Fiscal fundamentals: research, order and organization are required when devising an annual budget.

A well-organized budgeting plan is the key element to an efficiently run apartment portfolio. An apartment manager's ability to thoroughly evaluate every aspect of each community under management and allocate the proper funds to maintenance, upgrades and services is essential to both near-term and longterm success.

This process toward success starts with research. Before beginning budget preparations, conduct a comprehensive analysis of the economic trends that are shaping the market. What types of upgrades are attracting new residents? What does the competition spend its money on? How much will service providers and utility companies increase their costs? Implementing a broad survey of the market will better equip owners with the knowledge needed to execute a solid budget.

Complete due diligence and then build the budget from the ground up, via the use of "zero-base budgeting." Because finances vary each year, zero-base budgeting helps to achieve the optimum value from available funds from year to year. Every dollar spent on items throughout the year, ranging from utilities to landscaping, must be justified. Zero-base budgeting helps to control expenses by building the budget from zero, without focusing solely on funds spent on items in the previous year. Have last year's records handy for reference, but always start from scratch.

Devising an annual budget is a complex and often arduous process. To ensure that every aspect of the portfolio receives proper attention, lay out the budget process on a month-to-month basis, with each area of the budget receiving a clear set of expectations and goals. This process, which should begin early in the year, will ensure that the budget's forecast is as accurate as possible.

Below is a sample of a six-month budget plan, outlining each critical element to be addressed each month.

Month 1

Month 1 occurs seven months from fiscal year end. Management should evaluate the current condition of the community, including the inside of each apartment home, garage and carports, and complete a unit-by-unit inspection. Evaluate each apartment home for the condition of the flooring, appliances, systems and fixtures, and conduct the annual smoke alarm and HVAC filter checks. The summary of the inspection will be a solid backup for any interior capital expenditure budgeting.

Month 2

Once managers make an interior assessment of each unit, a capital expenditure team should evaluate exterior areas, such as asphalt, paint, wood and building systems. Because many of those elements enhance the look of the community and help to attract prospective residents, management may see a decent return on their investments through the upgrade and maintenance of these areas. The capital expenditure team should meet with property management to determine the overall condition of the property and decide what must be replaced and what can be upgraded.

Month 3

Work with service providers to set assumptions for variable items throughout the communities, such as furniture, services, turnover costs, media sources and landscaping, to see if any adjustments to costs are going to be made in the near future. Look into new initiatives for cost-saving strategies, such as ways to save energy.

Month 4

Determine the overall expenditures needed to mitigate risk. Hire a risk management team to inspect signage, trip hazards, decks and railings, systems maintenance, shops, pools, lighting, amenities, storage areas and potential moisture issues. Once those variables have been evaluated, prepare a risk report and incorporate expenditures into the budget. Contact insurance companies for a review of policy and costs.

Account for all costs such as phones, computer equipment and software. Each department in the management company should be responsible to submit forecasts of expected cost increases or decreases including training, human resources and accounting and information technology.

Month 5

Gather regional, local and submarket data to make a thorough market assessment. Evaluate economic trends such as job growth, home prices and affordability, mortgage rate forecasts and current and historical rent growth, or hire an economic forecaster to evaluate data specific to the company's communities. Many finns provide historical and current rent trends data by submarket, and local and regional economic forecast seminars and Chamber of Commerce data are also very informative. Finally, meet with owners to determine their goals for the near and long terms.

Evaluate exactly where the community is positioned in the market through a comprehensive market study covering current rents versus rents across the submarket. If the community's rents are below the current market, its forecasted growth may be higher than anticipated.

Determine if the community needs interior upgrades. It is possible for management to command higher rents by installing new appliances or upgrading countertops and cabinets. However, be cautious of setting a price on an upgraded unit that is equal to, or higher than, a new product.

Evaluate the loss to lease (the difference between market rent and the community's lease rent) to make assumptions for scheduled rent growth. Evaluate the renewal plan and lease expiration grid by month to determine how much of an increase current residents will get and how much turnover will occur at the community in the upcoming year. Lowering the turnover will help to keep costs down, but will also make it difficult to recapture loss to lease.

Determine payroll assumptions, which includes a review of current staffing needs and recommendations for changes, as well as salary increases.

Invite decision-makers to the community to preview the forecasted capital expense budgets.

Look closely at the foreseeable return on investment and ask the following:

* Is this a "want" or a "need?" If the item does not enhance revenue, decrease expenses or preserve the asset, it may be tough to justify the expense.

* Have managers conducted all necessary research to determine if they have a good estimate of the cost, time to implement and return on investment?

* Would managers advise their own mothers to spend the money? This question usually puts the proper perspective on the request.

Month 6

Put the data into the budget template. Begin with the onsite manager's contributions and then work the budget up the ladder for review and revisions. Include a comparison of the "controllable expenses per unit," which allows a side-by-side comparison of similar communities. Many management companies set benchmark numbers for expenses and require explanation when a community is budgeting significantly higher or lower than the benchmark.

Finish the business plan. A good business plan includes all market data, a thorough explanation of each budget category and the assumptions managers used. An executive summary section includes comments on staffing, market conditions and strategies, renewal and leasing strategies, cost reduction recommendations and the overall goals for the community in the budgeted fiscal year. This section also should include a discussion of the results from the current year and what changes may need to be implemented to improve results going forward.

Cindy Shepardson is Vice President of Operations for Western National Property Management, Irvine, Calif. She is responsible for the Western National Property Management portfolio, encompassing 27, 000 units throughout the western United States. She can be reached at [e-mail].