted by: Property Manager & Maintenance Supervisor

Approved by: Regional Manager

5.4

Contracts in Maintenance Expense

Drafted by: Property Manager, Maintenance Supervisor, & Account Manager

Approved by: Regional Manager

Turnover Expenses

Section

Item

Responsible Parties

Draft Complete?

Approved?

6.1

Turnover Contracts

Drafted by: Property Manager, Maintenance Supervisor, & Account Manager

Approved by: Regional Manager

6.2

Turnover Supplies

Drafted by: Property Manager & Maintenance Supervisor

Approved by: Regional Manager

Utility Expenses

Section

Item

Responsible Parties

Draft Complete?

Approved?

7.1

Routine Utility Expenses

Drafted by: Property Manager & Maintenance Supervisor

Approved by: Regional Manager

7.2

Cable and Internet Contracts

Drafted by: Property Manager & Account Manager

Approved by: Regional Manager

Taxes and Insurance

Section

Item

Responsible Parties

Draft Complete?

Approved?

8.1

Taxes

Drafted by: Asset Management

Approved by: Regional Manager & Property Manager

8.2

Insurance

Drafted by: Corporate Accounting & Asset Management

Approved by: Regional Manager & Property Manager

Capital Expenditures

Section

Item

Responsible Parties

Draft Complete?

Approved?

9.1

Routine Cap Ex

Drafted by: Property Manager & Maintenance Supervisor

Approved by: Regional Manager, Asset Management, and National Maintenance Directors

9.2

Non-Routine Cap Ex

Drafted by: Property Manager & Maintenance Supervisor

Approved by: Regional Manager, Asset Management, and National Maintenance Directors

Ownership Costs

Section

Item

Responsible Parties

Draft Complete?

Approved?

10.1

HRA Travel and Owner Hospitality

Drafted by: Regional Manager

Approved by: Regional Manager

10.2

Asset Management Fee

Drafted by: Corporate Accounting

Approved by: Regional Manager & Corporate Accounting

10.3

Ownership Accounting

Drafted by: Corporate Accounting

Approved by: Regional Manager & Corporate Accounting

10.4

State Income Tax

Drafted by: Corporate Accounting

Approved by: Regional Manager & Corporate Accounting

Debt Service

Section

Item

Responsible Parties

Draft Complete?

Approved?

11.1

Mortgage Principal and Interest

Drafted by: Corporate Accounting & Asset Management

Approved by: Regional Manager, Corporate Accounting, & Asset Management

Budgeting Detail

This guide is not intended as a one-size-fits-all tutorial. You are welcome to challenge any portion of this guide that does not best suite your property. These changes in theory should be discussed with your Regional Manager, and feedback is highly encouraged.

Rental Income

1.1: Market Rent

Property Managers should be aware of market influences that will affect their property and their forecasting of Market Rents throughout the year. These factors include new business or businesses leaving the area, new construction, and demographic shifts in the population.

Student properties should update Market Rent with peak rent as of the beginning of the school year. This will typically reflect the most current and aggressive market rates, resulting in the highest loss-to-lease figures and producing a minimum threshold from which to base pricing for the following lease-up.

Conventional properties should make sure budgeted Market Rent takes into account project market rent growth throughout the year. The changes are based on fluctuations in demand resulting from seasonality shifts, new competition, changes to the physical property (such as unit renovations), or other changes to amenity premiums.

1.2: GPR

Property Managers should project in-place rents by month based on expected renewal conversions and market rent growth. GPR growth is a factor of unit turnover, lease renewals, and market rent growth. Project the rate of renewal rent growth, review your expiration charts to understand where your expirations lie to get an idea of expected renewal conversions and turnover by month, and utilize your market rents to establish a baseline for new leases.

1.3: Vacancy Loss

Property Managers should project monthly vacancy depending on market seasonality, backfilling expectations (Student), turn, history, and other factors (such as unit renovation projects). Combine your historical vacancy trends by month with projected fluctuations in the market, such as the introduction of new competitors or expected changes in the local economy. Additional factors that should be considered are the speed of your turns, which is dependent on maintenance staffing/capabilities and usage of third-party vendors. Any units that are expected to be down for an extended period of time (either due to renovation or disaster) should also be considered in your vacancy projections. The HRA Standard for Vacancy typically ranges from 3%-5%.

