Chapter 21


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Chapter 21

  1. 1. Chapter 21 Property, Asset and Portfolio Management I. Upon project completion, developer turns to managing the asset. This involves the day-to- day building operation (property management), management of several buildings (asset management), and management of all real estate and other financial holdings (portfolio management). May have one or more managers performing these functions, but all should be looking to maximize value. A. Enterprise Concept - James Graaskamp recognized the concept that views property not as bricks and mortar, but as an operating entity, i.e. an operating business with a cash flow cycle. As such, buildings need to continually market and position themselves as markets change. From an asset or portfolio perspective, this business analogy extends to mean that multiple buildings and portfolio properties should be valued as operating businesses, not just bricks and mortar. Regardless of whether developer builds to earn fee, short-run or long-
  2. 2. run profit through increased value of development, quality management will earn greater returns. B. Management Triad - See Figure 21-1 for relationship among three managers. With small portfolios, managers could be one person. As get larger portfolios, need more levels of management. See Figure 21-2 for responsibilities of each type of manager. II. Fundamentals of Management from Development Perspective – Primary focus of management is to preserve and enhance value to property. All management functions should be planned and executed with that principle in mind. Management should be considered in the design and construction phases, not just when property is completed and turned over to manager. Numerous examples in text of how management issues can be incorporated in the design and construction of projects. A. Transition from Development to Management – development process is the shortest phase of property’s life cycle, with 1-2 years of 2
  3. 3. development versus 40-60 year life. Time for property to ‘stabilize’ (complete construction and achieve normal occupancy) can be short or long, based on property’s design, construction, management, etc. as well as competitive market conditions. Slow lease-up (long period to stabilize) can diminish value and lead to lower quality tenants. Property value is important to developer but also to manager – since they are compensated on performance, which will be directly related to design and competitiveness of property. Management contract should be executed that includes all agreements made between developer and manager (see Figure 21- 7). B. Property Strategic Planning Process – Regardless of whether dealing with new or existing construction, all properties can benefit from properly designed and implemented stragic planning process (Figure 21-5). Once again – eye has to be on creating or preserving value. Planning is an on-going process, with Strategic Plan reviewed and updated on a regular basis. 3
  4. 4. III. Management’s Role in Implementing Strategic Plan – after agreeing upon Strategic Plan, developer must devote resources to implementing plan: A. Staffing – need trained, competent staff to manage property. B. Marketing Program – developed to attract new customers as well as retain existing. Will include advertising, promotional events, compensation to staff, etc. Managers will market and lease property after initial occupancy. Marketing programs and costs need to be constantly monitored and revised as needed. C. Operating Budget – management team develops operating budget based on historical market information and first year pro forma. Must be realistic and based upon verifiable information, since ramifications of overstating income or understating expenses are severe. Easiest way to ensure accurate pro forma is to get asset and property managers involved early in the budgeting process, and to do a detailed, line 4
  5. 5. item budget using market comparable information. D. Capital Program – most projects will need additional capital expenditures to remedy construction /design deficiencies or to meet expanded tenant requirements. As such, managers should prepare long-term capital budget program to allow for budgeting major improvements. IV. Miscellaneous Management Elements: A. Influence of Public Sector in Project Management - since government can enforce police power (regulation without compensation) and pass laws requiring developer compliance, quality management is especially important. Example is Americans with Disabilities Act (ADA) that is civil rights legislation rather than building code. This Act can add significantly to new construction and renovation costs, since property owners must provide persons with disabilities equal access to facilities as general public. Management team must interact with public sector to ensure compliance. 5
  6. 6. B. Intelligent Buildings - although not as common as had been predicted, getting to be more widely used. Two types of intelligence: building management technologies (automated building systems such as elevators, fire detection, entry systems, etc.) and information technologies (primarily communications). Question to developer is whether use of technology is cost effective, i.e. will market pay for the intelligent building features. C. Training - obvious that well trained management team will enhance value of property. Several organizations provide professional training leading to designations: 1. Institute of Real Estate Management (IREM) - leading to Certified Property Manager, or Accredited Resident Manager or Certified Apartment Manager. 2. Building Owners and Managers Association (BOMA) provides office building management training and information. 3. International Council of Shopping Centers publishes information on shopping centers. 6
  7. 7. 4. National Council of Real Estate Investment Fiduciaries (NCREIF) deals with portfolio managers, as does Pension Real Estate Association (PREA). D. Corporate Real Estate Director - real estate is major part of corporation balance sheets (25- 40% of corporate assets), so management of this asset is very important. Asset management can help corporations reduce operating expenses, with big push to remove real estate from their ownership (i.e. sale-leasebacks have become very common in real estate, with corporations recognizing that they can better use the money for their business operations rather than real estate ownership). Corporate real estate directors assist in buy vs. lease decisions, location decisions, etc. 7