OPERATING EXPENSE RULES OF THUMB COMPARISONS Understanding IREM Income/Expense Reports

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1 OPERATING EXPENSE RULES OF THUMB COMPARISONS Understanding IREM Income/Expense Reports We were recently discussing operating expense rules of thumb with one of our clients. IREM (The Institute of Real Estate Management) provides the most thorough guidance on this topic via income and expense surveys that IREM members (like MEB) participate in annually. IREM produces a book each year with a wealth of statistics related to apartment operations across the country. Interpretation of the IREM reporting requires an understanding of the statistical methods used and can be confusing at first glance. We ve prepared this white paper to summarize the most useful information from the book and provide tips for analysis of the data. The IREM Income/Expense Surveys provide property managers with a useful tool to analyze and measure operating results and budget for the future. In this report, we re providing an overview of pertinent operating expense categories for 6 metro areas. Each expense category is expressed on an annual basis by: Median cost per unit Median cost per square foot % Of Gross Potential Income We ve chosen the following expense categories that we think are most reliably reported by IREM and useful for basing projections: Total Operating Cost Salaries and Personnel Real Estate Taxes Insurance Water and Sewer Provided on the following page are statistics on Phoenix, Tucson, Albuquerque, San Antonio, Dallas, and Houston. 1

2 COMPARISON OF IREM MEDIAN EXPENSES IN SELECTED METRO AREAS TOTAL OPERATING EXPENSES BY METROLPOLITAN AREA: IREM Median CITY $/Unit $/SQ FT %GPI Phoenix $3,780 $ % Tucson $3,839 $ % Albuquerque $3,827 $ % San Antonio $4,046 $ % Dallas $4,326 $ % Houston $4,427 $ % SALARIES AND PERSONNEL COST IREM Median CITY $/Unit $/SQ FT %GPI Phoenix $1,167 $ % Tucson $1,147 $ % Albuquerque $1,017 $ % San Antonio $1,123 $ % Dallas $1,080 $ % Houston $1,090 $ % REAL ESTATE TAXES IREM Median CITY $/Unit $/SQ FT %GPI Phoenix $557 $ % Tucson $406 $ % Albuquerque $569 $ % San Antonio $990 $ % Dallas $803 $ % Houston $778 $ % INSURANCE IREM Median CITY $/Unit $/SQ FT %GPI Phoenix $145 $ % Tucson $111 $ % Albuquerque $137 $ % San Antonio $188 $ % Dallas $204 $ % Houston $441 $ % WATER & SEWER Common Area + Apartments IREM Median CITY $/Unit $/SQ FT %GPI Phoenix $400 $ % Tucson $459 $ % Albuquerque $220 $ % San Antonio $434 $ % Dallas $513 $ % Houston $491 $ % Question? Call Melanie Morrison, CPM (520) Or melanie@mebmgmt.com 2

3 MORE DETAILS, PLEASE! For those of you who want to get more into the trees on these numbers, we ve included copies of the IREM report for each of the Metro areas (see last section of this report). We ve also highlighted the categories that we feel are most useful. (We d suggest that you review the comments below prior to-or as you review the individual reports). The first thing to know about the IREM reporting for each metro area is that the numbers don t add up at the bottom! Why not? IREM reports median numbers rather than averages to reflect more accurate comparisons in each of the categories. So, the numbers in each of the categories do not add up to the Total All Expenses category at the bottom of each page. Property managers use a variety of charts of accounts, so it is very difficult to get apples to apples comparisons on all categories. Because of this factor, the number of buildings included in each category will vary. When reviewing these individual metro reports, the following tips might help in your analysis: Note the number of buildings participating in the results for each category. That gives you a good idea of the sample size (the more buildings that are included, the more accurate the median number reported is likely to be). The number of buildings included in each category is shown in parentheses in the first column. At the bottom of the report for each city, note the Total All Expenses category. This relates to the Total Operating Expense category on your financial statement. The Payroll Recap line is a SEPARATE comparable number that is included in the Total All Expenses line and includes all payroll (both maintenance and administrative). Carefully review the utility comparisons. First, understand that CA stands for Common Area (not California!). IREM attempts to separate buildings that provide utilities to the entire property from buildings that provide the utility to common areas only. Sometimes there just aren t enough buildings in the survey in each of these categories for the numbers to be reliable. For properties in AZ, where we have quite a few chiller buildings, we have to take more precaution with the numbers. The IREM surveys do include some chiller properties, which tends to drive the operating expense medians higher. 3

4 We keep in mind that the Total All Operating Expense may need to be adjusted to more accurately reflect assets with individual A/C vs. chiller properties. Because of the chiller property factor, we adjust the Total All Operating expense down for individually metered buildings and up for chiller buildings. Property Taxes and Insurance are great stats to have and we think these are very reliable. Since most buildings provide water for both common area and apartments, we also feel that the stats for water and sewer (CA & APTS) are very reliable and useful in budgeting. Keep in mind that you can get very different results when calculating statistics based on per unit, square foot, and % of GPI. We haven t discussed much info related to the income portions of the IREM reports and, frankly, we don t focus much on these comparisons since each building is so unique. We do like to note the concession and vacancy percentages, as well as the Total Rents Collected for each market. Of course, every building is different! So, we are careful not to get too hung up on market statistics in either the income or expense results. We encourage our District Managers and site personnel to always compare their actual results with the IREM stats and analyze any categories that are off base. There could be a number of reasons for differences since each property is unique. The IREM reports offer us a terrific template to measure our results and a useful tool in analyzing how we can create the most value for our clients assets. Feel free to contact me with questions or comments! Melanie Morrison, CPM (520) melanie@mebmgmt.com Individual Metro Reports Are On Following Pages! 4

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