Chrissy's Views

Who Uses the Finished Budget?

Chrissy Jackson — Wed, 25 Aug 2010 09:54:40 +0000

The community manager will use the finished budget on an ongoing basis as purchasing decisions are made throughout the year. The maintenance supervisor should also use it for guidance when ordering supplies and timing delivery of materials. The office manager in a large community will use it when acquiring needed office supplies and items for resident relations.

By adhering to the numbers projected for expenses, everyone is able to maintain a modicum of control and help insure the bottom line numbers (the financial goals) are met.

The corporate office or owners of the community will also use the budget on a continuing basis to gauge the financial performance of the community. It is often said that the professional abilities of the onsite manager are reflected in how well they are able to reach or exceed the goals set forth in the budget.

On a monthly basis, when financial statements are prepared, the actual performance of the community is compared to the anticipated budgeted performance. Adjustments can then be made as needed to bring the community back into line with the planned performance. It is much easier to do this on a monthly basis than quarterly. Monthly reviews enable a community manager to receive constant feedback on financial performance.

Outside the company, a bank may use the budget as compared to actual performance for the purposes of establishing financial validity for the community when applying for a loan. If the budget vs. actual financial statements for the past years show that the property is consistently managed to the budgeted numbers, the bank is more likely to consider the budget that forecasts performance for the future year when the loan will be due for repayment.

What Components are Used in Budget Preparation? [cont’d.]

Chrissy Jackson — Sat, 07 Aug 2010 09:54:44 +0000

Review any vendor or supplier contracts

Review all utility charges with the supplier. This includes water, sewer, electric, gas, telephone, cable television, and any other utility for which you pay some other company. Ask if they plan any increases during your upcoming fiscal period. Look at their historical performance to see how much they normally increase their rates. Another important area for review, although not a utility, are the real property taxes and any personal property taxes the community pays. Call the local tax assessor to see if any changes are in the planning.

Examine the ADA compliance checklist to determine what you need to do to meet the goal of being ADA compliant in your office, sales center, and clubhouse. Incorporate improvements as you can into each year’s budget.

Next, think about the capital improvements that are needed in the community. Do you need to do some major street repair? Does the playground need new equipment? Is the maintenance shop in need of a new roof? Is it time to install a new blower motor in the wastewater treatment plant? Do you need new signage, lighting and landscaping at the entrance? These capital improvements, while they may be listed on the deferred maintenance list, are more often just things you “would like to do.” Try to include some of these “nice to have” things each year. From a marketing perspective, these are things that generally increase in a positive way the aesthetics of your community, and impress the prospective residents as they drive through the community. They also reinforce to the current residents the values you provide to them.

Finally, one of the last components of the budget is to study the specific schedules for complex categories. For example, if you have more than one employee, you need a specific schedule for wages. On that schedule, you would list each employee, their base pay at the beginning of the fiscal period, any allowances for bonuses, the payroll “load” (workman’s compensation, the employer’s share of health insurance, etc.), and any raises which you plan to make available to them during the coming year. Other areas where a specific schedule may be required would be for rent. In that case, the schedule would show the number of homesites that pay full rent, those that are on reduced rent along with the ending date of the incentive, and allow for new residents moving in and the rate of rent they will be charged. This schedule is also useful if you have more than one rate of rent in your community (corner homesites are more, lake front homesites are higher, etc.).

that are up for renewal during the budget period. Try to renew them now, during the budget creation process, so you aren’t surprised at the new rates. Consider the financial impact of bringing some of the work inside to staff to alleviate the payments to contractors. Be sure to take into consideration the skills of the onsite staff, the current demands on their time, and the equipment of the community before committing them to more tasks. Also review equipment leases and/or contracts for continuing applicability. Many communities lease their copier. Is it really large enough for what you do, or is it too large? Can you substitute a newer, better piece of equipment for the one currently under lease?

What Components are Used in Budget Preparation?

