Issue #03 | Article 03 / 04
How to budget in the current inflationary period
Find out what our experts are telling clients when it comes to budgeting in the current landscape.
Last updated: December 1, 2022
Fiscal responsibility is increasingly important in today’s economic environment of uncertainty. Among our core strengths is helping find efficiencies and plan for tomorrow – not just next week or next year but many years or even decades from now. We spoke with three leading experts at Avison Young who have their fingers on the pulse, to find out more about the type of counsel they are providing to clients.
Extra effort in examining assets can pay off financially
- Municipalities will be challenged to limit tax increase while delivering services. Owners and investors should examine each asset by refined region and property type, and not applying a broad-brush approach to all properties.
- Good corporate citizenship does not preclude owners from respectfully challenging their property assessment and taxes.
- Always seek guidance from your advisor before responding to municipal inquiries.
When it comes to your area of property tax, what is the biggest challenge your clients are facing when it comes to looking at budgets in this inflationary period?
Laurel: Uncertainty. Large Municipalities have been feeling pressure for some time to limit property tax increases. In an inflationary environment, stakeholders are only going to increase that pressure. It will be a challenge for municipalities to limit tax increase while delivering services. Additionally, inflationary periods are not necessarily aligned with higher valuation and taxes. A challenge for owners and investors is having to examine each asset by refined region and property type, and not applying a broad-brush approach to all properties, for budget forecasting. This takes some extra effort however the accuracy translates to confidence and positive performance of the asset.
What one piece of advice would you give in this economic environment?
Laurel: Whether your asset is in a robust or chronically vacant marketplace, the advice we extend to our clientele is to be diligent in reviewing every property assessment and seek our expertise any time there is a physical or significant tenancy change. Fervently pursue issues that will reduce your asset’s taxes to within the baseline of comparable properties or, even better, below competing properties. Good corporate citizenship does not preclude owners from respectfully challenging their property assessment and taxes. You only get so many chances up at the plate – and no one ever gets a hit by not swinging the bat. Our simplest advice: file an appeal and find an expert that will leave no stone unturned in trying to find savings.
What’s the most-often-made mistake you’re seeing among commercial real estate clients that you feel could be easily rectified?
Laurel: Too many real estate owners are responding to inquiries for information from municipalities without seeking guidance from a tax professional to understand the implications of providing the information. Always ask your advisor if this is the information to provide or if it should be provided in the manner that you were going to send it. Another mistake we often see is clients assuming their asset is correctly assessed, thinking that it does not have uniquely different characteristics which merit closer examination and consideration of a lower value than seemingly comparable properties.
Headwinds and Tailwinds
As businesses navigate opportunities and threats, “Headwinds & Tailwinds” aims to help decision-makers by answering key questions affecting Canadian businesses today.
No crystal ball for mergers and acquisitions
- The last two years have seen a strong mid-market M&A sector, but this may be impacted as the days of cheap capital are gone for the foreseeable future.
- Forecasting based on previous year performance is ineffective in this environment of swift change. Ensuring management of inflationary risk and having a well-capitalized balance sheet is key.
- A key trend is an increase in due diligence from counterparties as we face economic headwinds; having a capable M&A advisor can help secure the best transition possible.
Are you seeing any trends around how businesses are transitioning in/out of markets?
Aaron: Despite current economic uncertainty impacting transition activity, the last two years have seen a strong mid-market M&A sector with business owners looking to sell externally – rather than transitioning internally to a family member, for example. Our role as M&A advisors at Avison Young is to help business owners realize the best value for their business through an extensive and professional process. We work to have a deep understanding of the business, industry and owner motivations in order to help secure the best transition possible from both a monetary and lifestyle perspective. A key trend we are seeing is an increase in the due diligence process from counterparties as we face the current economic headwinds. Due diligence can be invasive and time consuming, another key reason why having a capable advisor is key to securing a best transition possible.
What’s the biggest challenge when it comes to looking at budgeting in the inflationary period for your clients?
Aaron: Typically, clients are accustomed to operating in a fairly stable environment where inflation-driven financial impacts can be reasonably forecast. Now, in this environment of swift change, if you’re budgeting based on the previous year, you’re going to get caught flat-footed, unfortunately. It’s especially tricky right now as some inflationary pressures are easing while others are gathering steam. While we don’t have a crystal ball, we can help business owners better plan for inflationary impacts in their business as there is an incredible amount of nuance that sits behind the headline inflation numbers. In the end, the best thing to do to manage inflationary risk – and other risks – is to have a well-capitalized balance sheet.
In your conversations, is there anything recurring -- When the phone rings, you can predict what the person is going to say because it seems to be the question of the day or the general mood?
Aaron: It’s hard to have a unique answer here – but it’s interest rates first and foremost. We have become accustomed to easy access to incredibly cheap capital and, frankly, those days are over for the foreseeable future. Central banks are in a precarious position of aggressively pushing monetary policy in an effort to push down inflation without completely crushing economic stability. Key economic indicators are showing this is starting to have an impact but we remain in uncertain times where central banks are going to keep their foot on the gas, raising rates into the slowing economy. Business owners and prospective buyers are looking toward 2023 with ample uncertainty around economic health. The market is in a unique situation where negative economic news is having a positive impact as the read-through is that central banks will ease off on their interest rate hiking plans.
With decades of experience, Avison Young’s team of professionals is uniquely positioned to work closely with clients on property conversions, supporting all life stages of a project from start to completion.
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