Asset and Property Management: The Basics

Asset and Property Management:

The BasicsDecember 1, 2005

Presenters:Leon Laptook, Director Community Development Law Center

Charlie Harris, Senior Housing Program Manager, CASA of Oregon

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This workshop is sponsored by the

Neighborhood Partnership Fund, through a grant provided by the U.S

Department of Housing and Urban Development

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SESSION GOALS: Provide overview of real estate asset

management functions Provide tools for developing a systematic

approach to asset management activities Provide ideas for improving your

relationship and communication with your property management firm

Provide practice analyzing project financials

Have some fun, win some fabulous prizes

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Agenda• Introductions• Overview• Regulatory Issues• Property Management• Resident Services

• Lunch• Financial Performance• Record-Keeping, Monitoring

• Wrap-up, Evaluation, Adjourn

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With a project that looks like this how could anything go wrong?

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Section One-Overview

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Definitions • The active and strategic pursuit of an

owner’s long term social, physical and financial goals from predevelopment through the administration and disposition of a property portfolio.

• A systematic plan for, and ongoing oversight of, the management of one or more housing project(s) in furtherance of the project’s goals and the organization’s mission.

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Key Characteristics of Asset

Management • Social, physical and financial goals• From predevelopment through

disposition• Long term perspective• Environmentals can easily change

over the life of a project• Affordable housing has a unique set

of constraints

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‘Asset Management Happens’

• Cannot decide ‘not to do’ asset management. It happens whether anyone is paying attention or not. – Failing to act has the same effect

as actively deciding to shorten the life of the asset

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Asset Management Responsibilities

• Oversight of property management activities

• Regulatory compliance• Oversight of physical condition of

the property- with a focus on longer term planning

• Financial performance• Resident services

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G E NE RA L A S S E T M A NA G E R RE S PO NS IBIL IT IE S

F iscal Offi cer

Assure P o l icesare Co mplied

w ith

Select, EvaluateP ro perty Mgr;

Ongo ingCo mmunicatio n

P M P lan & P o l iciesP M Agreement

Lease, Occupancy Rules

P ro perty Management

Repo rts toBo ard and

Funders

Reco rdkeep ing

Funder RequirementsB inder

Regulato ry Co mpliance

Inspectio ns

Cap ital NeedsAssessmentInspectio n P lanEmergency P lan

P hysical P ro perty

Analyze Mo .F inancials:

DCR, Occ Rates Expenses

Annual Rvwo f Budgetand Aud it

Annual BudgetAnnual Aud it

Mo nthly F inancialsand Rent Ro l l

F inancial P erfo rmance

Co o rd inateRes. Services

Assure Res.P art icipatio nin Decisio n

Making

Res. Services P lanRes. P art icipatio n P lan

Resident Services

Asset Manager Maintenance Ho using Develo per

Executive Directo r

Board of Directors

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Skills Needed

• Tact• Poise• Diplomacy• Savoir-Faire• Judgment

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Roles and Goals

• Owner: wants mission fulfilled– affordable housing for target

population while fostering organization’s financial health and community reputation

• Property Manager: – wants good project with maximum

fee and minimum hassle.

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• Target Population: wants affordable, safe, secure living environment while being treated fairly.– Tenants– Applicants and potential tenants

• Funders: want return on investment, compliance with project requirements and reports– Investors (limited partners)– Lenders– Government Agencies– Foundations

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• Community: – city – neighbors– police – social service agencies

• Want well designed, well maintained project that is an asset to the community.

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Section Two- Regulatory Compliance Matters

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Key Documents

• Binder with details on funder requirements– Loan Agreements, Trust Deeds,

Promissory Notes, Grant Agreements, etc.

• Calendar indicating reporting dates, deadlines, etc.

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Financing Documents

• Grant Agreements (e.g. HOME, Housing Trust Fund)

• Loan Documents (Promissory Note, Loan Agreement , Trust Deed)

• Partnership Agreement (LIHTC)• Declarations of Land Use

Restrictive Covenants

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Federal and State Laws

• Laws related to financing subsidies• Oregon Residential Landlord

Tenant Act (ORS Chapter 90)• Fair housing laws- Make sure your

staff and property manager get training

• Americans With Disabilities Act

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Typical Requirements

• Tenant Eligibility (income, rents, targeted population)

• Occupancy Requirements• Financial (insurance, DCR,

Deposits to Reserves)• Reporting, Monitoring (funders,

IRS, etc.)