1.4: Bad Debt

Bad Debt projections are based on both history and expectations due to changes in resident makeup. Changes in resident population could result from property repositioning, including unit renovations or amenity additions, or changes in target marketing. Work with your Account Manager to determine Bad Debt, including expected Bad Debt recovery and write-offs. The HRA Standard for Bad Debt ranges from 0.0%-0.3%.

1.5: Loss to Models

Loss to Models is comprised of Market Rent for any units used as model units at various times throughout the year. Loss to Models will change as Market Rent changes throughout the year.

1.6: Rent Concessions

Rent Concessions can be utilized during pre-leasing. Project your monthly Rent Concessions based on both history and expected changes in demand due to seasonality, introduction of new competition in the market, or lease-up. Naturally, changes in demand due to seasonality may affect your ability to lease, especially in high expiration months. Additionally, the presence of new supply in the market may result in a temporary drop in net demand. Lastly, student properties should employ the use of Rent Concessions during lease-up, taking into account changes in enrollment, new supply, operational capabilities, and historical use of Rent Concessions. Typically, Rent Concessions should not be used at properties that utilize revenue management software systems, such as Yield Star or Pricing Portal.

1.7: Cash Back Rewards

Cash Back Rewards can be utilized to bolster renewal efforts. Monthly Cash Back is based on both history and changes due to fluctuations in renewal conversion, market seasonality demand shifts, or lease-up incentives. Many of the same factors impacting usage of Rent Concessions also influence the usage of Cash Back Rewards. Changes in demand due to seasonality may affect your ability to convert renewals, and the impact of lower renewal conversions will be felt more strongly in high expiration months. Additionally, the presence of new supply in the market may result in a temporary drop in net demand. There may be circumstances where the usage of Gift Cards instead of Cash Back Rewards may be more appropriate, such as in the lead-up to a refinance or other capital event. Please consult with your Regional Manager to determine whether amounts budgeted to Cash Back Rewards should instead be allocated to expense-side Gift Cards.

Other Income

2.1: Utility Reimbursements

Re-evaluate resident Utility Reimbursements to be in-line with any upcoming Utility Expense increases. Lease agreements should be updated accordingly with any projected increases in Utility Expense. Look at Utility Reimbursement line items from the most recent month end in order to establish a starting point for the first month of your budget. Given changes you make to your lease agreement, you will need to phase in overall increases in your budget progressively over the course of the year as residents renew and new residents move in.

2.2: Bad Debt Recovery and Collection Fees

Project Bad Debt Recovery and Collection Fees as a ratio between typical recovery/collection success percentages and current/expected outstanding bad debt and delinquency. For example, if you have typically recovered 90% of bad debt, then it would be appropriate to multiply this 90% recovery percentage by bad debt to calculate your bad debt recovery.

2.3: Standard Reoccurring Other Income Items

Look at standard reoccurring other income line items from the most recent month end in order to establish a starting point for the first month of your budget. These other income items are charged regularly on a monthly basis. Pet Rent and Parking Fees are good examples of standard reoccurring other income items. You should plan appropriately for any increases that you anticipate over the course of the year. As an example, if you currently charge $20 per month for pet rent and are planning an increase to $25 per month, you will need to phase in this increase in your budget progressively over the course of the year as residents renew and new residents move in. The increase will not hit your financials all at once; rather you will progressively see an increase in pet rent as existing residents renew and as new residents lease. A good way to project pet rents for new residents is to apply the current percentage of residents with pets to new leases. For example, if 30% of your current residents have pets, it would likely be safe to assume that 30% of new residents would also have pets. This approach should be modified for properties with changing demographics (for example, shifting from majority-conventional to majority-student) that could result in fluctuations in certain reoccurring other income items.

