How am I supposed to understand create our 2023 properties budget?
I'm a newly hired asset manager in a small REPE and have the responsibility of creating our 2023 budgets for all ~20 of our properties. I have our 2022 actual expenses (YTD) and can look at invoices to find uncommon expenses... But it feels like I'm throwing a dart blindfolded trying to create these budgets. On top of that, it's extremely tedious and am wondering if there's a way to streamline the process.

How do you all create your budgets?
[{"id": "ix1zu4f", "text": "What property types do you asset manage? Do you have a property management company/companies handling the day-to-day operation of the assets? I'm also a PERE AM and the management companies are usually responsible for initial creation of operating budgets because they're closest to the nitty gritty detail of expenses, utility bills, service contracts, staffing, etc. The asset managers then review and provide feedback on the initial budgets based on business plan objectives, but we aren't setting up the first drafts. I know different firms are structured in different ways so this approach may not be applicable at your company, but my experience is that it would be almost impossible (and exceptionally tedious, as you noted) for an AM across 20 assets to be creating day-to-day operating budgets from scratch with a useful level of detail and accuracy.", "replies": [{"id": "ix218v8", "text": "You're absolutely right. We use Yardi and have an initial 2023 budget completely filled out by our accounting team. It follows our 2022 actuals pretty closely for the large majority of line items.\n\nI guess I'm just stumped on how I can make meaningful changes to our budget. I've identified a few glaring errors (just in how the data was pulled over), but do I need to get any more granular than that? And I don't really have any guidance on molding the budget around a business plan (our value is mostly unlocked in CapEx and leasing), so it feels like I need to just \"save money\", but also not underestimate.\n\nCould you walk me through your budget auditing process, what you're looking at/trying to understand, how granular you like to get, and how long it usually takes you to finish the budget for a single property?\n\nEdit: Property types I manage are 60% office, 30% industrial, 10% retail; no MF. We have in-house PM and facilities, so our budget tracking is pretty good I'd say.", "replies": [{"id": "ix26ntm", "text": "Sure. My review starts with setting up a comparison (I create an Excel file that shows all the major revenue and expense categories) between the proposed budget, prior year budget, T-12, and original pro forma/acquisition underwriting and I use that comparison to identify any material YOY swings in revenue or expenses or major variances to pro forma. \n\nMy goal is to make sure I understand and agree with the reasoning for any of those variances, whether favorable or unfavorable. Or, if something seems off (i.e. we're spending a much higher amount on a given controllable opex line item at an asset relative to other properties), I'll take that as a sign that I need to investigate further to understand the \"why\" and see if there's an opportunity to fix the issue (can we re-bid the contract to a new vendor, restructure staffing, bring in a utility consultant to identify efficiency opportunities, etc.?).\n\nThe second part of my review involves thinking about the budget in the context of our business plan and financial objectives for the asset. Lease-up play? Okay, do the occupancy, rental rate, and TI/LC assumptions make sense for the asset/market? Stabilized cash flowing asset? Okay, are we on track to achieve an acceptable level of YOY NOI growth? If not, is it an expense issue or a revenue issue, and can we do anything about it, or do I simply need to be prepared to explain the issue to others for purposes of awareness?\n\nReview time varies but I try to limit my initial review to around 1-2 hours per budget, then there may be a couple of rounds of comments and revisions with the PM. My personal opinion is that in our role, there's diminishing marginal benefit to time spent reviewing after a certain point. Can I pick apart every single line item and ask a question about it? Sure, and I used to do this during my analyst years before I realized it wasn't efficient or all that helpful. I try to focus on big picture strategy items versus getting caught up in every little expense. To an extent, you have to trust your property management team, and if you don't, then you should probably ask why you haven't looked at replacing them.