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  • Welcome to the Asset Management Orientation for PHA Boards. This orientation will provide an overview of HUD’s transition to asset management. It has been designed specifically for PHA Board members; however, it may also be a helpful orientation tool for PHA staff and Public Housing residents. The orientation is divided into three sections. All or part of these sections may be used depending on the target audience.
  • This training is divided into three sections: First, Section 1 will provide a general overview of asset management; Then, Section 2 will explore asset management in more detail, with a review of the five fundamental building blocks of asset management; Finally, Section 3 will introduce the concept of the Central Office Cost Center and the associated implications for PHA organizations.
  • Before we get started with section 1, let’s review the training format and some basic instructions for using the presentation viewer. This training has been designed to provide PIH Field Office staff with a user-friendly, flexible, and interactive learning tool to teach and reinforce knowledge related to Public Housing’s conversion to asset management. The training is based on the curriculum presented at live, regional training sessions conducted by HUD in 2007, but has been updated to incorporate many of the questions raised during those sessions. The training has several features that will assist you in the learning process. These include: Fully narrated presentation slides to provide an audio dimension for those who learn best through listening; The ability to navigate between slides as necessary. While the presentation will proceed from slide to slide automatically, you will have the ability to skip ahead and return to previous slides to re-examine topics as necessary; Exercises in each section to reinforce key concepts. Throughout the training, you will be asked to pause the presentation to complete exercises. Once you resume the presentation, answers will be provided to assist in the learning process; The ability to download the training to your computer is also available. While the training can be completed online, it is recommended that you download the training for optimal performance. Access to reference materials and websites will serve to enhance the learning process as well.
  • This is a screenshot of the presentation viewer. Let’s take a moment to introduce you to each section of the presentation viewer. Section 1, in the left-hand top corner, displays the instructor’s photo and the windows media player features to enable you to start, stop, pause, and resume the presentation. If you decide to stop the presentation and exit, simply click the “X” on the right-hand top corner of the presentation viewer. When you continue with the presentation at a later time, it will resume from where you left off. Section 2, in the left-hand bottom corner, contains five tabs. Click on each tab as they are explained. The Info tab provides basic information about the presentation including the duration, number of slides, and description. The Slides tab gives a vertical view of all the slides in the presentation. This will allow you to navigate between slides. The Download tab includes helpful reference materials and websites. Click on links in this tab to access the reference materials and websites. The Search tab allows you to search by key word for any text in the presentation. The Notes tab includes the instructor notes for each presentation slide. Since these notes match the instructor’s script exactly, you can use them to follow along with the instructor’s audio narration. Section 3, in the center, displays the presentation slides. Section 4, in the right-hand bottom, shows the thumbnail view of the slides. If you would like to skip ahead to a slide or revisit a slide that has already played, simply click on the thumbnail picture of the particular slide. Section 5, in the bottom pane, has seven buttons with different functions. Drag your mouse over each button as they are explained. The Left Back button moves the presentation backward by one animation. The Right Forward button moves the presentation forward by one animation. The Full Screen button switches back and forth between a full screen and a normal screen. A full screen shows only the presentation slide. The Contact Author button provides an email link to HUD’s Asset Management Help Desk. The Change Player Setting button provides access to the presentation playback settings window. This window will normally not be necessary except to change the slide type to image slide. The Help Center button provides WebEx online help and frequently asked questions. The Exit Player button closes the presentation and returns you to the main menu.
  • Let’s get started with Section 1, Overview of Asset Management.
  • In this section, we will: Begin by describing the events leading up to Public Housing’s conversion to asset management; Next, we will discuss key dates associated with the transition to asset management; Then, we will define the term asset management; We will also distinguish asset management from property management; and Finally, we will examine the various roles and responsibilities under asset management, particularly the PHA Board’s role as owner.
  • Why are we undertaking this shift to asset management? Let’s take a look at the background behind this transition. In 1998, Congress passed the Quality Housing and Work Responsibility Act, or QHWRA, which created a new Operating Fund Program for public housing. This replaced the Performance Funding System or PFS. At the same time, the Congress directed HUD to develop this new program through Negotiated Rulemaking. In 1999, HUD convened what was the first round of negotiated rulemaking sessions. Essentially, this first session ended with modest changes to the PFS, recommending that a larger study be conducted of the cost to operate well-run public housing. Later that year, Congress further directed that HUD contract with the Harvard University Graduate School of Design to conduct such a study as part of HUD’s appropriation bill. In 2003, Harvard completed the cost study. Harvard employed a benchmark model for estimating the cost of operating each public housing project, based on the operating costs in HUD’s multifamily housing programs. Overall, it recommended that public housing allowable expense levels be increased by 6%. In 2004, HUD took the results of the Harvard Study to convene the second round of negotiated rulemaking. After four meetings, a consensus Operating Fund rule was negotiated. In 2005, HUD published what was essentially the negotiated rule, referred to as the “final rule” on the Operating Fund Program (as opposed to the interim rule that resulted from the first round of negotiated rulemaking). The Final Rule did two things. First, it established a new formula for distributing operating subsidy to PHAs. Second, it required PHAs of 250 or more units to convert to asset management. In 2006, the Department issued a series of interim guidance on implementation of the final rule including PIH Notice 2006-33. In 2007, the Department issued final guidance on implementation of the final rule, including PIH Notice 2007-09. This training covers much of the guidance included in PIH Notice 2007-09.
  • Before we discuss how asset management will impact PHAs, let’s take a closer look at the PHA inventory. This table provides a break down of small versus large PHAs. Small PHAs are defined as a PHA with less than 250 units, while large PHAs are defined as those with 250 or more units. Along with a breakdown of small versus large PHAs, this table also includes the percentage of total units each makes up. As you can see, even though there are almost three times as many small PHAs as large PHAs, the large PHAs make up 83% of the total units in the Public Housing inventory. Asset management is required for PHAs with 250 or more units, but is optional for those with less than 250 units.
  • This table provides a breakdown of gainer and decliner PHAs in terms of the amount of subsidy received under the new Operating Fund Formula. Overall, about 26% of PHAs decline under the new formula and 74% gain. The net gain results in approximately $271 million in increased eligibility (in 2004 dollars). Please note that subsidy eligibility has also increased substantially in recent years because of higher utility prices; however, these higher utility costs are not the result of the new formula. To ease the impact on decliners, new funding levels are phased in over five years. For CY 2007, decliner agencies experienced only a 5% decline in eligibility between the old and new formulas. Gainer agencies received 50% of their gain in CY 2007.
  • One of the fundamental reforms that was recommended by the Harvard Cost Study, subsequently embraced by negotiated rulemaking, and then included in the final rule on the Operating Fund Program, was the shift to asset management. As stated in the rule: “PHAs shall manage their properties according to an asset management model, consistent with the management norms in the broader multi-family management industry. PHAs shall also implement project-based management, project-based budgeting, and project-based accounting, which are essential components of asset management.” The goal of this transition is to move the Public Housing program closer to the broader multifamily housing industry in terms of business practices.
  • In the roll-out of asset management, some of the key dates include: Assignment of asset management projects, or AMPs. This was one of the first tasks that PHAs had to complete; i.e., to group their units according to asset management projects or AMPs. For many, this was a great opportunity to reorganize many very small developments into more manageable configurations. PHAs completed this exercise in 2006. The new operating fund formula went into effect for the calendar year beginning January 1, 2007. PHAs submitted their subsidy forms for 2007 based on the new formula. In terms of subsidy eligibility, PHAs that receive more operating subsidy under the final rule, referred to as gainers, receive 50% of their gain in 2007. PHAs that decline under the new formula, or “decliners,” have their losses phased-in over a five-year period. Project-based budgeting and accounting (PBB/A) begins for PHAs whose fiscal years start July 1, 2007 and thereafter. There are new cost reasonableness standards that PHAs must comply with governing overhead and centralized services. These standards begin in 2008, but a PHA can have them phased-in through 2011. To conform to asset management, HUD will change the Public Housing Assessment System, or PHAS. The new PHAS will be designed to assess, wherever possible, the performance of the individual projects, rather than the PHA as a whole. In the first year of implementation, PHAs will not receive a score. PHAs must be in compliance with the remainder of the components of asset management by FY 2011.
  • Project-based budgeting and accounting begins for PHAs whose fiscal years start July 1, 2007. For example, a PHA with a fiscal year end of June 30 th would need to have project-based budgets by July 1, 2007. The cost reasonableness standards do not begin until fiscal years starting July 1, 2008. For example, a PHA with a fiscal year end of June 30 th would begin July 1, 2008. As mentioned previously, if PHAs can demonstrate that cost reasonableness standards will create undue financial difficulties, they may request an extension of compliance with management fees through 2011.
  • So, what is asset management? In a textbook sense, asset management is a process of making investment decisions for a collection or portfolio of assets, based on the mission, goals, and objectives of the owner, lender, funder, or regulatory body. Let’s take a closer look at each of these key elements: A process—Asset management is not episodic. It is not unplanned. It presumes that one has certain financial, operating, physical, and market data to make decisions. It assumes that this data is used to drive decisions. Investment decisions—What are investment decisions? A budget is an investment decision. A capital improvement is an investment decision. A rent increase is an investment decision. Refinancing or selling a project is an investment decision. Holding onto a project is an investment decision. Assets—What are assets? In the context of Public Housing, it’s the land and buildings. It’s also the rent, subsidy, and other program income. Mission, goals, and objectives of the owner, lender, funder, or regulatory body—Owners have different investment goals. Some have long-term goals, while others have short-term goals. Beyond that, owners may also be constrained by their funder or regulatory body. In public housing, we have certain statutory and regulatory requirements. A PHA, for example, cannot simply decide to rent to over-income families because a project has become desirable. Within these regulatory requirements, however, PHAs have certain flexibility over who they can admit and how they choose to operate.
  • It is common to confuse the terms asset management and property management. Property management is a subset of asset management. Asset management is associated with the strategic decisions associated with ownership objectives such as capital planning, repositioning of projects, and approving budgets. Property management is associated with the day-to-day management of the property. In Public Housing, we refer to properties as projects.
  • We talked about investment decisions, owner objectives, and so forth. But who is making these investment decisions? Who is the owner? Who plays what role? Who performs what functions? With respect to Public Housing: PHA Boards of Commissioners assume the role of owner, with the primary function of asset management. Boards make strategic decisions regarding the acquisition, disposition, and repositioning of properties. They also approve budgets and set policy. PHA staff, or, in certain cases, private management companies, perform the day-to-day operation function of the projects. In other words, they carry out the investment decisions and policies of the Board. PIH Field Offices assume the role of regulator, responsible for oversight and monitoring compliance with all applicable public housing laws, regulations, and rules. An important note to remember as we go through the training is that asset management and property management are functions , not roles.
