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Introduction To Asset
     Management
 Community Development Law Center
     700 SW Taylor, Suite 310
       Portland, OR ...
Presenter Information
 Community Development Law Center
  700 SW Taylor, Suite 310
  Portland, OR 97205
  Charlie Harris ...
Acknowledgments
 Thank you to Neighborhood Partnership Fund for sponsoring this
   training and PDC for providing this sp...
I. What is Asset Management

Definition: A systematic plan for, and
 ongoing oversight of, the management
 of one or more...
Asset Management is generally not
what we thought of when we formed
our CDCs. We focused on developing
affordable housing....
Why is Asset Management
            Important
 Difficult to house populations
 Limited funds
 Limited ability to raise ...
Asset Management Specifically Involves


 Making sure project:
  – meets owner’s social goals
  – remains financially via...
Analysis of Project in Relation to
           Overall Portfolio
 Housing Needs of Target Population versus
  other Projec...
Skills Needed

Tact
Poise
Diplomacy
Savoir-Faire
Judgment

                            9
II. Asset Management Roles and Goals
 People- keep owner, manager,tenants, funders
  and community happy
 Money- Keep mo...
Goals of Asset Management (cont’d)

 Owner: wants mission fulfilled
  – affordable housing for target population while
  ...
General Goals of Asset Management (cont’d)



Property Manager: wants good
  project with maximum fee for
  minimum hassl...
General Goals of Asset Management (cont’d)



Target Population: wants affordable,
 safe, secure living environment while...
General Goals of Asset Management (cont’d)

 Funders: want return on investment, compliance
  with project requirements a...
General Goals of Asset Management (cont’d)

 Community:
   – city
   – neighbors
   – police
   – social service agencies...
Differences from Property Management

 PM- Rent Collection
 AM- Policy on Late Payment
 Overlap- Tenant Relations
     ...
Differences from Property Management (cont’d)



 PM- Monthly Financial Reporting
 AM- Communicating with Investors
    ...
Differences from Property Management (cont’d)

 PM- Management of Daily Operations
 AM- Development of Strategic and
   ...
Differences from Property Management (cont’d)


 PM- Project Maintenance
 AM- Reserve Accounts
 Overlap- Capital Planni...
Clarify Areas of Overlap Between
      Owner and Property Manager
 Marketing Units
 Tenant Eligibility Determinations
 ...
Board Roles
 Who on Bd. is responsible (full Bd., committee,
  one person?)
 What kind of info does Bd. receive, how oft...
Staff Roles
 Develop Management Plan
 Budget with Property Manager.
 Monthly financials
 Annual Inspections
 Review o...
Break
15 Minutes


             23
III. Sources of AM Responsibilities


Project Documents
    • Management Documents
    • Financing Documents
    • Constr...
Management Documents

 Management Plan
 Management Agreement
 Lease and Occupancy Rules
 Schedules for Maintenance and...
Construction Documents

 Plans and Specifications
 Property Related Surveys
 Warranties




                           ...
Financing Documents
 Grant Agreements (e.g. HOME, Housing
  Trust Fund)
 Loan Documents (Promissory Note, Loan
  Agreeme...
Federal and State Laws
 Laws related to financing subsidies
 Oregon Residential Landlord Tenant Act
  (ORS Chapter 90)
...
IV. Typical Requirements

 Tenant Eligibility (income, rents, targeted
  population)
 Occupancy Requirements
 Financial...
Typical Requirements
 Tenant Eligibility
  – Tenant incomes
  – Applicant pool- target population
  – Verification, certi...
Typical Requirements (cont’d)

 Occupancy Requirements
  – Good Cause Eviction (HOME, RD,
    LIHTC)
  – Grievance Proced...
Typical Requirements (cont’d)

 Financial
  – Limits on cash flow
  – Debt coverage ratio
  – Insurance requirements
  – ...
Typical Requirements (cont’d)

 Record Keeping, Reporting and Monitoring
 Requirements
 – Income and expense reports to f...
Lunch
Please Return in One Hour


                        34
V. Oversight of the Money
          Financial Viability
 Baseline Financial Viability
  – Cover operating expenses
  – Ke...
Additional Project Financial Goals
 Deposit additional funds in replacement reserves
  for long term capital needs
 Fund...
Key Risks to Financial Viability

Revenue Risks
Operating Expense Risks
Initial Debt Structuring




                  ...
Revenue Risks
 Insufficient or Rent Increases
 Rent Collection Problems
 Vacancies
 “Economic Vacancy”= Uncollected re...
Comparison of Cash Flows
                                                           Comparison of Cashflow with 2%, 3% & E...
Operating Expense Risk
 Utility Cost Increases- double whammy!
  – Increased operating expense
  – Increased utility allo...
Debt Structure Issues
 Faulty underwriting assumptions,
  sometimes uncorrectable even with best
  management:
  – rents ...
Oversight of the Money
          Basic Documents
 Budget
 Income and Expense Report
 Rent Roll
 Balance Sheet
 Annual...
Budget
 Prepare with property manager; Board should
  review and approve
 Basis for determining whether actual expenses
...
Budget (cont’d)