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Tenant Eligibility

• Tenant incomes• Applicant pool- target population• Verification, certification and

recertification• Waiting Lists• Length of affordability restrictions

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Occupancy Requirements

• Good Cause Eviction (HOME, RD, LIHTC)

• Grievance Procedure• Lease Provisions

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Financial Requirements

• Limits on cash flow• Debt coverage ratio• Insurance requirements• Deposits to reserves and

escrows• Right to transfer property

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Record Keeping Requirements

• Income and expense reports for funders

• Annual audit requirements • Retention of files time frames

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Section Three- Oversight of Property Management

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Property Management Oversight

Key Documents •Management Plan and

Policies•Management Contract•Lease•Occupancy Rules

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Physical Condition of Property

Documents• Inspection Plan • Maintenance Plan

– emergencies; turnover- vacancy repair and re-occupancy; routine; preventative; tenant-requested

• Emergency Plans• Insurance Policies• Capital Needs Assessment and Plan

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Oversight of Physical Assets

• Relation to Design• Relation Between Physical

Problems and Financial Problems

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Section Four- Resident Services

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Resident ServicesKey Documents

• Relevant Parts of Funding Applications

• Resident Services Plan• Agreements with other entities for

provision of resident services

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Section Five- Financial Performance

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Key Documents

• Annual Budget• Monthly Financial Statements

– Income Statement– Balance Sheet– Rent Roll

• Annual Audit

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Baseline Financial Viability

• Cover operating expenses• Keep project out of default

– Make required debt payments to lenders, primary and subordinate

– Make required reserve contributions

– Meet minimum debt coverage requirements of lender

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Additional Project Financial Goals

• Deposit additional funds in replacement reserves for long term capital needs

• Fund asset management costs • Cover resident services costs• Fund or maintain operating reserves• Support for your organization

– subsidize other projects– subsidize other lines of business– fund a portion of general operating costs

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Key Risks to Financial Viability

• Revenue Risks• Operating Expense Risks• Initial Debt Structuring

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F INA NC IA L A NA L YS IS PRO C E S S F O R A S S E T M A NA G E R

Monthly: Rvw o f P erfo rmance Stds DCR, Occupancy,Expenses, Rsv Accts

Annual: Review o f P erf Stds, BudgetAud it, Internal Co ntro l P o l icies

Rent Levels

Co l lectio ns

Vacancies& Turno ver

Increase Revenue

P ro p Mgt Fee

On- site Mgr, AdminLegal, Acctg

Uti l i t ies

Maintenance

P ro p Taxes, Ins.

Lo w er Expenses

Refi nanceInt Rate, Amo rt P er.

Mo re EquityGrants, Investo rs

Restructure

No n- P erfo rming

OK

P erfo rming

Documents: Annual Budget, Aud it

Mo . Inc/ Exp Statement, Rent Ro l l ,Bal . Sheet, Internal Co ntro ls

Financial Performance

Asset Manager

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Revenue Risks

• Insufficient Rent Increases• Rent Collection Problems• Vacancies• “Economic Vacancy”= Uncollected

rents plus rent lost by vacancies

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Comparison of Cash Flows

Comparison of Cashflow with 2%, 3% & Every Other Year Annual Increases(Every other year at 5% Increase)

(35,000)

(30,000)

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

-

5,000

10,000

15,000

Year1

Year2

Year3

Year4

Year5

Year6

Year7

Year8

Year9

Year10

Year11

Year12

Year13

Year14

Year15

Year16

Year17

Year18

Year19

Year20

Ne

t C

as

h F

low

aft

er

Se

co

nd

Mo

rtg

ag

e P

aym

en

ts

3% Annual Rent Increase 2% Annual Rent Increase 5% Increase Every Other Year

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Operating Expense Risk• Utility Cost Increases- double whammy!

– Increased operating expense– Increased utility allowance, less rent

• Maintenance Costs Above Budget– High turnover– Under-rehabbed properties– High usage population– Poor management oversight

• Unforeseen/Unbudgeted Costs

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Debt Structure Issues

• Faulty underwriting assumptions, sometimes uncorrectable even with best management:– rents projected higher than market– operating expenses projected too low– insufficient reserve contributions or

insufficient start-up reserves– debt payments too high/insufficient cash

flow

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Review of Basic Documents

• Budget• Income and Expense Report• Rent Roll• Balance Sheet• Annual Audit and Tax Return• Organization’s Financial

Statements

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Budget• Prepare with property manager; Board

should review and approve• Basis for determining whether actual

expenses for upcoming year are reasonable• Sources of data for budget• Annually update• Rent increases- Allowable maximum rents;

utility allowance updates; need; market• Replacement reserve & operating reserve

needs

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Budget (cont’d)

• Identify Trends:• Calculate CDN or other industry standards• Expenses that are consistently

higher/lower than budget or other projects• Annual rent collection as percent of rents,

how much past due, written off debt• Vacancies- specific units or unit types• Capital needs assessment- inspection

findings

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Budget (cont’d)

• Issues of concern/findings in audit?• Trends indicated policy or management

changes?• Capital improvement plan- Longer term

planning?• Financial concerns- corrected through

management changes, capital spending, changes to debt structure?