  • Now let’s talk about the mission of PHAs. PHAs are bound by certain regulatory requirements governing the public housing program. As a result, they all share the same task of providing affordable housing to low-income families. Outside of this basic requirement, there can be a great deal of variation in mission, which would then affect goals and investment objectives. As you know, a PHA’s mission may vary in terms of: Who to Serve: Although all admissions to public housing must be low-income, and although at least 40% of a PHA’s admissions must be below 30% of area median income, there can be great variance in the residents PHAs choose to admit. Some PHAs choose to serve the most needy; others prefer a mix of low-income. Quality of Housing: Some PHAs may decide that adequate housing is sufficient; others may desire an even higher quality standard. Standard of Affordability: Although PHAs possess less flexibility in setting rent levels than other multifamily properties, PHAs do have some options for establishing minimum rents. Also, PHAs may establish permissible income deductions, but they are not reimbursed for such efforts. Social Goals: Some PHAs believe strongly that they should also provide social services in addition to basic housing; others believe that public housing is more bricks and mortar. Asset management does not change the mission of Public Housing, which, as indicated, can vary from one community to another (but all must be within the same statutory and regulatory framework). What asset management does is change the business model under which PHAs will operate.
  • Certain asset management requirements are not applicable to smaller PHAs PHAs with fewer than 250 units are not required to convert to asset management and its associated business rules. However, PHAs with fewer than 250 units that do not choose to adopt asset management will still be subject to the new Operating Fund Formula. They can also expect modest changes in financial reporting requirements in the upcoming years. Small PHAs will also be affected by changes in the Public Housing Assessment Subsystem, or PHAS, including on-site management reviews. Some small PHAs may voluntarily choose to implement asset management, either because they would like to take advantage of the new fee-for-service system, which will be discussed later in this training, or because they simply prefer the new business model.
  • What does the role of owner really mean? As an owner, you are responsible for overseeing the performance of the AMPs, setting the direction, and ensuring that decisions meet the overall PHA mission and goals. Here are the high-level key ownership responsibilities under asset management: First and foremost, PHA boards will review activities and ensure they align with the overall mission and goals of the organization. Under asset management, PHAs will be responsible for preparing project-level budgets that serve as a guideline for operating the AMPs. As the PHA board, or asset management owners, your role will be to review and approve those budgets. Another key responsibility will be to evaluate progress and recommend corrective action. This may involve developing goals for the AMPs or making decisions on certain repairs. As the owners, you will also monitor project-level performance against measurable benchmarks, such as an AMP’s operating expenses per unit. This type of benchmark is used to compare AMPs both within and outside of your portfolio, and as owner’s you’ll want to monitor these figures closely. It is also important to stay up-to-date on industry information such as the overall real estate market including potential risks and other opportunities. Finally, Board members play a pivotal role in fostering relationships with key stakeholders. Throughout the asset management transition this will be even more important. Successfully fulfilling your owner role involves focusing on true asset management actions and involvement. On one extreme, Boards may falter because they did not assume enough responsibility.
  • At this point in the training, we would like to take a moment to provide you with a legislative update. The Consolidated Appropriations Act of 2008 signed into law on December 26, 2007 contained two provisions which directly affect Public Housing Authorities converting to asset management. The two provisions are: The PHA election to be exempt from asset management for PHAs with 250-400 units, and The use of Capital Fund proceeds to pay for central office costs. The first provision is only effective for CY 2008. The second provision is considered permanent legislation. Both of these provisions will be discussed in detail in the following slides.
  • The first provision is the 400-unit exemption. This provision will allow PHAs with 400 units or less the option to elect to be exempt from asset management during the first year of implementation. This provision does not change the small PHA threshold for other program areas. For example, it does not change the threshold for full fungibility between the Operating and Capital Fund programs, permitted for PHAs with less than 250 units. PHAs with a unit count between 250 and 400 units that decide to convert to asset management will not have the “alternative asset management model” (i.e., the conversion to asset management without a COCC). Rather, PHAs between 250 and 400 units that convert must establish and operate a COCC using the reasonable management fees that are described in this training. A very important note about this exemption is that it is only authorized for Calendar Year 2008. This means that any PHAs deciding to take advantage of this exemption during 2008 will still need to convert to asset management the following year. If a PHA falls into this category and wishes to take advantage of the exemption, they must indicate with their CY 2008 operating subsidy submission whether they either will continue to implement asset management or elect to be exempt from asset management. CY 2008 operating subsidy submissions are to be submitted to HUD by April 25, 2008. If a PHA elects to be exempt, it must do so by Board resolution.
  • Before PHAs decide to exercise this exemption, there are a number of implications that should be considered. These include: PHAs who don’t convert will not be able to create a COCC and implement the fee-for-service model. These PHAs would continue to allocate overhead across all federal programs in accordance with OMB Circular A-87. This means that the PHA would lose the ability to generate de-federalized funds by its COCC. PHAs not converting will forfeit the $4 PUM asset management add-on, which will reduce subsidy eligibility by approximately $12,000 to $19,200 depending on number of unit months. Additionally, all units in a PHA will be combined into one AMP if a PHA decides not to convert, triggering a new Project Expense Level (PEL). On average, PHAs will experience approximately a $4.25 PUM reduction in PEL as a result of combining units into one AMP. PHAs should refer to PIH Notice 2008-16, Guidance on Asset Management Provisions in the Consolidated Appropriations Act, 2008, for additional implications.
  • The other asset management provision contained in the Appropriations Act of 2008 deals with the use of Capital Fund proceeds. This provision allows a PHA to use Capital Fund amounts to pay for central office costs, provided the PHA does not spend more than 20% of Capital Funds on Operations. This provision will not have much effect during the first year of asset management (given that PHAs are not required to comply with fee reasonableness requirements in Year 1). To assure that costs are reasonable, PHAs must, in implementing this provision, maintain a system of cost allocations for the recovery of overhead costs, in lieu of fee-for-service. Therefore, the PHA will not create a COCC. In turn, HUD will include a new line item on the FDS, called “Overhead Allocation,” where PHAs using section 226 will report their allocated overhead. They will not charge a fee. These overhead allocations are not “defederalized.” Overhead costs must still be considered reasonable and necessary and in compliance with OMB Circular A-87. It is important to note that this provision does not change the amount of Capital Funds that PHAs are allowed to transfer into operations. Small PHAs may continue to transfer 100% of their grants while large PHAs are still held to the 20% level.
  • Before we get into the nuts and bolts of the training, let’s take a moment to explore how asset management may impact your PHA. As a group, please discuss and provide an answer to the question above. At this time, pause this presentation to complete this workshop. Re-start the presentation when you are finished with the workshop.
  • This is the end of Section 1: Overview of Asset Management.
  • Welcome to Section 2: Asset Management Building Blocks.
  • In this section, we will explore asset management in more detail: <advance 1> We will introduce the five building blocks of asset management, or the initial priorities in terms of the overall asset management implementation.
  • In Public Housing, the conversion to asset management will focus on five core areas or reforms. These include: Project-based funding; Project-based budgeting; Project-based accounting; Project-based management; and Project-based performance assessment. Note that the project is the focus of these buildings blocks. The terms project and AMP will be used synonymously throughout this training. Let’s take a look at each building block individually.
  • In the past 40 or more years, PHAs have been funded at the entity level. The Final Rule establishes a system of project-based funding, our first building block. <advance 1> Under project-based funding, PHAs will complete a separate subsidy form for each project. <advance 2> A major component of a project’s subsidy calculation will be its Project Expense Level or PEL. The PEL is a model-generated estimate of the cost to operate the project, excluding utilities and taxes. It is based on the costs of operating other federally-assisted housing projects with similar characteristics. <advance 3> One of the biggest benefits to project-based funding is that it ensures appropriate resources are allocated to each AMP based on their unique characteristics (e.g. occupancy type, unit size, etc.).
  • <advance 1> Historically, operating subsidy was distributed by HUD to a PHA based on the PHA’s total portfolio of developments. PHAs then determined how those funds would be spent, either on administration or at the projects. <advance 2> Under the Final Rule, operating subsidy is calculated and assigned to the AMP. Each project will then pay the PHA certain allowable fees. These fees include: the property management fee, the asset management fee, the bookkeeping fee, fee for service, and any other program management fees. Each of these fees will be discussed later in this training Thus, the focus is on the project or AMP as the funds are directed toward each AMP. The PHA will earn fees for services provided to each of the AMPs and programs that the PHA operates.
  • One of the principles behind the Final Rule on the Operating Fund program is that each project will have a dedicated funding stream, one that reflects the costs of operating other Federally-subsidized housing in the same market. To understand the amount of funds available to any project, one must understand a number of concepts or elements, including: Project Expense Level or PEL; Utility Expense Level or UEL; Add-Ons; Frozen Rental Income; and Proration.
  • <advance 1> The PEL is the model-generated estimate of what it costs to operate a project, exclusive of taxes, utilities, and certain add-ons. <advance 2> Amounts are expressed in PUMs or Per Unit Month figures. <advance 3> HUD generates a PEL for each project. This PEL is based on the research conducted for the Harvard Cost Study and represents essentially what it costs to operate HUD subsidized housing owned by non-profits in the local market. <advance 4> Some of the major factors that were found to impact expense levels included: unit size (bedroom mix), market in which the project is located, age of property, and occupancy type. For example, a project in New York City will cost more to operate than a similar project in Des Moines, IA. <advance 5> The National average for PEL was $325 PUM for 2007. This figure excludes the New York City Housing Authority.
  • The Utilities Expense Level (UEL) is a figure that reflects payment to the PHA for utility costs for each project. The UEL is formula-determined and reflective of actual utility consumption during the previous three years, taking into account recent utility rates as well as a factor for inflation. Including three years of consumption will help to ensure a more accurate calculation of consumption over time because a project may consume more or less of a particular utility depending on the severity of local weather conditions for a given year. In other words, a three-year average will smooth out spikes and dips in consumption that could otherwise increase or decrease the amount of funding provided to an AMP for utility costs. Amounts are expressed in PUMs. The national average UEL was $125.95 PUM in 2007. However, the UEL that will be assigned to any particular project will vary according to the utility arrangements and other conditions at the project. In other words, the climate, the utility rates in the community, and whether the utilities are project-paid or tenant-paid will all affect the UEL.
  • As a result of the negotiated rulemaking, certain add-ons were included with formula expenses in addition to the UEL and PEL. These add-ons are listed in the table, along with total amount claimed in 2007. Thus, a PHA receives an average of $21.32 PUM in add-ons or about 16 percent of the PEL. Some add-ons are calculated in annual amounts, while others are calculated at a PUM amount. For purposes of presentation, all amounts have been converted to PUMs. Self-sufficiency refers to the reasonable cost of self-sufficiency program coordinators and associated costs pursuant to 24 CFR 990.190(a). Energy loan amortization is the amount of principal and interest payments for energy conservation measures pursuant to 24 CFR 990.190(b). Payment in lieu of taxes, or PILOT, is the amount paid for PILOT pursuant to 24 CFR 990.190(c). Cost of independent audits is the most recent actual audit cost of the Operating Fund Program pursuant to 24 CFR 990.190(d). Funding for resident participation activities is based on $25 per occupied unit per annum. Asset management fee is equal to $4 per eligible unit month if the PHA has at least 250 units or $2 per eligible unit month if the PHA has fewer than 250 units and has elected to transition to asset management. Information technology (IT) fee is $2 per eligible unit month. Asset repositioning fee is the amount for eligible units calculated pursuant to 24 CFR 990.190(h). One additional add-on, costs attributable to changes in federal law, regulation, or economy, is only allowed pursuant to specific instructions provided by HUD in 24 CFR 990.190(i).
