The Institute of Real Estate Management
Los Angeles Chapter #6
Multifamily Budget Workshop
Prepared by: Carol Eddy, CPM / Eddy Management Group
Presented by: May Davoudian, CPM & Farzaneh Tofighi, CPM
08/23/07
3/12/2016
1
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
income
 Meet budget projections
 Control expenditures
 Fulfill 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)
Monthly Variance
Report
Variance Analysis
(3)
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Financial Process
BUDGET
Rent Collection
Controlled Expenses
(Vacancy, Concessions,
Delinquencies)
(Operations, turnover, leasing, payroll,
legal, advertising, maintenance, utilities,
replacements)
Other Income
Uncontrolled
Expenses
(Financial, Capital
Improvements)
Income Statement
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
 Annual
 Long
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.
2.
3.
4.
5.
6.
7.
Pre-budgeting process
Tools to prepare the budget
Step by step process
Data, trends and equations
Methods to arrive at figures
Budget assumptions
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:
Step 2:
Step 3:
Step 4:
Step 5:
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Compare
Take corrective measures
Analyze
Adjust projections
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. Averages
2. Historical data to projections
3. Actual figures
4. Percent increase or decrease
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Averages
Total relevant budget category
Eliminate extraordinary income/expense
Review general ledger
Deduct one time purchases or repair
Deduct items not part of future budget equation
Divide by number of months data accumulated
Some averages may require additional data
Example: Through July 2005
Total Decorating Contract #65207
Extraordinary – Paint Laundry/ext
Total Budget Category
Divided by 7 months of data
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=
=
=
$1,260
- 690
$570
$ 82 (per mos)
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Historical Data to Projection
Historical information
Quantify projections
Equations to determine budget category
Example: Anticipate 15 unit turnovers/1.25 per month
Average cost to turn apartments:
Painting
$ 425
Cleaning
$ 65
Shampoo
$ 75
What would you budget monthly in rent-up expenses?
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Potential Rent Definition
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
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Gross Potential Rent
Calculation
Assume you currently have the following:
Occupied Units
20 one bedroom @ 500 each=
18 two bedrooms @ 625 each =
3 one bedroom @ 650 each =
5 two bedrooms @ 675 each =
Vacant Units @ Market Rate
2 one bedroom @ 675 each =
2 two bedroom @ 700 each =
GROSS POTENTIAL RENT =
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$
$
$
$_____
$
$_____
$
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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
Total number of apartments
PHYSICAL OCCUPANCY
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43
÷44
__%
21
Economic Occupancy
Defined: Physical occupancy less:
1. Units leased but not producing rent (delinquencies)
2. Apartments used for office, models or for storage
3. Apartments provided to staff as part of compensation.
Calculating Occupancy Rate (Economic)
Total occupied apartments
Total number of apartments
PHYSICAL OCCUPANCY
43
÷
44
98%
Delinquent apartments = 2
Model apartment
=0
Employee unit
=1
ECONOMIC OCCUPANCY
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______?
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Turnover/Revenue
1. Turnover
2. Revenue
a. Potential rents
b. Vacancy loss
c. Occupancy rate
d. Delinquency
1. Other income
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Budget Rent Potential
1. 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 rent
2. Implement a renewal plan for each anticipated
3. Project market rent increase
1. Current Market Survey
2. Know market and neighborhood condition
3. Historical increases
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Lease Renewal Projections
Review the rent roll – determine potential rent
Determine the market rent @ 100%
What is the below market rent (averaged) for each size?
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 decision
1. This should be monthly
2. Based on the number of renewals
3. Anticipate not everyone will renew
Step 1:
Step 2:
Step 3:
Step 4:
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Lease Renewal Projection
Step 1: Rent Roll
What is the Gross Potential Rent?
Step 2: Market Rent @ 100%
What is the Total Market Rent?
Step 3: Below Market Condition
What 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 unit
Management fee
Net operating income
Cash 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 Flow
Money Flow
Potential Rent
Less: Vacancies/collections
Add: Misc.. Income
Total Revenue
Less Operating expenses
$ 196,703
5,655
+
2,452
$ 193,500
- 103,093
NET OPERATING INCOME
Less: Principle/interest
Less: Capital improvements
Less: Owner’s Distribution
CASH FLOW
$
-
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$
$
90,407
000
000
82,950
7,457
35
Property Performance

How do you compare properties
performance in
Income Categories
 Expense 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
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