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



                          ...
Budget (cont’d)
 Identify Trends:
 Calculate CDN or other industry standards
 Expenses that are consistently higher/low...
Budget (cont’d)
 Issues of concern/findings in audit?
 Trends indicated policy or management changes?
 Capital improvem...
Income and Expense Report
 Primary tool to determine project health
 Must be detailed and include current period,
  year...
Income and Expense Report (cont’d)

 Income: Compare Gross rental income and
  Net rental income to see vacancy loss
 Ad...
Income and Expense Report (cont’d)
 Operating Expenses
   – know what’s included in each line item
   – what’s reasonable...
Income and Expense Report (cont’d)
  – repairs and maintenance
  – insurance
  – property taxes- exempt? If not exempt, va...
Income and Expense Report (cont’d)

 Net Operating Income= effective gross
  income minus operating expenses
 Debt Servi...
Rent Roll
 Use the Rent Roll in conjunction with the
  Income and Expense Report to get detail on
  vacancies (which unit...
Balance Sheet
 The project balance sheet describes the
  relative financial position of the project at a
  given point in...
Industry Standards
   CDN’s Industry Goals for Property & Asset Management
          CDN Goals related to Financial Perfor...
Annual Audit and Tax Return

 Prepared on an accrual basis
 May re-categorize capital expenses and
  repairs
 Owner’s B...
Organization’s Financial Statements

 Need to ensure that organization’s statements
  accurately incorporate project stat...
Break
15 Minutes


             57
VI. Oversight of the Physical
             Property
Maintenance Plan/Capital
 Replacements
Inspections
Relation to Desi...
VII. Monitoring, Reporting, Record-
                 keeping
 Use of compliance charts
  – Rent Restriction- sources of r...
Monitoring, Reporting, Record-keeping (con’t)


 Calendar with required reporting forms
 Files and filing
   – what’s in...
VIII. Organizational Approaches to
        Asset Management
Staff, Board, Property Manager Roles
Paying for Asset Manage...
Staffing and Paying for Asset
          Management
 How much money do you need to cover
  your costs?
 Who will do asset...
Integration with Housing Development
                Activities
 Take development of operating budget
 seriously:
  – def...
Integration with Housing Development
           Activities (cont’d)

 Design with maintenance and utility costs
  in mind...
Integration with Housing Development
               Activities
 Structure the “right” debt payment: Net cash flow
  needs...
Debt Coverage and Cash Flow
        SUMMARY                    @ 30%           @ 50%          @ 60%

 Average Net Cash Flo...
Tools and Systems
 Property Management Plan
 Asset Management Plan
 Capital Replacement Schedule
 Asset Management Dat...
Wrap-up
 Next Training:
  – “Developing an Asset Management Plan and
    Dealing with Troubled Projects”
  – January 14 a...
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Transcript of "Introduction To Asset Management Community Development Law Center"