  • <advance 1> The Operating Fund program is designed to provide projects funding for the costs of operating Public Housing that they cannot pay for through rental income. As a result, rental income is subtracted from the funding generated through the PEL, UEL, and add-ons, which we discussed on the previous slides. In short, a project must pay for some of the costs of running Public Housing through the rent it collects. A project’s formula income is equal to the PUM rental income from the PHA’s 2004 financial statements. Please note some calculations need to be performed since the PHA’s 2004 financial statements were not at the project level. The PUM formula income may be adjusted downward or upward depending on if utility allowances to tenants have increased or decreased since 2004. <advance 2> Under the Final Rule, the same PUM formula income will be used for calendar years 2007, 2008, and 2009, hence the name frozen formula income. Therefore, for the years 2007, 2008 and 2009, there is an incentive for PHAs to raise rent receipts because the additional collections do not get factored into the formula income. HUD will make the post-2009 policy determination on formula income in the future. <advance 3> The national average frozen formula income was $181.09 PUM in 2007.
  • <advance 1> Each year, total subsidy eligibility is compared with appropriations for the Operating Fund program. The difference is called proration. <advance 2> Proration is expressed as a percentage. <advance 3> For example, if total eligibility for subsidy in a given year is $4.0 billion, and Congress appropriates $3.6 billion, proration would be 90 percent.
  • Now that we’ve reviewed the funding components, let’s see how funding for a project is determined. We begin with the PEL, UEL, and add-ons. When these components are added together, they equal total formula expenses. Next, we subtract the formula income, which tells us the subsidy eligibility, or how much subsidy the project is eligible to receive assuming 100 percent proration. Subsidy eligibility is calculated using HUD form 52723 each year. Next, we apply the appropriate proration, which provides us with the actual subsidy the project will receive. However, this is not the full amount that the project will actually have to operate—it is only the operating subsidy. A PHA must then add back the actual rental income that the project will receive as well as any other income and transfers. The net result is effective income for the project. Effective income is the first component used to calculate our total net income. We will explore this further in Section 5: Project-Based Budgeting.
  • Along with project-based funding, PHAs will be required to undertake project-based budgeting, our next building block. Essentially, project-based budgeting means that budgets will now be completed at the AMP-level as opposed to the PHA entity-wide level. <advance 1> Primarily, project-based budgets will be used for internal PHA planning purposes. <advance 2> HUD will not prescribe a specific budget format, but the budget should reconcile to the updated Financial Data Schedule or FDS. <advance 3> Project-based budgets must be approved by the PHA’s Board prior to the start of each fiscal year. <advance 4> However, these budgets will not be subject to HUD approval, except in the case of non-performing projects.
  • Since project-based budgeting is such a fundamental component in the transition to asset management, let’s take a few moments to review some general AMP budgeting principles. First, let’s define a budget. <advance 1> A budget is an itemized projection of income and expenses over a specific period of time. In conventional housing management, budgeting is done for each individual property. Each asset’s financial performance is tracked individually and reported to the owner. This allows both the manager and the owner to make the best decisions for the property. Budgets often are customized to represent the diverse needs and activities of a business. For example, in Public Housing there will be separate budgets for each AMP, the PHA Central Office Cost Center, and the Capital Fund. <advance 2> A budget serves as a guideline for operating a AMP. It provides expected revenue figures as well as targeted expense amounts.
  • Now let’s take a look at a typical conventional budget structure. Of course, budgets may vary by PHA, but this is a standard operating budget format used in real estate management. <advance 1> We start with Gross Potential Income, or GPI. GPI is the maximum rent that can be derived from 100% occupancy and 100% collection of rents over the course of a financial period. To compute GPI, assume that all units are occupied, all rents are paid in full, and all payments are received on time. <advance 2> Of course, we all know that this isn’t always the case. So we must deduct for vacancy and collection loss. Vacancy and collection loss reflect lost income due to: physical vacancy, which is available but unoccupied space; economic vacancy, which is loss from concessions or space not available for lease (e.g. special use units); and collection loss, which is delinquent or uncollectible rent. <advance 3> Next, we add miscellaneous income. Miscellaneous income comes from any source other than rent. In the private sector, some sources of miscellaneous income include: parking fees, laundry machines, vending machines, forfeited security deposits, and late fees. <advance 4> This brings us to Effective Gross Income, or EGI. EGI is the actual amount collected in all categories of income. This figure becomes the source of funds used to pay the AMP’s operating expenses. <advance 5> As you know, operating expenses are the normal, day-to-day expenses of running an AMP. Categories of operating expenses can be customized to reflect the AMP’s needs and plans. <advance 6> After subtracting the total operating expenses from Effective Gross Income, we arrive at Net Operating Income, or NOI. NOI is an important gauge of the AMP’s financial strength. It is also used to determine the AMP’s value. The larger the NOI, the greater the amount that can be spent on future AMP improvements. <advance 7> At this point, many real estate managers deduct for reserves. Reserves for replacement are a form of savings used to cover future capital improvements. Reserves are typically considered a line item that occurs after NOI. <advance 8> Annual Debt Service, or ADS, is deducted at this point in conventional housing to pay the AMP’s loan principal and interest each year. Note: ADS may not be applicable to many PHAs. <advance 9> After all of the income and expense figures are accounted for, we arrive at the bottom line: cash flow. Cash flow is an indicator of financial health and shows that the AMP successfully met its major obligations, such as operating expenses and debt service.
  • As Board members responsible for approving project-level budgets, how do you know whether the AMP’s expenses are appropriate when compared to the income? There are two key benchmarks that are used to compare. <advance 1> The Operating Expense Ratio divides expenses by income to arrive at a percentage. The lower the ratio, the more efficient the operation. In Public Housing, the Operating Expense Ratio is currently close to 99 percent because income just covers expenses and there is no debt service. <advance 2> Operating Expense per Unit divides expenses by the number of units to arrive at a dollar amount. <advance 3> Common variables affecting both of these benchmarks include: the AMP’s age, taxes, the number of floors, and the size of units. <advance 4> Both the Operating Expense Ratio and the Operating Expense per Unit figure can be used to compare AMPs both within and outside of your portfolio.
  • Let’s practice assessing project performance using some of these benchmarks. <advance 1> First, review basic budget information for two similar apartment buildings shown on the next slide. <advance 2> On your own, calculate the Operating Expense Ratio and Operating Expense per Unit Ratio using the calculations we just reviewed. <advance 3> Next, divide into groups and identify the project with the lowest costs. <advance 4> Finally, discuss what other factors should be considered when evaluating the results of this cost comparison, and write down your responses.
  • We learned from previous slides that the Operating Expense Ratio is calculated by dividing operating expenses by income. This determines how much of our income is allocated towards operations. The lower the number, the higher the AMP’s income. In addition to learning about the Operating Expense Ratio, we also learned that Operating Expense per Unit is calculated by dividing operating expenses by the number of units. In this instance, we can see that Hamilton Place not only has a better Operating Expense Ratio, but their Operating Expense per Unit is also considerably less than that of Southside Apartments, so we can conclude that Hamilton Place has lower costs than Southside.
  • The following slide provides a breakdown of how you would calculate the Operating Expense Ratio and Operating Expense Unit for both Hamilton Place and Southside Apartments.
  • There are a variety of sources of these expense benchmarks available, as you can see here. One such resource are the Institute of Real Estate Management’s “Income/Expense Analysis Reports.” The Institute of Real Estate Management, or IREM, collects income and expense data for multiple property categories, including conventional apartments and federally- assisted apartments. Note that by submitting data before the annual March 1 st deadline, all contributors receive a free copy of that year’s Income/Expense Analysis for the property type they submitted. Benchmark information can also be obtained through Housing Finance Agencies. You can also obtain information on benchmarks through NeighborWorks (for small properties), Rural Development; and Local and Regional Market studies.
  • The next building block is project-based accounting. Project-based accounting provides the ability to track financial performance at the AMP level. Ultimately, this provides the necessary information to make more effective decisions at the AMP level. <advance 1> As with other federally-assisted housing programs, PHAs will be required to submit to HUD year-end financial statements on each project. These financial statements will include revenue, expense, and balance sheet items. <advance 2> Further, PHAs will only be able to charge projects for services actually received. For example, in accounting for project costs PHAs will not be permitted to spread the cost of central maintenance across projects. <advance 3> Lastly, any overhead fees and any fees for centrally-provided property management services, must be considered reasonable. This means that the costs must not exceed what other efficient operators would incur for those same services in the local market.
  • <advance 1> For conventional properties, the financial performance of each property is tracked individually and reported to the owner. Property-level financial reports allow the manager and owner to make the best possible decisions for each individual property. <advance 2> Project-based accounting provides very valuable information about the financial performance of each project managed by the PHA, such as net operating income, which is important for determining whether the asset is generating positive income or losing money. Unlike a project-based budget, project-based accounting, or financial reporting, is not a plan. Project-based accounting measures actual financial performance as opposed to forecasted or planned financial performance for a given period of time; typically the asset’s fiscal year. <advance 3> Financial reports will also tell us if our budgets, or plans, for a particular project’s financial performance are accurate. If the actual financial performance of a project differed substantially from the budget, either positively or negatively, we would want to know why and apply this information to the future budget.
  • In terms of basic requirements under the Final Rule, PHAs will be required to submit to HUD financial statements on each project including: <advance 1> Revenue, expenses, and balance sheet information. <advance 2> As will be shown shortly, these project-level financial statements will be included along with the regular Financial Data Schedule or FDS. <advance 3> Additionally, the FDS will be modified to capture the financial activity of the COCC. Importantly, the Final Rule places no requirement for submission of project-level financial reporting more frequently than annually, at year end.
  • Shown here is a simple representation of the existing entity-wide FDS. The existing FDS is designed around funds or programs in column format. There is, for example, a separate column for the Operating Fund, the Capital Fund, and the Section 8 Housing Choice Voucher Program, and PHAs enter dollar amounts associated with balance sheet and income statement accounts, or lines, in the appropriate column. As such, programs are organized by columns and accounts are organized by rows. For each program, the PHA reports assets and liabilities, also known as the balance sheet, in the corresponding column and rows. The PHA also reports revenue and expenses, also known as the income statement, in the corresponding column and rows. The income statement is not shown on this representation. This screenshot reflects the fact that the existing FDS does not require AMP-level reporting.
  • Shown here is a simple representation of the new AMP-level FDS. Like the existing entity-wide FDS, the new FDS is also designed around funds or programs in column format, but with one key difference. The new FDS includes supplemental schedules for each project enable PHAs to enter AMP-level balance sheet and income statement financial information consistent with the reporting requirements under the Final Rule and the principles of asset management. These supplemental schedules provide a column for each AMP owned by the PHA, and each column includes financial activity for both the Operating Fund and Capital Fund programs by AMP. The new FDS then sums the financial activity for each AMP into a total column that includes all PHA Operating Fund and Capital Fund financial activities across AMPs. Although a PHA will report both Operating Fund and Capital Fund Program financial information together by AMP, the Final Rule does not combine these programs. Program-specific accounts will enable the tracking of financial activity for these programs separately. The new format simply shows both Operating Fund and Capital Fund activity at the AMP-level. This screenshot reflects the fact that the new FDS requires AMP-level financial reporting. Module IV will discuss the new FDS in detail.
