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t’s hard enough to budget the correct amount of moneyfor Christmas gifts, let alone for an entire operatingyear in the multifamily housing industry.

While it may not be a major crisis if the Justin Bieberposter you promised your daughter for her bedroom wall is 5 percent more expensive than you anticipated, it is a seriousproblem if a community’s budget goes over by that amount—potentially putting your company more than $1 million in the red.

Consequently, it is imperative that apartment manage-ment companies have a firm grasp on the budgeting processand deliver the revenue promised to the owner at the start ofthe year. At the end of the day, if the owner isn’t happy,nobody is happy.

Following are tips and strategies that Nick Alicastro, Vice President of Business Development for Western NationalProperty Management, uses to create an effective annualbudget.

1Start Early. In early spring, Alicastro’s Irvine, Calif.-based team, which manages 24,000 units, begins the

budgeting process for the coming year. The capital expenseteam, regional managers and vice presidents tour every com-munity to determine the upcoming or immediate needs froma capital perspective. Additionally, every apartment is walkedby the onsite team and regional manager, who evaluate thecondition of the flooring, appliances, counter surfaces, cabi-nets and A/C units.

The purpose, Alicastro says, is to obtain an accurateassessment of each apartment home in order to determineprobable turnover costs. An extensive exterior review of eachcommunity is conducted to identify additional deficiencies.After such assessments are complete, Alicastro’s team deter-mines the capital dollars needed for each community duringthe next five years.

“The process is with much thought and provides anexceptionally accurate idea of the condition of each occu-pied apartment as well as a full understanding of short-termand long-term capital needs,” says Alicastro. “The necessityof providing ownership with an accurate representation of anticipated cash flow in the short and long term is crucial to the approval and completion of the anticipatedcapital projects. Accurate findings and estimations will givethe owner the ability to make decisions now that mayimpact cash flow and distributions in the future. At the end of the day that’s what they care about—a consistent andaccurate projection of returns and cash flow, with very fewsurprises.”

2Do Your Research. After all buildings are walked, theteam collects and solidifies hard bids from vendors, sup-

pliers, contractors and service providers for items that needto be addressed in the coming year. Alicastro says companiesshould not assume a project or service will be priced thesame the following year.

At the end of the summer, the team begins to load current-

Strategies to create an effective—and accurate—annual budget.

BY LAUREN BOSTON

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year operating numbers. At this point, a great deal of time isspent forecasting the balance for the rest of the year, and byOctober, a precise picture of the financial situation for theremaining months is evident.

“It’s imperative that we accurately express year-over-year revenue growth assumptions to our owner,” Alicastro says. “If a management company under- or over-projects current-year performance, the year-over-year figures are not accurate and mean less to the owner.”

3 Understand Your Market. During the budgeting processfor the future year, Alicastro’s team relies on economic indi-

cators, such as housing starts, new multifamily development andrenovations on existing multifamily communities, employmentstatistics and new industrial and retail construction. WesternNational also hires economic consultants who use a variety ofmacro and micro metrics to determine growth expectations forthe coming year.

Alicastro says it is also important to network with industrypartners to develop relationships and understand their currentand future projects..

“A property management company must know the conditionsof current markets and consider other competing communities’current and future goals or plans to enhance their own commu-nities,” Alicastro says. “A new lease-up or a change in leasingvelocity within the market could substantially reduce a commu-nity’s revenue.”

4Pick up the Phone. When determining the coming year’sbudget, Alicastro says his team thoroughly investigates prop-

erty tax fluctuations, anticipated property insurance costs, salaryadjustments and utility increases. Western National personallycontacts the utility companies to determine what increases maybe anticipated for the upcoming year. “A commonly known mis-take is to calculate a 3 percent inflationary cost against actualnumbers, however, it generally doesn’t reflect true numbers,” hesays.

5Sometimes, You Can’t Cut Corners. When consideringtotal operating expenses, Alicastro says payroll, insurance,

utilities and taxes are cost-drivers that may impact future needsof the community. “These are fairly consistent numbers thatdon’t deviate very much year-to-year and aren’t areas whereyou’re going to save a great deal of money,” he says. “There’svery little mobility up or down.”

However, Alicastro says a careful review of these line itemssometimes can yield gains. Changing insurance companies orcoverage, reducing staff, combining staff with other communi-ties, negotiating a new term with utility companies, implement-ing green solutions and appealing property taxes are ways in

which favorable savings may be obtained.Alicastro says with proper research, insurance and taxes are

easy to accurately budget. Payroll isn’t difficult, either, becauseWestern National Property Management budgets for base payroll,overtime, commissions, renewals, health insurance, taxes andworkers’ compensation.

When budgeting for payroll, Alicastro’s team reviews last year’sapproved budget and compares it to the new proposed budget. Hesays there should only be a modest increase based on the market-rate salary increase, assuming no change in the number ofemployees budgeted for that community.

“Usually, large year-over-year (actual versus budget) variancesreflect open positions in the previous year that could negativelyoffset the year-over-year numbers, in addition to overtime, com-missions and health insurance,” Alicastro says. “All deviationsshould be understood and explained to ownership. It may looklike you are asking for a 20 percent increase in payroll, when inreality you had an open position or positions that are creating afalse sense of savings.”

To avoid major budget discrepancies, Alicastro says the com-pany has an internal analyst whose sole responsibility is review-ing utilities, normalizing them and projecting costs for thefollowing year.

6 Be Realistic and Hit Your Target. If Western NationalProperty Management is 1 percent or 2 percent under or

over its budget each year, Alicastro says the team may not havedone enough accurate homework.

“That may not seem like a big deviation, but when you’redealing with a $20 million to $40 million business, 1 percentmakes a big difference,” he says.

While his team never wants to exceed budget, Alicastro saysthat if his company is significantly under budget, they risk beingaccused by their owners of “sandbagging” their numbers orbeing incompetent property managers.

“A good explanation should be prepared for any variance atthe end of the fiscal year to create an operating budget that isaggressive but attainable,” he says.

7More Eyes—More Accurate. Once the team hasreviewed a plethora of reports that compare the portfolio’s

communities and created an accurate forecast, Alicastro says theproposed budget is sent to the regional vice president followed bythe vice president and president. Ownership gives final approvalby the end of November.

Just in time to start worrying about holiday presents.

Lauren Boston is NAA’s Staff Writer. She can be reached at lauren@naahq.org or 703/797-0678.

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