• Longer term financing requirements- LIHTC year 15, OAHTC year 20, interest rate savings?

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Income and Expense Report

• Primary tool to determine project health• Must be detailed and include current

period, year to date, comparison to budget

• Review monthly• Usually prepared on cash basis; need

statement of accrued but unpaid expenses

• Don’t be afraid to ask questions

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Income and Expense Report (cont’d)

• Income: Compare Gross rental income and Net rental income to see vacancy loss

• Add “other income” to get Effective Gross Income

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Income and Expense Report (cont’d)

• Operating Expenses– know what’s included in each line item– what’s reasonable (compare to budget)– reason for variances

• Some common issues– for high turnover and vacancies: look at

waiting list; reasons for applicant denials and tenant move-outs; make-ready time

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Income and Expense Report (cont’d)

– repairs and maintenance– insurance– property taxes- exempt? If not exempt,

valuation issues?– Include expenses manager may not pay-

audit, resident services coordinator, tax credit monitoring

– Reserves: operating, replacement, tax and insurance escrows

– Know what’s included in loan payment-mortgage P &I, reserves, fees, escrows?

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Income and Expense Report (cont’d)

• Net Operating Income= effective gross income minus operating expenses

• Debt Service Coverage= Net Operating Income divided by Debt Service– 1.2 to 1.3 Excellent– 1.1 to 1.2 Good– less than 1.1 Poor– less than 1.0 Major Problem

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Rent Roll• Use the Rent Roll in conjunction with the

Income and Expense Report to get detail on vacancies (which units are vacant and for how long), and rents collected.

• Vacancy Rate= # of vacant units total # of units

• Most underwriting pro formas assume a 5% vacancy rate

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Balance Sheet

• The project balance sheet describes the relative financial position of the project at a given point in time.

• It consists of assets, liabilities, and owner’s equity.

• Profits or losses from the income and expense report cause changes in the owner’s equity on the balance sheet.

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Industry StandardsCDN’s Industry Goals for Property & Asset Management

CDN Goals related to Financial Performance

FOCUS AREA STANDARD Operating Expenses Monitoring &

Feedback loop in place Debt Service Coverage Ratio (NOI / DS)

1.2 to 1.3 is good

Operating Reserves 3 Months of expenses & debt service available

Deposits to Replacement Reserves

Sufficient to fund projected repairs & replacements projected over the next five years

Occupancy (# units occupied / # of units)

greater than or equal to 96%

Rent Collection (NRI / GRI)

greater than or equal to 96%

Maintenance expenses within 5% of annual budget

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Annual Audit and Tax Return

• Prepared on an accrual basis• May re-categorize capital

expenses and repairs• Owner’s Board should review and

approve Annual Audit; have auditor present

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Organization’s Financial Statements

• Need to ensure that organization’s statements accurately incorporate project statements

• Issues:– cash v. accrual basis– allocation of costs between project

and organization– when does project cash flow appear

on organization’s statements

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Section Six- Record Keeping, Reporting,

Monitoring

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Monitoring, Reporting, Record-keeping

• Use of compliance charts– Rent Restriction- sources of restriction,

levels, duration,referencing documents– reporting information- with contact

persons, referencing documents– payment requirements- amounts,

duration, starting dates, contingent payment calculations, contact persons

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Monitoring, Reporting, Record-keeping (cont’d)

• Calendar with required reporting forms

• Files and filing– what’s in tenant files– what’s in project files– how long to keep files

• Don’t expect uniformity among funder reporting requirements

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PRESENTER CONTACT INFORMATION

Leon Laptook, Director Community Development Law Center

921 SW Washington, Suite 454, Portland, OR 97205503-471-1180; leon.laptook@lasoregon.org

Charlie Harris, Housing Development ManagerCASA of Oregon

212 East 1st StreetNewberg, OR 97132

503-537-0319; charris@casaoforegon.org