  • The project-based management building block allows projects to operate using a conventional property management approach. <advance 1> For example, PHAs will arrange services “in the best interests of each project.” In other words, if a PHA chooses to centralize a service, the project must receive the same level of service from the central staff as could be obtained through the market or by handling the work with off-site staff. <advance 2> Additionally, PHAs may assign management personnel, such as a site manager, to each project. The primary responsibility of this staff person will be the day-to-day operation of that project. Depending on the size of the AMPs, it may not make sense for each AMP to have its own site manager. Site-based staffing decisions will depend on individual AMP characteristics. Typically, AMP-based staff is the norm in project-based management.
  • As you’ll recall, project-based management is one of our essential building blocks of asset management. Under the Final Rule, project-based management is characterized as “the provision of property-management services that is tailored to the unique needs of each property, given the resources available to that property. Under project-based management, these property management services are arranged, coordinated, or overseen by management personnel who have been assigned responsibility for the day-to-day operation of that property and who are charged with direct oversight of operations of that property.” It is important to note that in conventional real estate management, project-based management is the same thing as property management.
  • So why practice project-based management? <advance 1> First, giving the highest level of responsibility to those closest to the asset maximizes performance at all levels. This approach allows the on-site staff to manage the project operations and the supervisory staff to supervise several assets at once. <advance 2> Also, within any market, you may find different sub-markets. On-site staff members are closer to the issues affecting the local community. Localized staff can make decisions and give recommendations based on their personal experience with and knowledge of the local market. <advance 3> Of course, on-site staff are able to monitor the project more effectively than remote staff. Allowing the on-site staff to make decisions affecting the project without having to wait for the supervisor or home office improves response time. <advance 4> As you may presume, customer service is better performed at the site level. Residents would rather speak with on-site decision-makers face-to-face. Immediate action can be taken by on-site staff regarding resident issues.
  • Now that we know the basic definition of project-based management, let’s look at some common characteristics of this approach: <advance 1> Under project-based management, each project typically has an operating budget that is approved by the owner, in this case, the PHA Board. <advance 2> Also, the project is commonly assigned dedicated staff, including a site manager, who work on site at the project. <advance 3> In some cases, the project may be too small to afford full-time staff. In this case, staff may be part-time, or may be shared with other projects.
  • <advance 1> These site personnel have significant authority and oversee the day-to-day operations at the project. <advance 2> In fact, under project-based management, most project management tasks are handled or coordinated by the on-site staff. <advance 3> This often includes procurement. Under project-based management, procurement of items up to a certain amount is done by on-site management and reviewed by a supervisor. <advance 4> Finally, under project-based management, the person primarily in charge of the project on a day-to-day basis, including maintenance, is the site manager. While project-based management does not require that all project management services be performed on site, a decentralized model will often best serve the interests of the project. As a consequence, project-based management frequently introduces an organizational model different from what many PHAs may operate under presently.
  • Let’s suppose you own a group of restaurants. <advance 1> Would you have a budget for each one? Yes! You would do this because it is critical to forecast income, expenses, and overall performance of each restaurant. <advance 2> Would you hire a manager for each restaurant? Yes! You would want an on-site staff person to be responsible for the day-to-day operations of the business. <advance 3> What roles would you assign to on-site staff? What roles would you assign to central staff? For example, perhaps on-site staff would be responsible for purchases up to a certain amount, while central staff would approve larger purchases, such as a new piece of equipment for the restaurant. The same is true of project-based management.
  • Let’s take a closer look at some common management tasks. <advance 1> The table on the following slide lists a number of tasks commonly associated with managing Public Housing. <advance 2> As a group, determine whether each task should be performed on-site or centrally under project-based management.
  • For the purpose of this exercise, central may mean central staff directly employed by the PHA or a third-party management company hired by the PHA. It is important to note that the answers provided on this slide reflect the practices generally seen in the broader multifamily industry. However, there may be situations in which it makes sense to perform certain functions that are classified as “on-site” in this example centrally, and vice versa. The answers for these tasks are: Leasing units and enforcing the lease: On-Site. The leasing of units and enforcement of leases is generally site-based. Certain situations may arise regarding the enforcement of leases that require central staff involvement, but the general day-to-day work should be performed on-site. Processing families for admission and submitting 50058 forms as required: On-Site. The 50058 form contains information on families residing at a specific AMP, so intake and submission of 50058 forms should be performed on-site. Grant-writing and other predevelopment activities: Central. As grants are often awarded to PHAs as entities, these activities should be performed by central staff. Reviewing project-level budgets and reports: Central. While each project is required to create a budget, the review of the budget against goals should be the focus of the central staff. Site managers would also report on the budget and provide recommendations. Inspecting units, structures, and systems on a frequent basis: On-Site. Inspecting units, structures, and systems on a frequent basis is the responsibility of on-site staff. Each AMP should have dedicated maintenance staff that can inspect the premises on a regular basis. Taking applications for admission: On-Site. Taking applications for submission from potential tenants is generally completed on-site. Interacting with local government and HUD: Central. As it is the PHAs, and not the individual AMPs, that ultimately report to HUD and work with the local government, interaction with government entities should be handled by central staff. Overseeing the portfolio including tracking occupancy trends: Central. As PHAs are responsible for the portfolio as a whole, reviewing occupancy percentages and overseeing the portfolio is the responsibility of the central staff, and ultimately the Board. Preparing budgets for the property: On-Site. Developing budgets for each project primarily involves the site manager, but would also involve central staff. Purchasing and ordering goods and services: On-Site. Purchasing and ordering goods and services is generally done on-site. The site manager essentially purchases all goods and services for the project, with approval from the regional manager when the amount exceeds established thresholds. Some PHAs might require that any purchase over $500 be approved by the regional manager; others might not require any approval provided the item was included in the approved operating budget. However, once approval is received from the regional manager (if required), the site manager then completes the purchase – not a centralized purchasing agent. Deciding when a property needs revitalization, demolition, or disposition: Central. It is up to Central management to decide if and when a property needs revitalization, or should be disposed of to construct a new property.
  • Our last building block is project-based performance assessment. <advance 1> The current Public Housing Assessment System (PHAS) examines mostly PHA-wide activities, not project-specific activities. However, HUD is revising PHAS to emphasize AMP performance. <advance 2) Aside from PHAs, PHAs should develop internal monitoring mechanisms to monitor AMP performance on a regular basis. For example, PHAs may want to review AMP operating statements on a monthly basis to compare actual performance against budgeted performance.
  • <advance 1> Each project will be evaluated on its financial and management performance in addition to its physical condition, which is measured at a project level by a physical inspection. A central part of this new performance measurement structure will be a system of on-site management reviews of each project. PHAS will also be assessed on the obligation and expenditure of Capital Fund dollars. <advance 2> PHAS will rely on existing data sources where possible. For example, projects will continue to receive physical inspections. <advance 4> PHAS will emphasize on-site management reviews to assess managerial performance.
  • <advance 1> The Final Rule does not establish any particular requirements of PHAs in terms of their internal monitoring of AMP performance. It does not stipulate a specific frequency or manner in which a PHA must prepare internal performance reports. However, PHAs should develop internal monitoring mechanisms to monitor AMP performance on a regular basis. <advance 2> Performance can be monitored against goals stated in annual plans and budgets. For example, budget goals may include monthly income and expenditures.
  • <advance 1> Measuring the performance of a project assumes that there are well-articulated goals for that project. <advance 2> In most instances, the budget for the project includes, formally or informally, the goals of the project for the year. Consequently, simply meeting the expected financial performance often means that the other goals have been met. The budget should reflect such key operational issues as: rent collections, vacancy, unit turnaround, and level of maintenance services. The budget should also include any plans for non-routine maintenance or other capital investments.
  • All organizations will have different processes to ensure the routine performance of each project. Below is a sample timeline of an aggressive review process. Please note that not all PHAs will have regional managers. <advance 1> In this example, on the 5 th of month financial statements are made available, meaning that the Site Manager can access the financial statements for the previous month. <advance 2> On the 7 th of month the Manager’s monthly Project Report is due to Regional Manager. Here the manager takes stock of the performance of his or her project for the prior month, against the goals established. <advance 3> On the 9 th of month, a business meeting between the Site Manager and Regional Manager takes place to review the prior month’s financial and management performance. <advance 4> On the 10 th of month, the Regional Manager forwards a narrative variance report to Director of Project Management and Executive Director, accompanying the monthly financial report. <advance 5> On the 12 th to 15 th of month, the Executive Director reviews the project performance with the Board and Board Committees.
  • As the Board, you will have an important asset management function of reviewing the regular operating performance of a each project as well as planning for the long-term use of the asset. In order to handle this latter task, the following must be available: Physical needs assessment. You must have information regarding the physical condition of the project and the cost of upgrades. Market data. You should have an understanding of who the project currently serves, who it could attract, and the rents that it could command, both in its current condition, and with upgrades. Asset value: The PHA should have an understanding of the value of the asset, both in its current condition and with various upgrades. Funding sources: Finally, the PHA should understand the different funding sources available, either through the Capital Fund or private financing, to make improvements.
  • Once a PHA has this data, asset strategies should be considered. What types of asset strategies are available to a PHA? One strategy is to hold and defer capital needs. This is a legitimate strategy if funding is not readily available and the improvements are of a nature that can be delayed. Another strategy is to hold and modernize. This is also one of the most common strategies. Few public housing projects need to be sold or disposed. Most can continue to be used for their current purpose, provided they are modernized, commonly through the use of Capital Fund resources. A third option is to refinance the project. PHAs are beginning to use private debt to address their capital needs. The most common vehicle is the Capital Fund Financing Program, or CFFP. However, HUD will soon publish proposed rulemaking to establish an Operating Fund Financing Program, or OFFP, as well. A fourth option is to sell, dispose, or demolish the project. Such a decision may be made when there is no feasible financing strategy. This decision may also be made in situations where the value of the asset is such that the PHA could better use the proceeds to invest in other projects. Each of these strategies must be compared against the agency’s mission and goals to determine the most appropriate asset plan. The key is to make conscientious decisions about each project, even if the strategy is to hold and defer.
  • This is the end of Section 2: Asset Management Building Blocks.
  • Welcome to Section 3: The Central Office Cost Center.
  • Asset management provides a real opportunity for PHAs to maximize available opportunities and embrace an entrepreneurial business model. In this section, we’ll take a closer look at those opportunities and explore the PHA’s property management function. <advance 1> First, we will introduce the concept of the Central Office Cost Center, or the COCC, and the COCC requirements as laid out in the Final Rule. <advance 2> Next, we will describe the fees that the COCC can charge to the AMPs, and the rules and requirements surrounding these fees. <advance 3> Finally, we will discuss how asset management might impact the organizational structure of PHAs and provide a few high level examples of what the new structures might look like.
