It’s a bit weird to begin budgeting for the upcoming year without passing the half way mark in the current year. For many Hines buildings, the following year’s budgets are not due to the investors/owners until September or October. Internal reviews begin much earlier and culminate in a detailed package about each project, the operational performance and highlights from the year’s performance. This package functions as the property’s Annual Plan for the coming year. The process, review and resulting product are what make Hines one of the best in class real estate operators in the world.
The Annual Plan development starts with a complete review of the property’s current performance – marketing, finances, operations and construction – and how that relates to the current year’s budget. The projections that are compiled help forecast what the activity will look like for the remainder of the current year. The projections function as a good gut check on the status of the current year against the goals established for the year during last year’s Annual Plan process.
With the current year projections complete, it’s time to begin developing the Annual Plan for the upcoming year.
Property Condition Assessment
Projects that have traded recently can leverage the third-party Property Condition Assessment (PCA) report for potential items to include in the budget. In many cases the PCA can serve as a reference when developing a capital improvement plan for the immediate years following the report’s creation.
In the instances where a recent PCA is not available, Property Managers are tasked with developing the 15 year capital plan and necessary operating expenses to maintain or improve the property’s appearance, performance, marketability, etc. This process creates the foundation for the development of the property’s Annual Plan.
What makes up the Annual Plan?
Aside from the financials, there are a number of other components that make up a property’s Annual Plan.
- Executive Summary – essentially an overview of the project, ownership, size, debt and other key facts about the project that aid in summarizing the asset.
- Org Chart – highlights the roles of the onsite team, but also covers the details of those that support the onsite team or provide guidance, contract approval and other keys roles for the asset.
- Vision – perhaps unique to Hines; each year we define the vision we have for the project and how we plan to operate the asset in upcoming year. In 2014, the vision we set for Pleasanton Corporate Commons was: To Maintain High Water Mark Rental Rates and Enhance the Property’s Profile With Leading, Innovative, Sustainable Programs and Amenities
- Stacking Plan – A visual aid showing the tenant mix, expiration dates and current lease rates.
- Lease Related Information – Over several pages we review the tenant mix, lease expiration dates, revenue projections, debt coverage and other key financials important to fiscal and operational health of the asset.
- Team Triumphs – The teams big wins for the past year.
- Best Practices – With over 270 operational and engineering best practices developed, this takes a look at how well we’re doing implementing those practices at the property.
- Three Way Comparison – A detailed financial breakdown showing the current year’s budget numbers vs. current year’s projected numbers vs. upcoming year’s budget numbers. Significant variances are analyzed and explained.
- Value Creation – How world class operational platform impacts the overall value of an asset.
- Market Comparables – On a dollar per square foot basis, how are we performing against similar assets in the market? This is important because operating expense make up a portion of the tenant’s rent (in some leases) and it confirms spending in each category is appropriate in line.
- Annual Plan Slide – A look at what was accomplished in the past year and the defined goals that will be accomplished in the upcoming year.
While the time spent creating the budgets, annual plan and other supporting documents is immense, the package that results in the end is extremely valuable. I am a big fan of the entire goal creation and management process. Writing goals down is a practice very few people do, but has been shown to be a big driver in creating results. Adopting this concept at the building level makes a ton of sense and provides a good guide for the onsite team in the upcoming year.
Are there items you include in your budget preparations that I’ve left off this list?