1 introduction to asset management community development law center 700 sw taylor, suite 310...

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Introduction To Asset Management

Community Development Law Center

700 SW Taylor, Suite 310

Portland, OR 97205and

Housing Development Center

2627 NE Martin Luther King Jr. Blvd.

Portland, Or 97212

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Presenter Information

Community Development Law Center 700 SW Taylor, Suite 310 Portland, OR 97205 Charlie Harris 503.471-1182 charlie.harris@lasoregon.org Leon Laptook 503.471.1180 leon.laptook@lasorego.org

Housing Development Center 2627 NE Martin Luther King. Jr. Blvd. Portland, OR 97212 503.335.3668 Robin Boice robin@hdc1.org Eli Spevak eli@hdc1.org

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Acknowledgments

Thank you to Neighborhood Partnership Fund for sponsoring this training and PDC for providing this space.

Thank you to HUD for the funding to make this training possible.

The work that provided the basis for this publication was supported by funding under an award with the US Department of Housing and Urban Development. The substance and findings of the work are dedicated to the public. The author and publisher are solely responsible for the accuracy of the statements and interpretations contained in this publication. Such interpretations do not necessarily reflect the views of the Government.

Thank you for taking time out of your busy work lives to attend!

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I. What is Asset Management

Definition: 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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Asset Management is generally not what we thought of when we formed our CDCs. We focused on developing

affordable housing. For many, Asset Management is a new line of business and requires thinking about how it fits with our organization's mission and goals.

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Why is Asset Management Important

Difficult to house populations Limited funds Limited ability to raise additional funds Public agencies requiring maximum

accountability

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Asset Management Specifically Involves

Making sure project: – meets owner’s social goals– remains financially viable– maintains physical quality– stays in compliance with legal requirements

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Analysis of Project in Relation to Overall Portfolio

Housing Needs of Target Population versus other Projects

Need for Cash Flow Tenant Services Bookkeeping and Record-keeping

Requirements

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Skills Needed

Tact Poise Diplomacy Savoir-Faire Judgment

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II. Asset Management Roles and Goals

People- keep owner, manager,tenants, funders and community happy

Money- Keep money flowing while keeping rents affordable– Income– Expenses– Cash Flow

Property- Keep project in good repair over life of the project

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Goals of Asset Management (cont’d)

Owner: wants mission fulfilled– affordable housing for target population while

fostering organization’s financial health and community reputation

– Note: Non-profit organization does not mean no profit. Take out “profit” and you have “non-organization”

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General Goals of Asset Management (cont’d)

Property Manager: wants good project with maximum fee for minimum hassle.

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General Goals of Asset Management (cont’d)

Target Population: wants affordable, safe, secure living environment while being treated fairly.

– Tenants

– Applicants and potential tenants

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General Goals of Asset Management (cont’d)

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

• OHCS• City or County• IRS

– Foundations

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General Goals of Asset Management (cont’d)

Community:

– city

– neighbors

– police

– social service agencies Want well designed, well maintained

project that is an asset to the community.

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Differences from Property Management

PM- Rent Collection AM- Policy on Late Payment Overlap- Tenant Relations

Workouts with Tenants ***

PM- Record Keeping AM- Reporting to Lenders Overlap- Dealing with Regulations/Obligations

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Differences from Property Management (cont’d)

PM- Monthly Financial Reporting AM- Communicating with Investors

Hiring Accountants, Attorneys, etc. Cash Management

Overlap- Annual Budgeting

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Differences from Property Management (cont’d)

PM- Management of Daily Operations AM- Development of Strategic and

Property Goals Hire/Fire/ Evaluate Property Manger Hold/ Sell/Refinance Decisions

Overlap- Security Crisis Management

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Differences from Property Management (cont’d)

PM- Project Maintenance AM- Reserve Accounts Overlap- Capital Planning

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Clarify Areas of Overlap Between Owner and Property Manager

Marketing Units Tenant Eligibility Determinations Project Budget Property Taxes Property and Liability Insurance Purchasing Supplies and Equipment Resident Manager Hiring Reporting and Record-keeping

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Board Roles

Who on Bd. is responsible (full Bd., committee, one person?)

