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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
2
This workshop is sponsored by the
Neighborhood Partnership Fund, through a grant provided by the U.S
Department of Housing and Urban Development
3
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
4
Agenda• Introductions• Overview• Regulatory Issues• Property Management• Resident Services
• Lunch• Financial Performance• Record-Keeping, Monitoring
• Wrap-up, Evaluation, Adjourn
5
With a project that looks like this how could anything go wrong?
6
Section One-Overview
7
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.
8
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
9
‘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
10
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
12
Skills Needed
• Tact• Poise• Diplomacy• Savoir-Faire• Judgment
13
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.
14
• 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
15
• Community: – city – neighbors– police – social service agencies
• Want well designed, well maintained project that is an asset to the community.
16
Section Two- Regulatory Compliance Matters
17
Key Documents
• Binder with details on funder requirements– Loan Agreements, Trust Deeds,
Promissory Notes, Grant Agreements, etc.
• Calendar indicating reporting dates, deadlines, etc.
18
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
19
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
20
Typical Requirements
• Tenant Eligibility (income, rents, targeted population)
• Occupancy Requirements• Financial (insurance, DCR,
Deposits to Reserves)• Reporting, Monitoring (funders,
IRS, etc.)
21
Tenant Eligibility
• Tenant incomes• Applicant pool- target population• Verification, certification and
recertification• Waiting Lists• Length of affordability restrictions
22
Occupancy Requirements
• Good Cause Eviction (HOME, RD, LIHTC)
• Grievance Procedure• Lease Provisions
23
Financial Requirements
• Limits on cash flow• Debt coverage ratio• Insurance requirements• Deposits to reserves and
escrows• Right to transfer property
24
Record Keeping Requirements
• Income and expense reports for funders
• Annual audit requirements • Retention of files time frames
25
Section Three- Oversight of Property Management
26
Property Management Oversight
Key Documents •Management Plan and
Policies•Management Contract•Lease•Occupancy Rules
27
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
28
Oversight of Physical Assets
• Relation to Design• Relation Between Physical
Problems and Financial Problems
29
Section Four- Resident Services
30
Resident ServicesKey Documents
• Relevant Parts of Funding Applications
• Resident Services Plan• Agreements with other entities for
provision of resident services
31
Section Five- Financial Performance
32
Key Documents
• Annual Budget• Monthly Financial Statements
– Income Statement– Balance Sheet– Rent Roll
• Annual Audit
33
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
34
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
35
Key Risks to Financial Viability
• Revenue Risks• Operating Expense Risks• Initial Debt Structuring
36
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
37
Revenue Risks
• Insufficient Rent Increases• Rent Collection Problems• Vacancies• “Economic Vacancy”= Uncollected
rents plus rent lost by vacancies
38
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
39
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
40
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
41
Review of Basic Documents
• Budget• Income and Expense Report• Rent Roll• Balance Sheet• Annual Audit and Tax Return• Organization’s Financial
Statements
42
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
43
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
44
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?
45
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
46
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
47
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
48
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?
49
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
50
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
51
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.
52
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
53
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
54
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
55
Section Six- Record Keeping, Reporting,
Monitoring
56
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
57
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
58
PRESENTER CONTACT INFORMATION
Leon Laptook, Director Community Development Law Center
921 SW Washington, Suite 454, Portland, OR 97205503-471-1180; [email protected]
Charlie Harris, Housing Development ManagerCASA of Oregon
212 East 1st StreetNewberg, OR 97132
503-537-0319; [email protected]