Got into a discussion today. Basically which cost does your firm consider controllable vs non controllable?
Utilities and Management Fees seem to be the two that cause confusion. Seeing as we could replace our management team but might have trouble turning off the utilities...
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Hi Sham Wow, check out these resources:
Fingers crossed that one of those helps you.
Non-controllables traditionally include property taxes, insurance, management fees. These are items that you are going to pay whether the building is 0 or 100% full.
Utilities are a fixed, variable expense--you will always have some utility expenses (to power the building systems, common area lighting/HVAC, security systems, etc.), but the utility costs will also move up or down depending on occupancy...kind of a hybrid of fixed/variable.
There are also often programs or efficiency upgrades one can invest in to help control utility costs. Now, whether they make sense is another story entirely, but there is usually a way to reduce annual opex if you're willing to invest in capital upgrades.
You could also change the management team and then that cost would move. Management fees are usually also tied to revenues, which means that they could qualify as a a fixed variable cost just like utilities.
Basically we talked in circles about them, and noticed Brokers OM/Budgets sometimes mix these all up too.
I guess. But in reality this wouldn't happen. You'd negotiate with another firm and then ask your current management company to match that price. You can also contest your tax bill to your local department of finance (or whoever sets the tax rate). I think the point is more that an uncontrollable cost is one which someone else is setting. Taxes and insurance and management all fit that bill - a third party is dictating rates. You can shop that, but at the end of the day you don't control it. I don't view utility expense in quite the same way.
If you know the market you can also reasonably expect to decrease insurance costs.
insurance tends to go up unless you are doing some major exterior renovation for HVAC, roof, siding or you have an umbrella insurance that let's your costs go down. makes no sense for the cost to go down when you are paying more $$$ PSF for the asset.
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