2.4: Transactional Other Income Items

Transactional Other Income Items includes line items that occur at lease signing. Examples include screening and application fees. There should be a direct correlation between projected move-ins and budgeted transactional other income items.

Administrative Expenses

3.1: Manager Compensation

Manager inputs current salary, which will be modified by Regional as appropriate.

3.2: IT Consultant, Marketing and Training Salaries

Entered by Accounting. These are corporate support salaries spread across the company.

3.3: Other Salaries

Manager inputs salaries with proposed increases for the year. Increases will be subject to Regional approval. Keep in mind anniversary dates for timing of proposed increases.

3.4: Admin Commissions and Bonuses

Bonus and Commission potential to be determined jointly by Manager and Regional depending on benchmarks and goals set for different employees. History may be useful as a guide to help determine timing of bonuses and commissions.

3.5: Payroll Taxes

Budget figure to be provided by RMI, Accounting, and Regional.

3.6: Medical Insurance and Workers Comp

Budget figure to be provided by RMI, Accounting, and Regional.

3.7: Rent Allowances and Discounts

Carry forward current rent allowances and discounts, accounting for any anticipated changes through the year.

3.8: Management Fee

Student: 3.5% of Total Revenue

Conventional: 3.0% of Total Revenue

3.9: Permits and Fees

Account for upcoming routine permits and fees from city, county, state, or other jurisdictions.

3.10: Contracts in Admin Expense

Pull all contracts to evaluate services and pricing. Understand expiration dates and termination clauses. Identify whether services are truly needed or if there are better alternatives. Identify timing of any rate increases in contracts, and re-negotiate contracts as appropriate. This is a great time to review and ensure that contractual agreements are being fulfilled by vendors. New contract bids should be collected to ensure that the best option is selected to meet property needs and to ensure fair pricing. It is important to understand the scope of contracts to make sure you compare apples-to-apples with competing vendor bids.

3.11: Shuttle Bus

If applicable, work with Maintenance to determine upcoming needs for routine maintenance and potential for costly repairs to shuttle bus.

3.12: Other Admin Expenses

Budget for Training, Travel, Hospitalities, YES We Can, etc. and any other non-contract items should be reviewed with Regional. Budgeting can be influenced by history, however each line item should be thoroughly reviewed independently.

Marketing and Retention Expenses

4.1: Variable Cost Sources

Variable cost sources include pay-per-click or pay-per-lease marketing sources, such as Zillow, Google Ads, etc. These costs will vary by usage of each source. Leasing Manager should work with Property Manager by using historical data as a base guide to determine this expense, however work with Corporate Marketing to finalize these costs.

4.2: Fixed Cost Sources

Fixed cost sources, such as Apartment Guide, are routine, regular marketing expenses that do not fluctuate in cost depending on usage. These costs should be reviewed by both Leasing Manager and Property Manager. The success of these platforms should be evaluated to determine whether they’ve been effective marketing tools. Contracts should be reviewed, and recommendations to retain or discontinue usage of these sources should be made to Corporate Marketing. Corporate Marketing will work with property and Regional to finalize these items.

4.3: Corporate Marketing Initiatives

Corporate Marketing will provide properties with anticipated corporate-level marketing expense allocations based on companywide initiatives. The implementation of some corporate initiatives may provide opportunity for cost savings in other site-level marketing expenses. Cost saving opportunities should be evaluated with Corporate Marketing.

4.4: Events

Property Manager and Leasing Manager will evaluate event spending with Corporate Marketing and Regional Manager.

4.5: Creative and Collateral

Site will communicate expense expectations to Corporate Marketing. Expenses include both material and design costs for banners, A-frames, etc.

Maintenance Expenses

5.1: Maintenance Salaries

Manager inputs salaries with proposed increases for the year. Increases will be subject to Regional approval. Make sure to appropriately to account for changes in seasonal need for maintenance help. Keep in mind anniversary dates for timing of increases.

5.2: Maintenance Bonuses

Bonus and Commission potential to be determined jointly by Manager and Regional depending on benchmarks and goals set for different employees. History may be useful as a guide to help determine timing of bonuses and commissions.

