Real Estate Accounting Made Easy, 2nd Edition

8BUDGETING FOR OPERATING PROPERTIES

WHAT IS A BUDGET?

A budget is a formal business plan set by an organization for future business activities on which actual future activities will be evaluated. It can also be described as a management tool used to communicate management's goals and objectives for a given future period. For an operating property, a budget helps management understand the future outlook of the property, including the revenue streams and expenditures. A well prepared budget is an important tool used by management in cash flow planning and asset valuation. A budget also communicates management's strategy and sets the tone for both short-term and long-term expectations.

COMPONENTS OF A BUDGET

Normally there are various sections of an operating property budget. However, the level of detail depends on the organization's structure, goals, and objectives. The most common components of a budget are:

1. Executive Summary
   1. Brief description of the entity or assets or both
   2. Discussion of key goals and objectives
   3. Organizational chart
   4. Brief market overview and economic conditions
2. Presentation of the detail budget, commonly made up of:
   1. Revenues
      1. Office rents
      2. Retail rents
      3. Residential rents
      4. Operating expense recovery
      5. Storage rents
      6. Antenna rents
      7. Parking rents
      8. Interest income
      9. Investment income
   2. Recoverable operating expenses
      1. Wages and salaries
      2. Property taxes
      3. Electricity
      4. Heating, ventilation, and air conditioning (HVAC)
      5. Cleaning
      6. Water
      7. Insurance
      8. Security
      9. Management fees
      10. Repairs ...