Chrissy Jackson — Mon, 28 Jun 2010 18:26:42 +0000

Components are not people. Components are items that the people involved in creating the budget use to better enable them to forecast the financial future of the community. The more components that are available and the more that you use, the more accurate and complete your fiscal forecasting will be.

How can you see into the future? One of the best ways is to look at the past! That’s right. The historical financial performance of a community is the first component that should be reviewed when creating a new budget for the future. Look at the various categories. Be sure you understand what charges, costs, and other expenses were put into each expense category. Think in terms of the big picture. Are there any planned changes to the operation of the community that will significantly increase or decrease these expenses? Are you increasing the usage of the clubhouse? Will that create more of a demand for supplies or cleaning? Are you subsidizing the uniforms of employees? Or are you planning on getting uniforms this next year?

When looking at past performance, it is helpful to go back more than just one or two years. There are sometimes recurring issues that only happen once every four or five years. Look at those unusual expenses and the timing to project a reoccurrence within the next budget period.

Look at the income side of the picture, too. What increases (or decreases) can you logically expect to take place within the next fiscal period? Are you planning a rent increase? Are you anticipating less late fees to be collected? Are you increasing your NSF charges? What about the application fees? Do you charge pet fees? Are they going up, staying the same, or being eliminated? Do you foresee net economic occupancy increasing? Do you think you will have more economic vacancies?

Consider the deferred maintenance list. This is a list of all items in the community that have been noticed as needing attention, but not immediately. For instance, when someone says, “Boy, we’re going to have to do something about the roof on the clubhouse within the next couple of years,” write it on the deferred maintenance list. Then, when you are preparing the budget, review these items. Which ones need to be considered within the next 12-month period? Which ones can comfortably be put off until the future? Remember that planning ahead for the expense and incurring it while it is still an option is generally less expensive than waiting until it is an emergency. At that point, funds have to be found from somewhere and the cost of repair is usually much higher.

Discuss the appropriate sections of the budget with your onsite employees. The maintenance supervisor should be aware of the total dollars allocated each month for repairs and maintenance supplies, for vehicle repairs, for equipment lease and repair. Other categories that are under his control should be discussed with him for his input. The onsite community manager or office manager should be aware of administrative expenses within the community office, total dollars allocated for office supplies, resident relations, and other functions that are under their control.

Allowing an employee to have input into the budget not only gives you as budget creator more input, but it also gives them more perspective as to how the community operates financially. It allows them to see how their day-to-day decisions on expenditures affects the bottom line. It also then gives you as the owner the future ability to pass responsibility for adherence to the budget to them. Encourage them to make spending decisions only after referring to the budget to be sure the money is allocated and available. Growing your employees and their worth to you begins with sharing responsibility. The creation of the budget is a great beginning.

Don’t stop employee input at the onsite level. If you have a larger corporate office, or regional managers, involve them in the budget creation process. They most likely see things on a broader scale than the community manager, and can give valuable input from a different perspective. With their overview of more than just one community, they are also likely to be more cognizant of events that may take place and can help plan financially for unforeseen expenses.

Who Creates a Budget?

Chrissy Jackson — Tue, 15 Jun 2010 10:47:00 +0000

Depending on the size of your community, and the overall size of the company that owns the community, the number of people involved in creating a budget can vary from one to as many as ten or more. And, if there is a board of directors who must approve the final product, their input, while not used in the actual creation of the budget, might change the final product.

In the situation where the community is owned by a sole proprietor, it will be that person who creates the budget, since it is probably a rather small community and most likely an owner/operator situation.

A little larger situation might be where it was a partnership or corporation of some type that owns the community. In this instance, it would probably be an absentee owner with an onsite community manager. Depending on the relationship between the two, the tenure of the community manager, and the openness of the owners, the budget creation varies. Some of these situations do not actively involve the community manager in reviewing the financial statements, making active decisions about purchases or capital improvements, or even knowing the financial goals of the community. In those cases, it is back to the owner to create the budget. If, however, the community manager is involved in the financial end (reviewing, making decisions, etc.) then they should be at least somewhat involved in the budget creation process.