What kind of info does Bd. receive, how often? What decisions does Board want involvement in:

– Hiring/evaluating Property Manager– Tenant Selection Criteria– Eviction Process/Grievance Procedure– Budget Approval

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Staff Roles

Develop Management Plan Budget with Property Manager. Monthly financials Annual Inspections Review of Compliance Requirements Annual Property Manager evaluation

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Break15 Minutes

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III. Sources of AM Responsibilities

Project Documents• Management Documents• Financing Documents• Construction Documents

State and Federal Laws

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Management Documents

Management Plan Management Agreement Lease and Occupancy Rules Schedules for Maintenance and Capital

Replacement

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Construction Documents

Plans and Specifications Property Related Surveys Warranties

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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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IV. 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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Typical Requirements

Tenant Eligibility

– Tenant incomes

– Applicant pool- target population

– Verification, certification and recertification

– Waiting Lists

– Length of affordability restrictions

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Typical Requirements (cont’d)

Occupancy Requirements

– Good Cause Eviction (HOME, RD, LIHTC)

– Grievance Procedure

– Lease Provisions

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Typical Requirements (cont’d)

Financial

– Limits on cash flow

– Debt coverage ratio

– Insurance requirements

– Deposits to reserves and escrows

– Right to transfer property

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Typical Requirements (cont’d)

Record Keeping, Reporting and Monitoring Requirements

– Income and expense reports to funders

– retention of files time frames

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LunchPlease Return in One Hour

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V. Oversight of the MoneyFinancial Viability

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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Revenue Risks

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

plus rent lost by vacancies

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Comparison of Cash FlowsComparison 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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Oversight of the MoneyBasic 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)

Budgeting process is a good time to do a review of financial performance

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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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Break15 Minutes

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VI. Oversight of the Physical Property

Maintenance Plan/Capital Replacements

Inspections Relation to Design Relation Between Physical Problems

and Financial Problems

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VII. 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 (con’t)

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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VIII. Organizational Approaches to Asset Management

Staff, Board, Property Manager Roles Paying for Asset Management Integration with Housing Development

Activities Tools and Systems

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Staffing and Paying for Asset Management

How much money do you need to cover your costs?

Who will do asset management? Sources- out of project budget,

organization budget, other sources of funding.

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Integration with Housing Development Activities

Take development of operating budget seriously:– define on site staffing/ costs/ foregone rent– evaluate actual maintenance costs of similar

projects and populations– build in asset management fee as an expense– don’t underestimate needed reserve

contribution

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Integration with Housing Development Activities (cont’d)

Design with maintenance and utility costs in mind

Require developers to provide compliance charts as part of their scope of development work (whether in-house or out-sourced)

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Integration with Housing Development Activities

Structure the “right” debt payment: Net cash flow needs to provide:– Cushion for variances in revenues and expenses

– Cover any asset management, resident services or reserve contribution not included in operating expenses

– Meet other cash flow expectations of your org. For extremely low income, 1.10 debt coverage is

not enough

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Debt Coverage and Cash Flow

SUMMARY @ 30% @ 50% @ 60%

Average Net Cash Flow in dollars per year per unit

$ 72 $ 339 $ 473

Percent of the operating expenses (if operating

expenses are $2971 per unit) 3.2% 11.4% 15.9%

Percent of anticipated net revenues, assuming 5%

vacancy 2.3% 5.0% 5.7%

Operating Expenses assumed at $2,971 per unit per year. Shows average of one

through four bedroom units, except for the 30% column. The 30% category excludes one-bedroom units, which cannot support $2971 per unit in expenses.

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Tools and Systems

Property Management Plan Asset Management Plan Capital Replacement Schedule Asset Management Database Project Binders

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Wrap-up

Next Training: – “Developing an Asset Management Plan and

Dealing with Troubled Projects” – January 14 and 15, 2002

Technical Assistance Request Forms Thank you for attending! Thank you for filling out evaluations!