  • Before we discuss the requirements for the Central Office Cost Center, we are going to briefly explain the background behind its development. <advance 1> In the broader multifamily industry, many owners will employ the services of property management companies in order to handle the day-to-day operations of the owner’s properties. In these instances, the owner will pay the property management company a fee for the work performed. These property management functions can either be performed internally by a property management division or can be contracted out to a third-party property management company. <advance 2> In Public Housing, the COCC will operate just like a property management company. The COCC will provide day-to-day oversight of a PHA’s AMPs and, in return, each AMP will pay the COCC certain allowable fees, all of which will be discussed in detail later in this section. <advance 3> Under the Final Rule, all PHAs with 250 or more units are required to establish a COCC; however, small PHAs, those with fewer than 250 units, are free to implement the COCC model as well.
  • <advance 1> The Central Office Cost Center, or COCC, is a business unit within the PHA that employs most of the PHA’s management and administrative staff. The COCC earns income from the fees that it is allowed to charge each of the AMPs along with other business activity, where applicable. For PHAs, there are a number of benefits in implementing the COCC approach: <advance 2> First, it greatly simplifies administrative requirements related to the accounting of overhead costs. The fees charged will be used in lieu of complex systems for allocating overhead expenses. <advance 3> Second, the COCC provides PHAs with greater flexibility. PHAs will be free to determine how to use their fee income. This allows PHAs to further support their individual mission and goals.
  • Now that we’ve spent some time looking at the concept of the COCC, let’s see how the COCC earns income in the Public Housing world. Recall our flow of funds diagram from section 2. In the new model, the operating subsidy is accounted for at the AMP level. The AMP then pays fees to the COCC. <advance 1> Under the Final Rule, this payment comes in the form of: the property management fee, the asset management fee, the bookkeeping fee, fee-for-service, and program management fees (e.g. Housing Choice Voucher Program, Capital Fund Program, etc.). This is the income of the COCC in the Public Housing world. Let’s take a closer look at the potential fee income earned by the COCC.
  • As we just mentioned, there are several types of fees that the COCC may charge including: <advance 1> A property management fee for overseeing the operations of each AMP. <advance 2> A bookkeeping fee for the bookkeeping and accounting operations of each AMP. <advance 3> An asset management fee for each AMP. <advance 4> Program management fees and other business activity income. Some potential sources of program management fees are the Capital Fund Program and Housing Choice Voucher Program management and bookkeeping fees. Other income might include management of a section 202 and development fees earned from non-public housing units. <advance 5> Fee-for-service (for example, centralized painting or extermination). We often call these different sources of fee income, lines of business (e.g. property management).
  • Let’s start with the property management fee. <advance 1> The Final Rule requires PHAs to charge each AMP a “reasonable” property management fee to fund the operation of the central office as compensation for overseeing the operations of the AMP. <advance 2> In essence, this property management fee replaces traditional PHA overhead allocations. <advance 3> The property management fee is only based on occupied units and HUD-approved vacancies, and does not include limited vacancies. <advance 4> Nationally, the average property management fee paid in 2004 in HUD’s Multifamily Housing programs for unlimited dividend and non-profit sponsors was $35 PUM. The range of fees paid will vary by market.
  • PHAs may use three methods to determine the property management fee: <advance 1> 80 th percentile of management fees paid in the local market. This data is published in the Supplement to PIH Notice 2007-9 on page 57. <advance 2> Local Multifamily fee schedules created by the HUD Multifamily office in the same region. PHAs and HUD staff should consult HUD Multifamily staff for information on these fee schedules. <advance 3> Other compelling local data from the market.
  • <advance 1> In addition to a property management fee, the COCC will be permitted to charge a fee for the project accounting function (bookkeeping) provided by the COCC in the amount of $7.50 PUM. This bookkeeping fee includes salaries of appropriate staff; the establishment, maintenance and control of accounting systems; and/or contracts for accounting services. <advance 2> Just like the property management fee, the bookkeeping fee is only based on occupied units and HUD-approved vacancies, and does not include limited vacancies. Prior to the advancement of automated systems, most bookkeeping activities in multifamily housing were performed onsite. Today, the accounting for project funds is a task that is done mostly through a management agent’s central office, which is often charged to the project as a bookkeeping fee. <advance 3> In 2004, the average bookkeeping fee in HUD’s Multifamily Housing program was about $3.50 per unit per month. PHAs will report the management fee and the bookkeeping fee as separate line items on each project’s financial statements. For all practical purposes, the management fee and the bookkeeping fee represent the reimbursement to the managing entity for the oversight of the project and the production of all related financial statements.
  • <advance 1> Under the Final Rule, the COCC may also charge each project a “reasonable” asset management fee. The asset management fee is charged for those tasks of ownership that would be residual if all property management functions were contracted to a third-party. In such instances, the owner would still need to perform such tasks as approving the annual budget for the AMP, ratifying any recommendations for rent increases, and overseeing the performance of the property manager. HUD will generally consider an asset management fee charged to each AMP of $10 per unit per month as reasonable. <advance 2> The asset management fee is subject to the availability of excess cash. To determine if a project has sufficient “excess cash” to pay the asset management fee, HUD will use a calculation similar to the computation of “surplus cash” in HUD’s Multifamily Housing programs, which is a balance sheet approach. Therefore, as long as the project has sufficient funds in its reserves, the COCC could charge the project an asset management fee. <advance 3>Asset management fees, up to the allowed per unit per month amount, will be paid based on the number of ACC units. This is different from the property management and bookkeeping fees, which are paid based on the number of occupied units and allowable vacancies in the project.
  • <advance 1> The COCC will be permitted to recover the costs associated with managing the Capital Fund Program. <advance 2> The COCC will charge up to 10% of the total Capital Fund Program Grant as a management fee. This fee is not based on actual costs, so PHAs are not required to keep documentation related to the expenditures associated with this fee. It is important to note that the 10% management fee should only be applied to Capital Fund Grants from FY 2007 and beyond. All grants from previous years should still be charged actual costs regarding program administration.
  • <advance 1> The COCC may also charge the HCV Program for the work performed by central staff in support of the HCV program. Under the current system, PHAs are paid an “administrative fee” for the operation of the HCV program. This fee covers both front-line and fee expenses. Under the Final Rule, PHAs are encouraged to adopt a fee-for-service approach to HCV administration in which the COCC charges the HCV Program fees in exchange for all administrative work performed. <advance 2> These are broken down into two different fees: <advance 3> The first of the two is the HCV Management Fee. The amount a PHA can charge will be based on the higher amount of either 20% of the annual administrative fee the PHA could charge or $12 PUM based on the total number of vouchers leased. <advance 4> Along with the HCV Management Fee, a PHA may also charge an HCV bookkeeping fee of $7.50 PUM based on the total number of vouchers leased. It is important to note that this method is only recommended and is not required; PHAs may continue to administer the HCV program in the same manner they have in the past.
  • Along with the fees already discussed, the COCC may have a number of other potential revenue streams, depending on which other programs the PHA participates in. These potential revenue streams are: <advance 1> Public Housing development: The COCC can charge an administrative fee equal to 3% of the total development grant, or up to 6% with HUD approval, for public housing development. <advance 2> Other HUD Programs: Where authorized, the COCC can charge up to 15% of the total grant amount for other PIH Grant Programs, such as ROSS. <advance 3> And finally, other business activity: The COCC could also earn fees from other non-public housing sources in which the PHA is involved. For example, the PHA may be engaged in development outside of the public housing program or could be the management agent for a non-public housing project.
  • <advance 1> From time to time, it may be beneficial to provide certain project management services centrally. Per PIH Notice 2007-09, Updated Changes in Financial Management and Reporting for Public Housing Agencies Under the New Operating Fund Rule (24 CFR Part 990) , a PHA may choose to centralize various front-line expense activities. Every time an AMP uses one of these centralized, front-line functions, the COCC would charge the AMP a fee for the service provided, just like if the AMP were to hire a third-party contractor to perform the task. These fee for services are another way in which a COCC may earn revenue under asset management. <advance 2> The following are two examples of front-line activities that could be charged under the fee-for-service model: <advance 3> Maintenance: If a PHA chooses to maintain a centralized maintenance function then all work provided to the AMPs must be charged using a fee-for-service approach rather than actual costs. <advance 4> Legal Services: If a PHA maintains a centralized legal department that handles the AMP-level legal issues, such as evictions, then this service must be charged using a fee-for-service approach.
  • PHAs that elect the fee for service approach for centralized services must adhere to the following guidelines: <advance 1> Fees must not exceed the market rate for the work received. Under this approach the PHA’s Central Office Cost Center is providing services much like a third-party contractor and as such can only charge the AMPs the market rate for these services. <advance 2> PHAs must use the fee for service approach for centrally provided maintenance. <advance 3> Consistent with the Final Rule, centrally provided front-line services must be in the best interest of the AMPs and cannot cost more than if performed on-site. <advance 4> PHAs must maintain documentation for the fees charged to the AMPs. For example, acceptable documentation may include multiple quotes from external contractors that establishes a price for the same work the PHA has chosen to provide centrally using the fee for service approach.
  • To summarize, let’s take a look at the fee revenue portion of a PHA’s central office cost center. This particular PHA has 1,000 units and maintains 97% occupancy. <advance 1> In this case, the maximum property management fee established by the local Field Office is $40 per unit per month. So, we have $40 times 1,000 units times 12 months at 97% occupancy. This totals $465,600. <advance 2> Next, we have a bookkeeping fee of $7.50 times 1,000 units times 12 months at 97% occupancy for a total of $87,300. <advance 3> To this we add the asset management fee of $10 per unit per month times 1,000 units times 12 months for a total of $120,000. Remember that asset management fees are paid based on the number of ACC units, unlike the property management and bookkeeping fees, which are paid based on the number of occupied units. <advance 4> And finally, the only property management service that this PHA performs centrally is extermination, which it does on a fee-for-service basis of $50 per treatment and each unit was treated once during the course of the year. All other property management services are performed on-site. So, we take $50 times 1000 treatments for a total of $50,000. <advance 5> Therefore, this PHA’s COCC would earn $722,900 in fees for the operation of its projects, exclusive of any other miscellaneous income that the PHA may earn.
  • <advance 1> One important difference under asset management is that PHAs will now be required to segregate between front-line expenses and administrative expenses, also known as fee expenses. Before we discuss how these expenses will be treated, let’s define each of the expense types. A front-line expense is an expense that is directly related to the operation of an AMP. As such, this expense should be paid for by the AMP income, such as Operating Subsidy or tenant rental revenue. A fee expense is any expense that would be considered an administrative expense. These expenses should be paid for by the COCC through the fee income it generates, such as the property management fees or any fee for service they operate. Now lets take a closer look at some examples of the two expense categories.