\n\nAnyways, longer answer than I'd intended but hopefully it's helpful. For reference, my portfolio consists of \\~30 multifamily assets.", "replies": [{"id": "ix2wt2z", "text": "Good answer. This is the way.", "replies": [], "depth": 4}, {"id": "ix4hugs", "text": "Your setup makes a lot of sense and I like the thought process. So helpful! Thank you!", "replies": [], "depth": 4}], "depth": 3}, {"id": "ix29rf2", "text": "This may or may not be helpful, but I work mostly on office with a decent variety in location (4-5 states) and size (50k-400k SF). \n\nThe leasing and capex plans are the bulk of what is discussed when I present budgets to our IC. I take a look at what historical leasing has been, get input from our leasing teams, and do an audit of our current vacancies and what market activity has been like throughout the year. Really, I just want to make sure that the leasing goals I present are realistic. Like I wouldn\u2019t budget 40k SF of net new leasing if we did 5k SF throughout all of 2022, unless I had a real reason to believe we would drastically improve leasing activity. As far as capex goes, I also get input from our leasing an property management teams, especially when it comes to building systems that I am less knowledgeable about. Might be able to get additional insight from a PCA too.\n\nAs far as opex goes, I typically take a pretty basic approach. Since our PMs are more in tune with expenses, I like to ask questions on what is driving increases and decreases vs 2022 actuals and the last handful of years of expenses, if available. We compare our 2023 budgets to a reforecast for the year, a T12, and our original underwriting so major variances typically jump off the page. If RET are going up because they\u2019re being reassessed, if cleaning contract expenses are increasing because of wage increases, if R&amp;M in 2022 was low because of unneeded contingencies, etc, I need to know so I can accurately explain why operating expenses are going up/down as a whole and how they shake out compared to underwriting.\n\nI\u2019m on the analyst/associate level so I wind up going into more detail than my boss, and each budget is different. I\u2019d say an initial review could take anywhere from 2-4 hours for one of my smaller deals, and 4-6 for a larger deal. Then subsequent follow ups are usually shorter, but can have multiple revisions depending on many issues there are.\n\nHope this helps.", "replies": [{"id": "ix4if6i", "text": "I like the idea of talking to PM to see what the expense drivers are for each property/the portfolio (an unusually big one for us this year was HVAC). I'll lean on them more. Thank you!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ix6ks84", "text": "Hi, follow-up question here. I know your focus is MF but I was wondering if you had an opinion on the usefulness of Argus software in commercial AM. I'm trying to improve our analysis processes as we scale up and am looking for software that could help with that. Currently using CoStar, VTS, Yardi.", "replies": [{"id": "ix6pmi6", "text": "Argus is the industry standard for modeling/valuation work pertaining to assets with commercial leases, especially once you start to layer CAM reimbursements in. Not sure of any program that better serves the purpose but it\u2019s also not my area of focus so there could always be some lesser known substitute out there. You might also look into Prophia. My firm uses it on the office side and colleagues speak highly of it, though I\u2019ve not used it myself. iLevel is also an interesting tool which serves a variety of purposes and communicates directly with Yardi data.", "replies": [], "depth": 3}, {"id": "j129x30", "text": "&gt;What property types do you asset manage? Do you have a property management company/companies handling the day-to-day operation of the assets? I'm also a PERE AM and the management companies are usually responsible for initial creation of operating budgets because they're closest to the nitty gritty detail of expenses, utility bills, service contracts, staffing, etc. The asset managers then review and provide feedback on the initial budgets based on business plan objectives, but we aren't setting up the first drafts. I know different firms are structured in different ways so this approach may not be applicable at your company, but my experience is that it would be almost impossible (and exceptionally tedious, as you noted) for an AM across 20 assets to be creating day-to-day operating budgets from scratch with a useful level of detail and accuracy.\n\nHi u/micipolo, I'm looking for an opportunity to learn more about the processes and reporting work you have to do at a PE firm and was wondering if there would be an opportunity to chat? In exchange, my partner and I can help you with automating any tech work or reporting or anything that you need including building a website etc.