I am struggling to create a solid modeling methodology for forecasting operating expenses during the pre-leasing and lease-up phases. Do any of you tie escalation of payroll and contract services to occupancy targets? Is there a standard market practice for traditional multifamily?
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I usually just assign a "fixed %" factor to each expense line item in order to address that. So for example property taxes would be 100%, but something like R&M I might set at 50%. So your model would run (Budgeted R&M * .5) + (Budgeted R&M * .5 * Physical Occuapancy %). It's not rocket science but it's close enough.
yeah this is generally fine. Variable expenses that fluctuate with occupancy generally include unit turns, R&M, and utilities. Contract services, G&A, salaries are generally fixed--you are going to pay them the total monthly contract value regardless of how many units are leased.
Thanks. This is what I am currently doing, but do not have evidence for a best practice for fixed % per line item. Maybe I need to go through the accounting statements of past deals to solve for actual average fixed % during development/lease-up and work off of that.
run everything 100% fixed, except R&M and utilities which you can run at 35-50% fixed (assumes unit turns are included in your R&M #). You can toggle this number to cook your returns a bit within reason. Anything more detailed is an unnecessary mental circle jerk/waste of time IMO. Maybe you can run contract services a bit lower as well.
Good insight, thanks.
Contract services are only going to escalate if you sign the contracts that way. Otherwise you can delay certain services but they're going to come eventually. You can staff the management & maintenance teams gradually too to offset some salaries/employment expenses. Your management company will have suggestions for that.
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