  • A fee expense is an expense of the COCC. Examples of fee expenses are: <advance 1> The costs, including salary and benefits, associated with certain, centralized personal such as, <advance 2> The Executive Director <advance 3> Any Regional Managers <advance 4> All human resources staff members <advance 5> the finance and accounting staff <advance 6> Along with these staff members, all equipment, furniture, and services that are needed to successfully operate the COCC would also be considered a fee expense <advance 7> Finally, central servers and software that are used to directly support the COCC should be paid for through the fee income generated. <advance 8> In the Supplement to PIH Notice 2007-09, HUD provided Table 7.2, found on pages 45-46, which provides some details on the fee expenses found in the Operating Fund Program. Please note that this list represents only a few examples of fee expenses.
  • Unlike fee expenses, front-line expenses are those that should be incurred by each AMP, not the COCC. Examples of front-line expenses are: <advance 1> The costs, including salary and benefits, associated with onsite personnel, such as <advance 2> The housing manager or site manager <advance 3> All maintenance technicians <advance 4> Any Resident Services staff members <advance 5> Along with the onsite personnel, front-line expenses also include the costs associated with maintaining an onsite office at the AMP. These costs could include office furniture, computer hardware and software, and office supplies. <advance 6> Finally, all utility costs associated with AMP operations are considered a front-line expense <advance 8> In the Supplement to PIH Notice 2007-09, HUD provided Table 7.2, found on pages 45-46, which provides some details on the front-line expenses found in the Operating Fund Program. Please note that this list represents only a few examples of front-line expenses.
  • Now that we’ve reviewed the basics of asset management, what are the next steps? Under asset management, the Board will continue to work closely with PHA leadership to discuss these items in more detail and solidify plans. As we’ve seen, there are many benefits to the asset management transition, but it will require change.
  • Throughout this training, we’ve explored various high-level benefits of the move to asset management. Let’s get more specific and think about your PHA. What can you expect in terms of the benefits of asset management? <advance 1> First of all, the project-level focus of asset management allows PHAs to provide services in the best interest of each individual project, taking cost and responsiveness into consideration. Additionally, asset management paves the way to provide additional housing opportunities. <advance 2> The bottom line is that asset management enables PHAs to operate more efficiently. However, this won’t happen overnight and it may be necessary to examine various organizational models and adjust them to accommodate a more project-based management approach. Remember that HUD is measuring results rather than process so it will not dictate how PHAs should be organized, except where performance is unsatisfactory. As a result, each PHA has the flexibility to determine appropriate organizational models that best meet the needs of each project. <advance 3> With more activities performed at the project-level, PHA staff will take on more meaningful responsibilities and activities. This will create more knowledgeable staff members, who will be in a better position to both better assist the tenants at each project as well as maintain and operate each project more efficiently. HUD realizes that training will be required to achieve this goal, but this shift will foster true accountability and opportunity. HUD has already provided substantial training in the completion of AMP-level subsidy forms and AMP-level financial reporting, which began last summer and is on-going. <advance 4> Finally, due to the nature of project-based accounting and financial reporting changes related to asset management, changes may need to occur in management information systems such as accounting and IT. These new systems will provide the necessary information to make decisions in the best interest of the project.
  • There are a number of resources available on the HUD Asset Management website to assist PHAs throughout this conversion to asset management: <advance 1> “Revisions to the Public Housing Operating Fund Program; Final Rule,” or 24 CFR 990, amends the regulations of the Public Housing Operating Fund program to provide a new formula for distributing operating subsidy to PHAs. It also establishes requirements for PHAs to convert to asset management. <advance 2> “Preparing for Asset Management Under the New Public Housing Operating Fund Rule (24 CFR 990): A Planning Document” provides an outline of the overall policy framework underlying the transition to asset management. <advance 3> “Demonstration of a Successful Conversion to Asset Management: Stop-Loss Submission Kit Year 2” includes instructions and related submission requirements for PHAs that want to apply to have their losses stopped under the new Operating Fund formula. <advance 4> “Demonstrating Successful Conversion to Asset Management: A Site Visit to the Charlotte Housing Authority” summarizes the results of a site visit to the Charlotte Housing Authority in Charlotte, North Carolina.
  • <advance 1> PIH Notice 2007-09, Changes in Financial Management and Reporting for Public Housing Agencies Under the New Operating Fund Rule (24 CFR Part 990), provides guidance on financial management and reporting requirements for PHAs under asset management. This notice is often referred to as the “supplement.” <advance 2> Finally, the Asset Management Help Desk is a resource where Field Office and PHA staff can receive real-time assistance with questions and guidance related to asset management. The email address is AssetManagementHelpDesk@hud.gov and the toll-free telephone number is 1-800-511-8478. Please note that some questions require input from one or more HUD offices and may require more than the standard response time.
  • This is the end of Section 3: The Central Office Cost Center.
  • All Sections (Consolidated) PowerPoint file

    1. 1. Asset Management Orientation for PHA Boards
    2. 2. Overview of Asset Management Orientation for PHA Boards Section 1: Overview of Asset Management Section 2: Asset Management Building Blocks Section 3: The Central Office Cost Center
    3. 3. Training Format <ul><li>Designed for PHA Board members </li></ul><ul><li>Based on the curriculum presented at live, regional training sessions conducted in 2007 </li></ul><ul><li>Features include: </li></ul><ul><ul><li>Fully narrated presentation slides </li></ul></ul><ul><ul><li>Ability to navigate between slides </li></ul></ul><ul><ul><li>Exercises in each section </li></ul></ul><ul><ul><li>Ability to download the training to your computer </li></ul></ul><ul><ul><li>Access to reference materials and websites </li></ul></ul>
    4. 4. Basic Instructions for Presentation Viewer . . . . . . . 1 2 3 4 5
    5. 5. Section 1: Overview of Asset Management
    6. 6. Overview of Asset Management Learning Objectives <ul><li>Provide a brief history of the events leading up to Public Housing’s conversion to asset management </li></ul><ul><li>Identify key dates associated with the transition to asset management </li></ul><ul><li>Define asset management </li></ul><ul><li>Distinguish asset management from property management </li></ul><ul><li>Describe key roles and responsibilities under asset management, particularly the PHA Board’s role as owner </li></ul>
    7. 7. History and Background <ul><li>1998: Quality Housing and Work Responsibility Act </li></ul><ul><li>1999: Negotiated-Rulemaking I, Funding of Harvard Cost Study </li></ul><ul><li>2003: Cost Study Completed </li></ul><ul><li>2004: Negotiated-Rulemaking II </li></ul><ul><li>2005: Final Rule on Operating Fund Program </li></ul><ul><ul><li>New Operating Subsidy Formula </li></ul></ul><ul><ul><li>Asset Management Requirement for PHAs with 250+ Units </li></ul></ul><ul><li>2006: PIH Notice 2006-33 (Interim Guidance/Financial Reporting) </li></ul><ul><li>2007: PIH Notice 2007-09 (Final Guidance/Financial Reporting) </li></ul><ul><li>2008 Appropriations Bill (Include full name here) </li></ul>
    8. 8. A Look at the PHA Inventory Data is based on the “Operating Fund Annual Report Calendar Year 2007,” October 31, 2007. % of Total Units Number of PHAs Size Category 805 2,327 83% 17% 250 or more units Less than 250 units
    9. 9. Gainers and Decliners Under the New Operating Fund Formula Data is based on the “Operating Fund Annual Report Calendar Year 2007,” October 31, 2007. % of Total PHAs Number of PHAs Gainers/Decliners Category 814 2,304 26% 74% Decliners Gainers
    10. 10. <ul><li>“PHAs shall manage their properties according to an asset management model, consistent with the management norms in the broader multi-family management industry. PHAs shall also implement project-based management, project-based budgeting, and project-based accounting, which are essential components of asset management.” </li></ul><ul><li>Revisions to the Public Housing Operating Fund Program; Final Rule </li></ul><ul><li>HUD, September 19, 2005 </li></ul>Central Tenet of Asset Management
    11. 11. Key Implementation Dates <ul><li>Determination of Asset Management Projects (AMPs) – Calendar Year 2006 </li></ul><ul><li>Implementation of new Operating Fund Formula – Calendar Year 2007 </li></ul><ul><li>Project-Based Budgeting/Accounting (PBB/A) – Fiscal Year 2007 </li></ul><ul><li>Cost Reasonableness Standards – Fiscal Year 2008 </li></ul><ul><li>New Public Housing Assessment System – Effective Second Year of PBB/A </li></ul><ul><li>Full implementation of Asset Management – Fiscal Year 2011 </li></ul>
    12. 12. Effective Dates for Implementation *Extension through 2011 on case-by-case basis 4/1/2009 through 3/31/2010 4/1/2008 through 3/31/2009 Mar 1/1/2009 through 12/31/2009 1/1/2008 through 12/31/2008 Dec 10/1/2008 through 9/30/2009 10/1/2007 through 9/30/2008 Sept 7/1/2008 through 6/30/2009 7/1/2007 through 6/30/2008 June Cost Reasonableness * PBB and PBA PHA Fiscal Year-End
    13. 13. Asset Management Definition <ul><li>Asset management…is a process of making investment decisions for a collection (portfolio) of assets , based on the mission, goals, and objectives of the owner, lender, sponsor, or regulatory body. </li></ul>
    14. 14. Asset Management vs. Property Management <ul><li>Asset Management </li></ul><ul><ul><li>Mission/goals/policies </li></ul></ul><ul><ul><li>Strategic decision making </li></ul></ul><ul><li>Property Management </li></ul><ul><ul><li>Day-to-day management/operations </li></ul></ul>
    15. 15. A Look at Entities, Roles and Functions PIH Field Offices PHA Staff or Mgmt Company PHA Board Entity Role Function Owner Regulator Operator Property Management Oversight and Monitoring Asset Management
    16. 16. Difference in PHA Missions <ul><li>Who to serve </li></ul><ul><li>Quality of housing </li></ul><ul><li>Standard of affordability </li></ul><ul><li>Social goals </li></ul>
