The Digital Decide: Using Asset Management Software

Calculating an internal rate of return can be difficult. Discounting cash flows can be time consuming. Analyzing investment options can be confusing. Fortunately, today’s property managers will frequently use investment analysis software to perform these tedious tasks.

When projecting lease revenue and the timing of income and expenses, financial analysis software combines all of the variables and produces a net result. The resulting matrix of returns using alternative assumptions becomes a useful tool in assessing risk, as well as establishing best-case and worst-case scenarios and predicting a most likely outcome.

There are many software packages on the market. Before settling on one, you should familiarize yourself with the features available in each, and compare these to your actual needs. For example, you may only need to perform simple projections or only very complex, comprehensive ones. Or you may need a system flexible enough to do both.
What If…
What if you need to provide your largest tenants with added incentives to re-up? Are they worth it? What if the promised pie-in-the-sky, 50 percent energy savings on an energy retrofit turns out to be closer to 15 percent? Is it still a worthwhile investment? Maybe.
Software can help property managers balance different trade-offs of a transaction. Consider, for example, a tenant who wants a $30 per-square-foot tenant improvement allowance, even though the market rate is normally $20/sf. Using the software, you can readily compute the necessary rate needed to maintain or enhance the value of the property. The reverse would also be true if a tenant wants a lower rent, but can accept the property with minimal improvement dollars. Your financial software will allow you to compute an acceptable rental rate that assumes reduced front-end costs.
The right software package can simplify the management of current assets. But, possibly more valuable, it can also be used to predict future performance. Assets can be easily stress tested to see how they will react to changing variables. Depending on the software package you choose, these variables may include:
  • lease rates
  • free rent
  • discount rates
  • interest rates
  • inflation
  • downtime
  • vacancy allowances
  • residual sales prices
  • tenant renewal probabilities
In addition to these tools, software packages often allow you to:
  • create basic to complex recoveries
  • calculate percentage rent for leases
  • make forecasts for real estate projects
  • create cash flow and variance report formats
  • summarize accounts grouped together or shown individually
  • define simple or complex partnership and joint venture analyses

In addition to current assets, you can forecast hard and soft costs and required funding associated with construction and development projects. Acquisitions, development, renovation, redevelopment, or unit sales projects can be specified.
Information In, Knowledge Out
Before you can generate any sort of report, you need to provide your software with some data. You can enter a wide range of data, including:
  • inflation (for example, general, market rent, expense, CPI)
  • lease rates (for example, office rental rates, retail rental rates, lease renewal rates)
  • building areas (for example, net rentable area, usable area, occupied area)
  • tenant improvements and leasing commissions
  • vacancy allowance/credit loss
  • sales volume (percentage rent)
  • downtime and rent abatement
  • revenues and expenses

By inputting high-quality data, property managers and owners can project the lifecycle performance of assets, from investment and partnership to financing, development, leasing, maintenance, and disposition. Using software specifically designed for asset management can eliminate errors, tedious adjustments, and latency issues inherent in spreadsheet forecasts. It will also allow you to allocate revenue or expense, profit or loss based on the percentage of participation of specific partners or equity providers.
Intelligent decision making can be enhanced by using the right software package. Many packages will generate reports to simplify examining debt ratios, consolidations, and portfolio sensitivity.
But, a Decade of Data
Many managers already use spreadsheets to track and predict property performance. There is a natural reluctance to shift to more sophisticated tools because those spreadsheets seem to be doing the job, and the task of manually transferring as much as a decade of data to a new system is too daunting.
However, using dedicated software simplifies this complicated process. Many packages will integrate with property management and general ledger applications. Many also have the ability to import data from Microsoft Excel spreadsheets, Access databases, or other sources, thus eliminating manual data entry, which increases efficiency and ensures greater accuracy. You can import data such as revenues, expenses, a chart of accounts, and tenant data such as lease rates, tenant improvements, and leasing commissions, along with customizable data fields.
This article is adapted from BOMI International's course Budgeting and Accounting, part of the RPA® designation program. More information regarding this course is available by calling 1.800.235.2664. Visit BOMI International’s website, www.bomi.org.

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