5.3: Non-contract Expenses

Budget for non-contract, non-capital routine maintenance expenditures by using both history and evaluating the condition/quality of systems (HVAC maintenance, gutter cleaning, etc.).

5.4: Contracts in Maintenance Expense

Property Manager and Maintenance Supervisor should jointly pull all contracts to evaluate services and pricing. Understand expiration dates and termination clauses. Identify whether services are truly needed or if there are better alternatives. Identify timing of any rate increases in contracts, and re-negotiate contracts as appropriate. This is a great time to review and ensure that contractual agreements are being fulfilled by vendors. Landscaping is a particularly critical contract to review. New contract bids should be collected to ensure that the best option is selected to meet property needs and to ensure fair pricing. It is important to understand the scope of contracts to make sure you compare apples-to-apples with competing vendor bids.

Turnover Expenses

6.1: Turnover Contracts

Property Manager and Maintenance Supervisor should jointly pull all contracts to evaluate services and pricing. Identify whether services are truly needed or if there are better alternatives. Identify timing of any rate increases in contracts, and re-negotiate contracts as appropriate. This is a great time to review and ensure that contractual agreements are being fulfilled by vendors.

6.2: Turnover Supplies

Budget for turnover supplies using both historical turn supplies cost per unit or per bed. Project the number of units/beds that will likely turn by month in the coming year in order to determine turnover supplies.

Utility Expenses

7.1: Routine Utility Expenses

Research proposed increases for the upcoming year and when those increases will occur. This is also an opportunity to re-evaluate resident utility fees to be in-line with any upcoming increases. Also take this time to evaluate opportunity to save on utility expenses through energy efficiency initiatives (light bulb replacement, water-saving plumbing fixtures, window replacement, etc.).

7.2: Internet and Cable Contracts

Regionals will be able to advise on alternatives to existing cable and internet providers. Property manager should pull all contracts to evaluate services and pricing. Understand expiration dates and termination clauses. Identify whether services are truly needed or if there are better alternatives. Identify timing of any rate increases in contracts, and re-negotiate contracts as appropriate. This is a great time to review and ensure that contractual agreements are being fulfilled by vendors.

Taxes and Insurance

8.1: Taxes

Asset Management will provide forecasted tax figures to Property Manager and Regional Manager.

8.2: Insurance

Asset Management and Accounting will provide forecasted insurance figures to Property Manager and Regional Manager.

Capital Expenditures

9.1: Routine Cap Ex

Routine capital expenditures can be largely influenced by history, however should be evaluated line item by line item to take into account expected increases or decreases due to condition of physical property. Routine cap ex includes regular replacement of property systems (HVAC replacement, carpet/vinyl replacement, appliance replacement, etc.).

9.2: Non-Routine Cap Ex

Non-routine cap ex includes one-time or irregular capital improvements, such as new roofs, exterior painting, or building of a playground or other amenities. Non-routine cap ex can be further broken down between Asset Preservation and Value-Add Initiatives. A running list of long-term capital needs to be kept by the Maintenance Supervisor. These needs should project 3 years into the future and should include timing of expected Asset Preservation expenditures (roofs, parking lots, etc.). Asset Management and Regional Manager will be available to assist in refining this list. Depending on our property strategy and cash position, certain Value-Add initiatives should be proposed by the Property Manager to the Regional Manager and Asset Management. Value-Add initiatives could include a unit renovation plan, large-scale landscaping upgrades, gym equipment, or amenity additions like a playground or dog park. 2 or more bids should be collected to estimate the cost of these items for budgetary purposes.

Ownership Costs

10.1: HRA Travel and Owner Hospitality

To be determined by Regional Manager and other Corporate Resources.

10.2: Asset Management Fee

Amount allocated by Accounting. 0.5% of Total Revenue.

10.3: Ownership Accounting

Budgeted by Corporate. 3rd party CPA fees.

10.4: State Income Tax

Budgeted by Corporate. Filed annually by Accounting, if required.

Debt Service

11.1: Mortgage Principal and Interest

Provided by Asset Management and Corporate Accounting to Regional Manager.