In larger communities where there is a maintenance supervisor who has a fairly good sized staff (three or more plus the supervisor) it is another opportunity to get one more person involved in helping put good information into the budget process.

In a typical property management company, there are regional managers who also work with the budget creation. A regional manager may supervise as many as 15 or more community managers. By working together, and getting input from onsite staff when applicable, the budget is more accurate, better understood, and becomes a more effective tool.

How Long Does it Take to Create a Budget?

Chrissy Jackson — Thu, 03 Jun 2010 15:57:50 +0000

Because of all the complexities involved in creating an accurate budget, it requires time to thoroughly research each item, review supporting data, and make a projection for next year. At the very least budget preparation should start 3 – 4 months prior to the beginning of the new fiscal period.

However, as you will soon learn on the following pages, the thought that goes into creating an effective budget, the research, and the making of notes, really is a continual process. Many community managers keep a folder on their desk or readily available in a drawer that says “Budget Notes” and into it they constantly put things that they notice throughout the current year. This may be a note that something needs to be included in the budget next year because they noticed a shortfall this year. It may be an adjustment to an income category due to a mid-year Guideline change (late fee increase, for example) or policy change (elimination of application fees, for example).

Other items that need to be included in this “Budget Notes” folder will become more apparent to you as we continue to progress through the creation of the budget. Once you have created a budget, you will spend the rest of the year more aware of the things that are needed, and this folder will be a great place to put them. The more organized you can be when starting the actual creation process, the more effective your finished budget will be. And, that makes it a more valuable tool for you.

The creation of a budget has often been referred to as someone looking into a crystal ball and trying to see the future through clairvoyant methods. In reality, that is fairly close to the truth. The one additional thing you have going for you in this effort, however, is the historical knowledge of the community performance. The next two posts will show you how to use this as the foundation for creating an effective budget.

How Does a Budget Work?

Chrissy Jackson — Sat, 22 May 2010 09:37:31 +0000

A well-written budget lays out every financial detail of your community that can be anticipated. It shows the sources of income, how much each will generate every month throughout the coming year, and any projected increases from any income source during the year. Expenses are listed as you expect them to occur, with seasonal adjustments for the appropriate items.

By making the budget as accurate as possible, it will work with you in helping you reach the financial goals of your community. Operational decisions should be made only after consulting the budget. In emergency situations, the budget can help you re-align expenditures for the remaining months of the year. At all times, you will know exactly how close you have come to reaching your monetary objectives for the year.

Even though a budget typically is written to cover a 12-month period, it is broken down on a month-by-month basis. When you look at anticipated income and expenses in bite-sized pieces, it is easier to keep the numbers accurate and on target. It is also easier to make corrections should some unforeseen event cause you to stray from your original projections.

Most communities collect rent on a monthly basis, although a few collect annually. For the bulk of the operations that collect each month, this format allows the income shown on the budget to be adjusted as you anticipate changes. These changes would typically include move-ins, move-outs, model homes being sold, rental incentives beginning or ending, and rent increases. In some cases, each resident has a 12-month lease, beginning when they move in. This monthly format then allows an astute community manager or owner to project the exact amount of increased income to expect in any one month.

Expenses do not remain constant throughout the year. In most climates, there will be a seasonal fluctuation in gas, electric, pool expenditures, and perhaps even personnel. Planning for the future on a monthly basis is the only way to accurately reflect these variations.

Budget Vocabulary

Chrissy Jackson — Wed, 12 May 2010 13:12:55 +0000

Accrual Method – a method of accounting that recognizes expenses when they are incurred, not when they are paid. It also shows receivables as future income. It does not reflect the checkbook.

Assets – include such items as the infrastructure, land, cash in bank, accounts receivable, and prepaid expenses.

Average Market Rent – a figure which results from dividing the total rent collected by the number of homesites which contributed

Balance Sheet – a reconciliation of assets, liabilities, and owner’s equity.