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ix4pugs", "text": "You are right - just by looking at YTD expenses it won't give you a good picture of the property performance.\n\nThis is my budgeting process that I typically follow:\n\n**STEP 1 - Asset Strategy**\n\n1) Determine Leasing Strategy (analyze expected vacancies, renewals, current market conditions (supply &amp; demand). Establish leasing rates. \n\n2) Determine Capital projects (create inventory list with all major components in the building and track installation date, useful life and replacement cost). Establish capital projects based on the condition of the building and the leasing strategy.\n\n&amp;#x200B;\n\n**STEP 2 - Expenses**\n\n1) Calculate the Forecast for the current year and analyze the Forecast vs Budget.\n\n2) Determine :\n\n\\- Property Taxes (discuss / review with a tax consultant); based on the market conditions I budget 5-7% increase\n\n\\- Insurance (discuss with insurance broker)\n\n\\- Utilities (analyze the data from current year , consumptions , rates and adjust the prices based on the proposed rates in the area)\n\n\\- Service Contracts (add all recurring contracts such as HVAC, roof, fire and life safety, security, janitorial etc)\n\n\\- Salaries (building operators, management , on-site staff)\n\n\\- Management Fees\n\n\\- Calculate Recoverable Capital for existing and proposed projects\n\n\\- Non-recurring expenses \n\n\\- Add other Non-Recoverable Expenses such as LL work &amp; related expenses\n\n\\- **Analyze cost ( psf)** all the proposed expenses vs other properties in the area to see how competitive the property is in the market\n\n**STEP 3**\n\nAnalyze Expenses - Current Budget vs Forecast and Forecast vs Proposed Budget\n\n**STEP 4**\n\nDetermine Revenue - base rents, Cam charges, other revenue.\n\nPay attention to the CAM charges to make sure all the expenses allowed by the leases are recovered from the tenants. Look at the Recovery Ratio (the higher number the better)\n\nHopefully this helps. If you have other specific questions feel free to DM.", "replies": [], "depth": 1}, {"id": "ix4vuvb", "text": "Long time PM here\u2026.while I agree with the other posts here let me also add that preparing a budget is also an art form. There is a \u201cgut\u201d component to it.  Knowing your local market in terms of how local contractors are reacting to inflation and their increases in material costs.  (Something you can\u2019t find online). What are your local utility companies looking like.  I\u2019m in the Northeast for example and we are fascinated a diesel shortage which is driving our heating oil costs through the roof!  \n\nNot that this advice helps you for this year, however if you review your budgets quarterly you will start to see patterns and after a few years you should be pro.  \n\nAlso take comfort in knowing that many of us have been giving the same daunting task at your level.  It\u2019s part of \u201ccutting the teeth\u201d.  Be diligent, put the extra time in and it will get a lot easier.  Good luck!", "replies": [], "depth": 1}, {"id": "ix4xx8u", "text": "From a Property Manager in a decent size market:\n\nRevenue - Pull a rent roll and determine any lease bumps throughout 2023.\nGet leasing assumptions from the brokers. Just have them do this and then review their findings and adjust accordingly.\nBudget any free rent and/or operating expenses.\nBudget commissions and TI. \nMake sure any gross ups amounts are accounted for per leases. \nOperating - As others noted, make sure all monthly, quarterly, semi annuals are input per the contract. I usually do a 3% increase on anything that extends past the contract date with services that will likely continue. \nAdjust certain accounts (cleaning, utilities,etc) if leasing increases are assumed. Or move outs. Along with the standard rate increases on those items as well.\nIf a PM team is working on the asset, they may know of bigger inspections that are done every two, three, or five years that will need to be input. Infrared, arc flash, fire life safety, etc. \nWhen I\u2019m doing opex I always have a GL open looking at each account I budget for. \n\nMostly just reiterating what others have said, but figured I\u2019d put in my two cents. If you need any Property Manager perspective don\u2019t hesitate to shoot me a DM.", "replies": [{"id": "ix4yd97", "text": "Something my last Asset Management group had us do was really helpful. They had four categories on an excel: 2023 budget, 2022 budget, 2022 reforecast, 2021 budget. They had us input all number and explain any variances over $5,000 and 5%. I\u2019d adjust this threshold depending on the assets sq ft. Really put into perspective the changes and why they occurred.", "replies": [], "depth": 2}], "depth": 1}]