  1. 1. Introduction To Asset Management Community Development Law Center 700 SW Taylor, Suite 310 Portland, OR 97205 and Housing Development Center 2627 NE Martin Luther King Jr. Blvd. Portland, Or 97212 1
  2. 2. 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 2
  3. 3. 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! 3
  4. 4. 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. 4
  5. 5. 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. 5
  6. 6. Why is Asset Management Important  Difficult to house populations  Limited funds  Limited ability to raise additional funds  Public agencies requiring maximum accountability 6
  7. 7. Asset Management Specifically Involves  Making sure project: – meets owner’s social goals – remains financially viable – maintains physical quality – stays in compliance with legal requirements 7
  8. 8. 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 8
  9. 9. Skills Needed Tact Poise Diplomacy Savoir-Faire Judgment 9
  10. 10. 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 10
  11. 11. 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” 11
  12. 12. General Goals of Asset Management (cont’d) Property Manager: wants good project with maximum fee for minimum hassle. 12
  13. 13. General Goals of Asset Management (cont’d) Target Population: wants affordable, safe, secure living environment while being treated fairly. – Tenants – Applicants and potential tenants 13
  14. 14. 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 14
  15. 15. 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. 15
  16. 16. 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 16
  17. 17. Differences from Property Management (cont’d)  PM- Monthly Financial Reporting  AM- Communicating with Investors Hiring Accountants, Attorneys, etc. Cash Management  Overlap- Annual Budgeting 17
  18. 18. 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 18
  19. 19. Differences from Property Management (cont’d)  PM- Project Maintenance  AM- Reserve Accounts  Overlap- Capital Planning 19
  20. 20. 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 20
  21. 21. 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 21
  22. 22. Staff Roles  Develop Management Plan  Budget with Property Manager.  Monthly financials  Annual Inspections  Review of Compliance Requirements  Annual Property Manager evaluation 22
  23. 23. Break 15 Minutes 23
  24. 24. III. Sources of AM Responsibilities Project Documents • Management Documents • Financing Documents • Construction Documents State and Federal Laws 24
  25. 25. Management Documents  Management Plan  Management Agreement  Lease and Occupancy Rules  Schedules for Maintenance and Capital Replacement 25
  26. 26. Construction Documents  Plans and Specifications  Property Related Surveys  Warranties 26
  27. 27. 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 27
  28. 28. 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 28
  29. 29. IV. Typical Requirements  Tenant Eligibility (income, rents, targeted population)  Occupancy Requirements  Financial (insurance, DCR, Deposits to Reserves)  Reporting, Monitoring (funders, IRS, etc.) 29
  30. 30. Typical Requirements  Tenant Eligibility – Tenant incomes – Applicant pool- target population – Verification, certification and recertification – Waiting Lists – Length of affordability restrictions 30
  31. 31. Typical Requirements (cont’d)  Occupancy Requirements – Good Cause Eviction (HOME, RD, LIHTC) – Grievance Procedure – Lease Provisions 31
  32. 32. Typical Requirements (cont’d)  Financial – Limits on cash flow – Debt coverage ratio – Insurance requirements – Deposits to reserves and escrows – Right to transfer property 32
  33. 33. Typical Requirements (cont’d)  Record Keeping, Reporting and Monitoring Requirements – Income and expense reports to funders – retention of files time frames 33
  34. 34. Lunch Please Return in One Hour 34
  35. 35. V. Oversight of the Money Financial 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 35
  36. 36. 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 36
  37. 37. Key Risks to Financial Viability Revenue Risks Operating Expense Risks Initial Debt Structuring 37
  38. 38. Revenue Risks  Insufficient or Rent Increases  Rent Collection Problems  Vacancies  “Economic Vacancy”= Uncollected rents plus rent lost by vacancies 38
  39. 39. Comparison of Cash Flows Comparison of Cashflow with 2%, 3% & Every Other Year Annual Increases (Every other year at 5% Increase) 15,000 10,000 5,000 Net Cash Flow after Second Mortgage Payments - Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 (5,000) (10,000) (15,000) (20,000) (25,000) (30,000) (35,000) 3% Annual Rent Increase 2% Annual Rent Increase 5% Increase Every Other Year 39
  40. 40. 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
  41. 41. 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
  42. 42. Oversight of the Money Basic Documents  Budget  Income and Expense Report  Rent Roll  Balance Sheet  Annual Audit and Tax Return  Organization’s Financial Statements 42
  43. 43. 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
  44. 44. Budget (cont’d) Budgeting process is a good time to do a review of financial performance 44
  45. 45. 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 45
  46. 46. 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? 46
  47. 47. 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 47
  48. 48. 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 48
  49. 49. 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 49
  50. 50. 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? 50
  51. 51. 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 51
  52. 52. 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 52
  53. 53. 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. 53
  54. 54. Industry Standards CDN’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  1.2 to 1.3 is good (NOI / DS) Operating Reserves  3 Months of expenses & debt service available Deposits to Replacement  Sufficient to fund Reserves projected repairs & replacements projected over the next five years Occupancy  greater than or equal (# units occupied / # of units) to 96% Rent Collection  greater than or equal (NRI / GRI) to 96% Maintenance expenses  within 5% of annual budget 54
  55. 55. 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 55
  56. 56. 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 56
  57. 57. Break 15 Minutes 57
  58. 58. VI. Oversight of the Physical Property Maintenance Plan/Capital Replacements Inspections Relation to Design Relation Between Physical Problems and Financial Problems 58
  59. 59. 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 59
  60. 60. 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 60
  61. 61. VIII. Organizational Approaches to Asset Management Staff, Board, Property Manager Roles Paying for Asset Management Integration with Housing Development Activities Tools and Systems 61
  62. 62. 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. 62
  63. 63. 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 63
  64. 64. 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) 64
  65. 65. 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 65
  66. 66. Debt Coverage and Cash Flow SUMMARY @ 30% @ 50% @ 60% Average Net Cash Flow in $ 72 $ 339 $ 473 dollars per year per unit Percent of the operating expenses (if operating 3.2% 11.4% 15.9% expenses are $2971 per unit) Percent of anticipated net revenues, assuming 5% 2.3% 5.0% 5.7% vacancy 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. 66
  67. 67. Tools and Systems  Property Management Plan  Asset Management Plan  Capital Replacement Schedule  Asset Management Database  Project Binders 67
  68. 68. 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! 68
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