    17. 17. Operating Fund Program Final Rule and Small PHAs <ul><li>PHAs with fewer than 250 units are not required to convert to asset management. Still, they will be: </li></ul><ul><ul><li>Subject to new funding formula </li></ul></ul><ul><ul><li>Required to use the new year-end financial reporting template (FDS, or Financial Data Schedule) </li></ul></ul><ul><ul><li>Affected by change in PHAS </li></ul></ul><ul><li>Small PHAs may choose to implement asset management and follow the key business rules like any larger PHA </li></ul>
    18. 18. PHA Board: Owner Role <ul><li>Review activities for conformance with missions and goals </li></ul><ul><li>Evaluate progress and recommend corrective action </li></ul><ul><li>Monitor performance </li></ul><ul><li>Stay up-to-date on industry information </li></ul><ul><li>Foster relationships with key stakeholders </li></ul>
    19. 19. Asset Management Changes from Appropriations Act of 2008 <ul><li>The Consolidated Appropriations Act of 2008 contained two provisions which pertain directly to asset management. The two provisions are: </li></ul><ul><ul><li>PHA election to be exempt from asset management for PHAs with 250-400 units </li></ul></ul><ul><ul><li>Use of Capital Fund proceeds to pay for central office costs </li></ul></ul><ul><li>The first provision is only effective for CY 2008. The second is considered permanent legislation. </li></ul>
    20. 20. 400-Unit Exemption for CY 2008 <ul><li>For the purpose of being exempt from asset management, the size threshold increased from 250 units to 400 units </li></ul><ul><li>Does not change small PHA threshold for other program areas </li></ul><ul><li>PHAs between 250-400 units that elect to convert will not have option of “alternative asset management model” (available only for PHAs of less than 250 units) </li></ul><ul><li>Exemption only authorized for CY 2008 </li></ul><ul><li>PHA must notify HUD via CY 2008 operating subsidy submissions by April 25, 2008 </li></ul>
    21. 21. 400-Unit Exemption: Implications <ul><li>Will not implement fee for service model, and will not create a COCC </li></ul><ul><li>Will not receive the $4 PUM asset management add-on </li></ul><ul><li>All units will be combined into one AMP, possibly affecting Project Expense Levels (PELs) </li></ul><ul><li>Refer to PIH Notice 2008-16 for additional implications </li></ul>
    22. 22. Capital Fund Program Changes <ul><li>PHAs may transfer Capital Funds to Operations for payment of central office costs </li></ul><ul><li>In implementing this provision, PHAs must maintain cost allocations for overhead costs (in lieu of fee-for-service/management fees) and, therefore, not establish a COCC </li></ul><ul><li>Overhead costs must still be considered reasonable and necessary </li></ul><ul><li>Large PHAs may still only transfer up to 20% to “Operations” </li></ul>
    23. 23. Workshop 1.1: Asset Management Change Assessment <ul><li>How might asset management change the way your PHA does business? </li></ul><ul><ul><li>As a group, please discuss and provide an answer to the question above. </li></ul></ul>
    24. 24. End of Section 1
    25. 25. Section 2: Asset Management Building Blocks
    26. 26. Asset Management Building Blocks Learning Objectives <ul><li>Introduce the five building blocks of asset management </li></ul>
    27. 27. Initial Priorities/Building Blocks Project-based funding Project-based budgeting Project-based accounting Project-based management Project-based performance assessment
    28. 28. Project-Based Funding <ul><li>Separate subsidy form for each project </li></ul><ul><li>Project Expense Level (PEL) is a major component </li></ul><ul><li>Ensures appropriate resources are allocated to each AMP </li></ul>Project-based funding
    29. 29. The Flow of Funds <ul><li>Property Management Fee </li></ul><ul><li>Asset Management Fee </li></ul><ul><li>Bookkeeping Fee </li></ul><ul><li>Fee-for-Service </li></ul><ul><li>Program Mgmt. Fees. </li></ul>HUD PHA OLD $ HUD AMP NEW PHA/COCC $ Subsidy $ Fees
    30. 30. Components of Formula Funding <ul><li>To understand the amount of funds available to any project, one must understand the following: </li></ul><ul><ul><li>Project Expense Level (PEL) </li></ul></ul><ul><ul><li>Utility Expense Level (UEL) </li></ul></ul><ul><ul><li>Add-Ons </li></ul></ul><ul><ul><li>Frozen Formula Income </li></ul></ul><ul><ul><li>Proration </li></ul></ul>
    31. 31. Project Expense Level (PEL) <ul><li>Model-generated estimate of cost to operate a project on a per unit basis, exclusive of taxes, utilities, and add-ons </li></ul><ul><li>Amount expressed in PUMs (per unit month) </li></ul><ul><li>Major coefficients that have a large impact on PEL </li></ul><ul><ul><li>Unit Size (Bedroom Mix) </li></ul></ul><ul><ul><li>Local Market </li></ul></ul><ul><ul><li>Age of Property </li></ul></ul><ul><ul><li>Occupancy Type (Family vs. Elderly) </li></ul></ul><ul><li>National average was $ 325 PUM in 2007 (excluding New York City Housing Authority) </li></ul>
    32. 32. Utility Expense Level (UEL) <ul><li>Represents the average utility consumption for a project over the past three years, multiplied by recent utility rates </li></ul><ul><li>Amount expressed in PUMs </li></ul><ul><li>National average was $125.95 PUM in 2007 </li></ul><ul><li>Assigned UEL will vary by project </li></ul>
    33. 33. 2007 Add-Ons $21.32 $279,481,009 Total Add-Ons $ 3.31 $ 43,329,841 Asset Repositioning $ 2.00 $ 26,215,754 IT (Info. Technology) Fee $ 3.26 $ 42,777,668 Asset Management Fee $ 1.90 $ 24,860,325 Resident Participation $ 1.31 $ 17,159,716 Cost of Independent Audit $ 7.26 $ 95,199,853 Payment in Lieu of Taxes $ 1.29 $ 16,844,422 Energy Loan Amortization $ 1.00 $ 13,093,430 Self-Sufficiency PUM Amount Add-Ons
    34. 34. Frozen Formula Income <ul><li>Equal to a project’s rental income reported on 2004 financial statements, adjusted for changes in utility allowances </li></ul><ul><li>Effective for 2007 through 2009 </li></ul><ul><li>National average was $181.09 PUM in 2007 </li></ul>
    35. 35. Proration <ul><li>Each year, total subsidy eligibility is compared with appropriations for the Operating Fund program; the difference is proration </li></ul><ul><li>Expressed as a percentage </li></ul><ul><li>Example: </li></ul><ul><ul><li>Eligibility = $4.0 billion </li></ul></ul><ul><ul><li>Appropriation = $3.6 billion </li></ul></ul><ul><ul><li>Proration = 90% </li></ul></ul>
    36. 36. Determining Project Funding <ul><li>Project Expense Level (PEL) </li></ul><ul><li>+ Utilities Expense Level (UEL) </li></ul><ul><li>+ Add-ons </li></ul><ul><li>= Formula Expenses </li></ul><ul><li>- Formula Income </li></ul><ul><li>= Subsidy Eligibility </li></ul><ul><li>- Proration </li></ul><ul><li>= Actual Subsidy </li></ul><ul><li>+ Rental Income </li></ul><ul><li>+ Other Income </li></ul><ul><li>+ Transfers </li></ul><ul><li>= Effective Income </li></ul>Effective Income - Operating Expenses = Net Income
    37. 37. Project-Based Budgeting <ul><li>Used for planning purposes </li></ul><ul><li>Budgeted amounts must reconcile to FDS </li></ul><ul><li>Must be approved by PHA Board </li></ul><ul><li>Not subject to HUD approval </li></ul>Project-based funding Project-based budgeting
    38. 38. Project-Based Budgeting (continued) <ul><li>What are project-based budgets? </li></ul><ul><li>Itemized projection of income and expenses over a specific period </li></ul><ul><li>Guideline for operating the project </li></ul>
    39. 39. Sample Conventional Budget <ul><li>Gross Potential Income (GPI) </li></ul><ul><li>- Vacancy and Collection Loss </li></ul><ul><li>+ Miscellaneous Income </li></ul><ul><li>= Effective Gross Income (EGI) </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>= Net Operating Income (NOI) </li></ul><ul><li>- Reserves for Replacement </li></ul><ul><li>- Annual Debt Service (ADS) </li></ul><ul><li>= Cash Flow </li></ul>
    40. 40. Ratios Used for Expense Benchmarking <ul><li>Operating Expense </li></ul><ul><li>Ratio (%) = </li></ul><ul><li>Operating Expense </li></ul><ul><li>per Unit ($) = </li></ul><ul><li>Several variables may impact benchmarks </li></ul><ul><li>Expense benchmarks can be used to compare efficiencies across properties </li></ul>Operating Expenses Income Operating Expenses Number of Units
    41. 41. Workshop 2.1: Expense Benchmarks <ul><li>Consider data from two similar apartment buildings shown on the next slide </li></ul><ul><li>Calculate the Operating Expense Ratio and Operating Expense/Unit Ratio </li></ul><ul><li>In groups, identify the project with the lowest costs </li></ul><ul><li>What other factors should be considered when evaluating the results of this cost comparison? </li></ul>
    42. 42. Workshop 2.1: Expense Benchmarks 86% 91% $7,500 $14,500 OpEx/ Unit OpEx Ratio $145,000 $150,000 Operating Expenses $160,000 $175,000 Income 10 20 # of Units Southside Apartments Hamilton Place
    43. 43. Calculating Expense Benchmarks <ul><li>Hamilton Place: </li></ul><ul><li>Operating Expense Ratio: </li></ul><ul><li>$150,000 (Operating Expense)/$175,000 (Income) = 86% </li></ul><ul><li>Operating Expense per Unit: </li></ul><ul><li>$150,000 (Operating Expense)/20 (Number of Units) = </li></ul><ul><li>$ 7,500 </li></ul><ul><li>Southside Apartments: </li></ul><ul><li>Operating Expense Ratio: </li></ul><ul><li>$145,000 (Operating Expense)/$160,000 (Income) = 91% </li></ul><ul><li>Operating Expense per Unit: </li></ul><ul><li>$145,000 (Operating Expense)/10 (Number of Units)= </li></ul><ul><li>$ 14,500 </li></ul>
    44. 44. Where Can I Find Benchmarks? <ul><li>Project Expense Levels (PELs) </li></ul><ul><li>Project Level Data </li></ul><ul><li>IREM Income/Expense Analysis ® Reports </li></ul><ul><ul><li>www.irem.org </li></ul></ul><ul><li>Housing Finance Agencies </li></ul><ul><li>NeighborWorks (small properties) </li></ul><ul><li>Rural Development </li></ul><ul><li>Local and Regional Market Studies </li></ul>
    45. 45. Project-Based Accounting <ul><li>Year-end project statements submitted to HUD </li></ul><ul><li>Can only charge projects for services actually received </li></ul><ul><li>Fees must be considered reasonable </li></ul>Project-based funding Project-based budgeting Project-based accounting
    46. 46. Project-Based Accounting (continued) <ul><li>For conventional properties, the financial performance of each property is tracked individually and reported to the owner </li></ul><ul><li>This allows the manager and owner to make the best possible decisions for each individual property </li></ul><ul><li>Similarly, PHAs will assemble project level financial data </li></ul>
    47. 47. Project-Based Accounting Under the Final Rule <ul><li>Annual year-end financial statements on each AMP will be required </li></ul><ul><ul><li>Revenues, expenses, balance sheet </li></ul></ul><ul><ul><li>To be included with the Financial Data Schedule (FDS) </li></ul></ul><ul><ul><li>FDS will also be revised to include a column for the COCC </li></ul></ul>
    48. 48. Entity-Wide FDS Financial Reporting Model (Existing) $11,500,000 $750,000 $250,000 $500,000   $10,000,000 Liabilities and Net Assets  $5,950,000 $500,000 $50,000 $400,000 $5,000,000 Net Assets $5,550,000 $250,000 $200,000 $100,000 $5,000,000 Liabilities $11,500,000 $750,000 $250,000 $500,000 $10,000,000 Assets           Statement of Net Assets Rural Housing Section 8 Voucher Program Capital Fund Operating Fund Total Program Balance Sheet