Besides varying by amount, a mortgage will vary by term (the length of the mortgage), the interest rate, how the interest rate is calculated, and when it is applied. Typically, mortgage payments are made monthly. However, the payment may vary from month to month if the loan is an adjustable rate mortgage, commonly referred to as an “ARM”. The interest rate on this type of loan may float with a specific index such as the prime rate (the rate a bank charges its best customers when they borrow money). This rate may change continuously and therefore, the monthly payment for the loan may also change. A fixed rate mortgage, on the other hand, does not change over the term of the loan. Payment amounts remain constant.

Capitalization Rate – this is often referred to as simply “cap rate”. It is a percentage used to show the rate of return that an investor wants to make or will make on an investment. By varying the purchase price of the community, the investor has an opportunity to control the capitalization rate (or rate of return) he wishes to realize from his investment. The higher the selling price of the community, the lower the cap rate will be for the investor (buyer).

Cash Accounting – a method of accounting that only records the actual dollars spent and revenue collected. It reflects the checkbook. It does not allow for accumulating of expenses (such as taxes) which grow monthly but are usually paid only annually. Nor does it account for receivables or payables.

Cash Flow – the amount of money left after debt service is deducted from net operating income

Chart of Accounts – the listing of the account name and number assigned to each line item in the financial statement

Debt Service – the monthly mortgage payment on the community, which typically includes principle, interest, and escrow amounts. Some communities may have more than one mortgage that must be accounted for in this category. A typical mortgage will be 80% of the purchase price of the property. The remaining 20% is then referred to as owner’s equity.

Depreciation – this is a non-cash item that is subtracted from NOI primarily for tax purposes. Depreciation is a concept that permits the recovery of the cost of an asset over the useful life of the asset. The Internal Revenue Service has assigned a useful life to both residential property (27 ½ years) and commercial property (31 ½ years).

Economic Occupancy – the counting of total homesites within a community which are obligated pay rent each month

Economic Vacancy – the counting of total homesites within a community which do not incur a monthly obligation for payment of rent

Effective Gross Income – the actual amount of money deposited into the checking account as received from residents. This includes rents paid and other income collected. This amount is also known as actual cash on hand before expenses and debt service.

Fixed Expenses – those expenses which continue, regardless of occupancy rate, such as taxes, streetlights, mortgage, and commercial insurance

Gross Potential Rent – sometimes called “optimum rent”, this is the actual dollar value of your potential income if all homesites were obligated to pay the current rate of rent

Income Statement – a reconciliation of revenues, expenses, and debt service for the property. It generally also includes a comparison of budget to actual.

Liabilities – include outstanding economic obligations such as accounts payable, loans, mortgages

Net Operating Income – the amount of money left after operating expenses are deducted from effective gross income

Operating Expenses – a category that includes both fixed and variable expense totals

Other Income – income received by the community on a regular basis other than rent. Examples include late fees, extra person charges, water and sewer reimbursements, pet fees, returned check charges, etc.

Owners Equity – includes capital stock, paid-in capital, retained earnings, and partners equity

Physical Occupancy – the counting of total homesites within a community, on which a home sits, but does not necessarily incur an obligation to pay rent

Physical Vacancy – the counting of total homesites within a community which have no home sitting on them

Reserves for Replacement – a fund set aside for the replacement of items that wear out from time to time, such as air conditioning systems, roof replacements, and large equipment. The general amount is 5% of income. Most property management companies prefer to simply expense items when they are incurred, rather than set aside a contingency fund.

This concept implies that any physical improvements to land will deteriorate over time and the owner of the property will eventually have to replace them. The IRS allows a property owner to deduct this continuing obsolescence each year as a cost of doing business. Land can not be depreciated since it does not deteriorate nor lose its value.

Vacancy and Collection Loss – a dollar value computed by adding together three things: the uncorrectable rent for vacant homesites, the uncorrectable rent for economic vacancies, and any other uncorrectable rents which are written off as bad debts or given away as promotions

Vacancy and Collection Loss – the total of lost revenues from vacant homesites combined with uncorrectable receivables. Promotional discounts are also included as part of the vacancy loss in most cases, although some companies do show these incentives as expenses, rather than as a loss of income.

