Cash flow's other side | Four easy ways to spend less on your commercial property and improve the bottom line
Spend less than you make. It’s Financial Success 101. My attorney/father-in-law preaches it. The owner of my company has championed it. My accountant friends repeat it like a broken record. It seems every successful businessman or woman I know understands and lives by that basic principle. “Spend less than you make” is a simplified description of a successful cash flow model, and like any good commercial property owner will tell you, cash flow is king.
In today’s difficult commercial market (and in any market for that matter), increasing cash flow is at the forefront of every property owners’ priority list. In past years, raising rental rates was the obvious answer. However, it’s well documented that vacancy rates are increasing and per-square-foot rental rates are declining. Considering cash flow equals income minus expenses, let’s explore the other side of the equation. How can a property owner decrease overall operating expenses and ultimately “spend less than they make?”
Realizing value
Let’s start with the big-ticket items. In today’s market, the lowest hanging fruit is property taxes. Every piece of real estate has an assessed value that the town or city applies via an internal valuation process. Now is the time to scrutinize that assessed value and, if appropriate, request a tax abatement. If the property was reassessed within the last three to seven years, its assessed value is likely inflated given the real estate boom in the middle part of the decade.
All it takes to challenge the assessed value of your property is a call to the local assessors’ office, a few pages of paperwork and some evidence supporting a decrease. That evidence can include a broker’s opinion of value, an updated appraisal, recent comparable sales or data showing nearby rental and vacancy rates. The only downside to getting the assessed value of your property lowered is that a prospective buyer may use it as a general gauge of the building’s current market value. If you plan to sell your building in the short term for significantly more than its assessed value, a tax abatement may be a bad idea. If you’re planning on a long-term hold and are looking to save some bucks on operating expenses, call your local tax assessor today.
The second step to lowering your operating expenses is an easy one. Shut the lights off. If not properly monitored, utility expenses can account for up to 40% to 50% of operating costs for a commercial building. However, each utility (whether gas, electricity, oil or water) can be tracked and managed. Every year, property owners should run an internal energy audit. The most common step is upgrading lighting. Replacing older T-12 fluorescent fixtures with T-8 fixtures and electric ballasts will return your investment within two years. You can also add timers and motion sensors. Furthermore, there are a number of grants and government rebate plans to encourage energy improvements that can also offset initial costs.
The importance of managing utility costs is reflected in more places than just the bottom line. We recently had a commercial office building under contract for sale. Initially, the numbers looked pretty good; solid income, reasonable taxes, insurance and management costs. However, when the buyer took a closer look at the electricity and HVAC (powered by natural gas) costs, he was blown away. The building was built and designed in an extremely inefficient manner. Mainly for that reason, the buyer voided the deal.
Comparison shopping
Two other line items to scrutinize on your expense sheet are management and janitorial costs. Management companies are like anything else — you get what you pay for. If you want top of the line management, bookkeeping, tenant relations, etc., be willing to pay a premium. Not having to deal with the consistent headaches an investment property can bring is often priceless. However, if you own a smaller, less management-intensive investment property, take a closer look at what you’re being charged. Make a couple of phone calls and shop around. Better yet, call other landlords and ask for referrals.
The same can be said for your janitorial service. They are vendors like anyone else and have competition, which can be good for landlords. It’s worth calling around to make sure the service you are getting is at a rate consistent with, or better than, the market.
Rather than asking “How can I make more money?” consider “How can I spend less money?” Your homework for the week is to take out your balance sheet and do an inventory of what expenses can be lowered. If analyzed carefully and creatively, you’ll find your cash flow and your overall profit margin will significantly increase.
Justin Lamontagne, associate broker at CBRE/The Boulos Co. in Portland, can be reached at jlamontagne@boulos.com. Read more of Justin’s columns here.
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