Variable Expenses – sometimes called “controllable expenses” and viewed as those more readily under the manager’s control. They also vary directly in proportion to occupancy. Examples include water, sewer, maintenance, office supplies, and wages.

What is a Budget?

Chrissy Jackson — Wed, 12 May 2010 12:57:14 +0000

Simply put, a budget is a tool. When effectively used, this tool can enable you to have a community that is financially sound. A community owner or manager will be able to predict the financial performance of the community for the next 12-month period. A budget will allow you to plan for large, capital expenses and other high dollar improvements.

In reality the budget is a 12-month snapshot of the monetary performance of your community – your business. Many times, this 12-month fiscal period coincides with the normal year (January to December), but that is not always true. Sometimes, a company has determined the need for a fiscal period to be other than January to December. By definition, a fiscal year (the period covered by a budget) can be any period containing 12 consecutive months. So, for the balance of this handbook, please remember that when we discuss the budget period, it may not always be the traditional January to December.

This fiscal overview will show the projected amount of income you hope to realize, and the sources that will provide it. Also listed will be the expenses you realistically count on incurring. Additionally, an effective budget allows you to plan for the financial growth of your community – your business – by showing the amount of net income generated each month if the budget is met.
The net income is the financial goal of your community. It is building value in your business and your investment. By utilizing one of the various methods of creating a budget discussed in the next chapter, you can plan for the value growth of your community.

Too many times, community owners think there is no need for a budget. They live by the old rule that says “Put money in the bank whenever you can and only spend what you need to spend.” That rule may keep you afloat, but without a way of tracking financial progress, without a way to set and reach financial goals, you don’t know if your business is performing as well as it could or not. A budget is the tool that brings all of this together for the community owner. That same tool is what helps the community manager realize his or her role in creating value for the community owner, and helps track that it really happens.

Who among us would take off on a trip across the country without consulting a road map? Not many. And just as that road map keeps us focused and on track to success (reaching our destination), so does the well-written budget. Operating a business out of your hip pocket and making snap decisions on the spur of the minute rarely leads to success these days. Planning and focus more often allow you to reach the goals of financial success for your community.

A well-written budget is more than just another tool – it is the cornerstone of the future of your business. Over the coming weeks, we’ll continue to look at how to create a budget that works for your community and how to set financial goals that make sense for your future.

Making Money by Spending

Chrissy Jackson — Tue, 27 Apr 2010 12:00:01 +0000

A community manager is in charge of the finances of the community. They put collected money in the bank and spend as approved to maintain the community. What is approved? In some companies, there’s a budget prepared annually and throughout the year it serves as a guide for the managers. It is only exceeded in case of an emergency, and only with prior approval. Other companies don’t run by a budget, but rather depend on the manager’s ability to cost efficiently run the community. That’s harder to do.

Later, we’ll get into how a budget is created, who’s involved, and how to use this tool in effectively managing your community financially.

Today, let’s look at the overall picture of running a community. First, it needs a manager. This is the face and personality that represents the community and the company to the public, to area businesses, and to prospects. A manager is the most important tool in the tool box.

A manager needs an office. When presenting the community to a prospective home buyer or new resident, the manager needs a quiet place to conduct business. This is a financial expense, but when contrasting the level of professionalism found in an office with that of a manager working out of their home, there is no comparison. It’s an investment that sets the tone and atmosphere of the community.

While different business practices and management theories abound, most successful business owners & employees understand the importance of having respect for each other. Part of that respect is exemplified by creating a proper work atmosphere and physical space.

Another part of financial management involves equipment and vehicles. It’s not always important to have brand new, shiny mowers and trucks, but it is important that they be clean, well-maintained, and functional. Taking care of equipment includes preventive maintenance, and that falls under the responsibility of management. The budget must support this expense.

In a community that is actively marketing to fill vacant homesites or sell homes, it’s important to pay attention to the physical appearance of the entrance, the office, and the model homes. Anything you are trying to sell should be the most attractive in that area of the community. Flowers are relatively inexpensive for the amount of beauty they bring. Mowing the lawns of vacant homesites and model homes uses up time and financial resources, but it must be budgeted and done.

If you are a community that works from a budget, it’s also necessary to understand that if you don’t collect all the money shown on the income side, you may not be able to spend all that is shown on the expense side. Most owners will make exceptions for planned capital improvements, but there are times when reining in spending is required when accounts receivable are too high.

The financial health of a community is part of the underlying stability that allows growth and development. For the most part, it’s the responsibility of the community manager to create this stability by collecting rent when it is due and keeping an eye on expenses.

Some of the ways you as a manager can control expenses include bulk shopping. If there is another community close, share a large purchase to get a discounted rate of something you both use, rather than buying smaller quantities and paying more.

Most of the office supply stores offer a reward program that provides rebates for purchases. When you as a manager order office supplies, remember that rebate goes to the company, not to your personal budget. Use that reward credit on your next purchase of office supplies for the company.

Weigh the option of keeping some maintenance supplies on hand rather than running to the hardware store each time you need a fitting. Each community maintenance supervisor should know what they use on a routine basis. When possible, build a small inventory. It’s less expensive to buy a couple extra fittings than it is to drive to the store each time you need one. You save both labor and gas. Obviously, this means you need to have a place to store this inventory where you can find it when you need it.

Budgeting well means planning ahead for needed items for the community, too. Over the coming weeks, we’ll begin to look at budget items and how to put together a strong budget custom-tailored for your community.

Community Finances – chatting with Dave Barlett

Chrissy Jackson — Wed, 14 Apr 2010 03:10:31 +0000

As we continue this series on community finances, I’ve taken the opportunity to etalk with Dave Barlett, of Keyes Commercial Realty. Here’s our Q & A for you:

Question: What can owners/community managers can do to maintain value by not acquiring rentals. I feel that many owners see a repo in their community, and think it’s best to pick it up from the lender for a song, then use it as a rental or lease-purchase in order to keep cash flowing in. I’m not sure that’s best long term for value of the community. What’s your feeling?

Answer: Of course, the strongest argument for acquiring a repo is to help insure that it stays in the community, because replacing a unit is often an expensive proposition, especially for an operator without an on-going sales campaign. Another strong argument for buying the unit is to make sure that any needed repairs are performed in a timely and competent manner. Arguments against? The cost of admission, time and trouble to cleanup, repair and sell……every situation is different, of course…..keeping the unit in place and in good condition is always a positive for the long term value of the community, and assuming the park owner is committed to doing so, they have to balance out the long term interests of the community versus their short-term financial ability to buy or repair units or not, as well as their willingness and ability to do so….

Question: Do you see a downside in overall community value by increase the number of community-owned homes? And – how is an owner to sell the home once he acquires it . . . or are you advocating keeping it as a rental unit?

Answer: The idea is to sell off the unit to a good tenant as soon as possible, probably by carrying the paper, because as the number of community owned units rises, it becomes a different kind of deal to an investor. No owned units is the best number, 10% is probably the tipping point….In certain markets, like near military bases, is where you see a lot of parks that own the units, catering to yearly family renters. That’s not for every park owner, though….

Question – Anything else to share with community owners about this part of the financial picture?

Answer: I guess I should just caution owners not to let any situation get out of hand. My last seller had acquired 50 units in a 108 unit park, which might have been okay, but 30 of the units were so rough that they were un-rentable, and of the other 20 that were rented, I’d guess that they will need a full rehab once vacated. She was on the verge of losing the park because of the vacancies, but she was an absentee owner, and her park called for a hands-on owner. I guess it comes down to the fact that you need to be a hands-on operator if you’re going to acquire the units, whether you’re going to rent or sell them.

Thanks, Dave, for your insights. Next week we’ll look at some other strategies for strengthening the value of the community.