    49. 49. Asset Management Project FDS Financial Reporting Model (New) $339,000 $114,700 $98,500 $125,800 Net Income $1,313,000 $421,600 $429,000 $462,400 Expenses $1,652,000 $536,300 $527,500 $588,200 Revenue Operating Statement $5,144,000 $1,627,500 $1,731,500 $1,785,000 Equity $4,674,000 $1,503,500 $1,521,500 $1,649,000 Liabilities $9,818,000 $3,131,000 $3,253,000 $3,434,000 Assets Balance Sheet Project 3 Project 2 Project 1 Total Asset Management Projects Financial Statement
    50. 50. Project-Based Management <ul><li>Arrange services in the best interest of the project </li></ul><ul><li>Assign management personnel to each project </li></ul>Project-based funding Project-based budgeting Project-based accounting Project-based management
    51. 51. Project-Based Management (PBM) <ul><li>“ The provision of property-management services that is tailored to the unique needs of each property, given the resources available to that property...Under PBM, these property management services are arranged, coordinated, or overseen by management personnel who have been assigned responsibility for the day-to-day operation of that property and who are charged with direct oversight of operations of that property.” </li></ul><ul><li>24 CFR 990 </li></ul>
    52. 52. Why Practice PBM? <ul><li>Maximizes performance at all levels </li></ul><ul><li>Local staff are closer to market changes and community issues </li></ul><ul><li>On-site staff can monitor the project </li></ul><ul><li>Response to resident issues is faster and more personal </li></ul>
    53. 53. Common Characteristics of PBM <ul><li>Each project has an operating budget to be approved by the owner </li></ul><ul><li>The project is assigned dedicated management and maintenance personnel who frequently work on site </li></ul><ul><li>If a project is too small to afford full-time staff, the project may have part-time or shared staff </li></ul>
    54. 54. Common Characteristics of PBM (Continued) <ul><li>Site personnel have significant authority and responsibility over the day-to-day operations </li></ul><ul><li>Most project management tasks are handled or coordinated by the on-site staff </li></ul><ul><li>Procurement is done by on-site management and reviewed by supervisor </li></ul><ul><li>The person primarily in charge of the project on a day-to-day basis, including maintenance, is the site manager </li></ul>
    55. 55. Project-Based Management Example <ul><li>You own a group of restaurants. </li></ul><ul><li>Would you have a budget for each restaurant? </li></ul><ul><li>Would you hire a manager for each restaurant? </li></ul><ul><li>What roles would you assign to on-site staff vs. central staff? </li></ul>
    56. 56. Workshop 2.2: Assignment of Common Tasks <ul><li>The table on the following slide list tasks commonly associated with managing Public Housing </li></ul><ul><li>As a group, determine whether each task should be performed on-site or centrally under project-based management </li></ul>
    57. 57. Workshop 2.2: Assignment of Common Tasks (Answers)            Purchasing and ordering goods/services Preparing budgets for the property Overseeing the portfolio including tracking occupancy trends Deciding when a property needs revitalization, demolition, or disposition Interacting with local government and HUD Taking applications for admission Inspecting units, structures, and systems on a frequent basis Reviewing project-level budgets and reports Grant-writing and other predevelopment activities Processing families for admission and submitting 50058 forms as required Leasing units and enforcing the lease Central On-Site Task
    58. 58. Project-Based Performance Assessment <ul><li>Revise PHAS to emphasize AMP performance </li></ul><ul><li>Development of internal PHA monitoring mechanisms </li></ul>Project-based funding Project-based budgeting Project-based accounting Project-based management Project-based performance assessment
    59. 59. HUD Oversight and the Public Housing Assessment System (PHAS) <ul><li>Each project will be evaluated on financial, managerial, and physical aspects in addition to use of Capital Funds </li></ul><ul><li>New system will: </li></ul><ul><ul><li>Be consistent with the norms in multifamily housing </li></ul></ul><ul><ul><li>Avoid PHA self-certifications </li></ul></ul><ul><ul><li>Rely on existing data sources </li></ul></ul><ul><ul><li>Emphasize on-site management reviews </li></ul></ul>
    60. 60. Internal PHA Monitoring Mechanisms <ul><li>Develop mechanisms to collect data to measure actual AMP performance against goals </li></ul><ul><li>Goals must be clearly articulated in annual plans and budgets. For example, budget goals may include monthly income and expenditures. </li></ul>
    61. 61. Project Goals <ul><li>In order to measure performance, goals must be articulated </li></ul><ul><li>Annual budget preparation includes goals: </li></ul><ul><ul><li>Rent collections </li></ul></ul><ul><ul><li>Vacancies </li></ul></ul><ul><ul><li>Unit turnarounds </li></ul></ul><ul><ul><li>Inspections </li></ul></ul><ul><ul><li>Maintenance services </li></ul></ul>
    62. 62. Sample Monthly Project Review <ul><li>5 th of month: Financial statements made available </li></ul><ul><li>7 th of month: Manager’s monthly Project Report due to Regional Manager </li></ul><ul><li>9 th of month: Meeting with Site Manager and Regional Manager to review performance </li></ul><ul><li>10 th of month: Regional Manager forwards narrative variance report to Director of PM and ED, accompanying monthly financial report </li></ul><ul><li>12th–15 th of month: ED reviews performance with Board and Committees </li></ul>
    63. 63. Long-term Capital Planning and Asset Repositioning <ul><li>Key information needed: </li></ul><ul><li>Physical needs assessment </li></ul><ul><li>Market data </li></ul><ul><li>Asset value </li></ul><ul><li>Funding sources </li></ul>
    64. 64. Long-Term Capital Planning and Asset Repositioning: Strategies <ul><li>Asset strategies: </li></ul><ul><li>Hold/defer </li></ul><ul><li>Hold/modernize </li></ul><ul><li>Refinance </li></ul><ul><li>Sale/disposition/demolition </li></ul><ul><li>Each strategy must be compared against the mission and goals of the agency </li></ul>
    65. 65. End of Section 2
    66. 66. Section 3: The Central Office Cost Center
    67. 67. The Central Office Cost Center: Learning Objectives <ul><li>Explain the concept and requirements of the Central Office Cost Center (COCC) under the Final Rule </li></ul><ul><li>Describe the allowable fees charged by the COCC </li></ul>
    68. 68. Central Office Cost Center (COCC) <ul><li>Owners of Multifamily properties employ property management companies for the day-to-day operation of properties </li></ul><ul><li>The Central Office Cost Center will operate like a property management company </li></ul><ul><li>Final Rule requires all large PHAs (250 or more units) to establish a COCC </li></ul>
    69. 69. Central Office Cost Center <ul><li>Business unit within the PHA that earns income from fees and/or by overseeing other business activity </li></ul><ul><li>Simplifies administrative requirements </li></ul><ul><li>Provides greater flexibility to support mission of PHA </li></ul>
    70. 70. Review: The Flow of Funds <ul><li>Property Management Fee </li></ul><ul><li>Asset Management Fee </li></ul><ul><li>Bookkeeping Fee </li></ul><ul><li>Program Management Fees </li></ul><ul><li>Fee-for-Service </li></ul>HUD PHA OLD $ HUD AMP NEW PHA/COCC $ Subsidy $ Fees
    71. 71. Types of Fee Income <ul><li>Property management fee </li></ul><ul><li>Bookkeeping fee </li></ul><ul><li>Asset management fee </li></ul><ul><li>Program management fees and other business activity </li></ul><ul><li>Fee-for-service (e.g., centralized painting or extermination) </li></ul>
    72. 72. Property Management Fee <ul><li>Fee charged to AMPs for oversight provided by COCC </li></ul><ul><li>Replaces traditional PHA overhead allocations </li></ul><ul><li>Based on occupied units and HUD-approved vacancies (not including limited vacancies) </li></ul><ul><li>Average management fee in HUD’s multifamily housing programs was $35 PUM (2004) </li></ul>
    73. 73. Methods of Determining Property Management Fees <ul><li>80 th percentile of fees paid by market </li></ul><ul><li>Local HUD multifamily fee schedules </li></ul><ul><li>Other compelling local market data </li></ul>
    74. 74. Bookkeeping Fee <ul><li>COCC is permitted to charge a bookkeeping fee for the project accounting function of $7.50 PUM </li></ul><ul><li>Based on occupied units and HUD-approved vacancies (not including limited vacancies) </li></ul><ul><li>Average bookkeeping fee in HUD’s multifamily housing programs was approximately $3.50 PUM (2004) </li></ul>
    75. 75. Asset Management Fee <ul><li>Fees charged to AMPs for those tasks that would be residual if all property management functions were contracted to a third-party ($10 PUM) </li></ul><ul><li>Subject to the availability of excess cash </li></ul><ul><li>Based on total number of ACC units </li></ul>
    76. 76. Capital Fund Program Management Fee <ul><li>Fee charged to the Capital Fund Program for management related to capital activities </li></ul><ul><li>COCC may charge up to 10% of total Capital Fund Program grant as management fee </li></ul>
    77. 77. Housing Choice Voucher Program Fee <ul><li>Fees charged for all administrative work performed by COCC staff related to the operation of HCV program </li></ul><ul><li>Two different fees can be charged: </li></ul><ul><ul><li>HCV Management Fee – Higher of either 20% of annual administrative fee or $12 PUM based on number of vouchers leased </li></ul></ul><ul><ul><li>HCV Bookkeeping Fee – $7.50 PUM based on number of vouchers leased </li></ul></ul>
    78. 78. <ul><li>Public Housing Development </li></ul><ul><li>Other HUD Programs (ROSS, HOPE VI, etc.) </li></ul><ul><li>Other business activity </li></ul>Program Management Fees and Other Income
    79. 79. Fee for Service: Centralized Front-Line Functions <ul><li>PHAs may choose to centralize various front-line expense activities and charge AMPs a fee for these services </li></ul><ul><li>Examples </li></ul><ul><ul><li>Maintenance </li></ul></ul><ul><ul><li>Legal Services </li></ul></ul>
    80. 80. Fee for Service Guidelines <ul><li>PHAs must adhere to the following: </li></ul><ul><ul><li>Fees must be based on the market rate for the work received and not the actual cost </li></ul></ul><ul><ul><li>PHAs must use the fee for service approach for centrally provided maintenance </li></ul></ul><ul><ul><li>Centrally provided front-line services must be in the best interest of the AMPs and cannot cost more than if performed on-site </li></ul></ul><ul><ul><li>PHAs must maintain documentation for the fees charged to the AMPs </li></ul></ul>
    81. 81. Sample COCC Revenue from Fees Amount Fee Calculation Fee $465,600 $40 x 1,000 units x 12 months x 97% occupancy Management Fee $87,300 $7.50 x 1,000 units x 12 months x 97% occupancy Bookkeeping Fee $120,000 $10 x 1,000 units x 12 months Asset Management Fee $50,000 $50 x 1000 treatments Extermination Fee-for-Service $722,900 Total
    82. 82. Front-Line Expenses vs. Fee Expenses <ul><li>Unlike in the past, front-line expenses and administrative expenses, called fee expenses, will need to be separated </li></ul><ul><li>Fee Expenses: </li></ul><ul><li>An expense of the COCC </li></ul><ul><li>Paid for by fee income generated by COCC </li></ul><ul><li>Front-Line Expenses: </li></ul><ul><li>An expense of the AMP </li></ul><ul><li>Paid for by AMP income (e.g. subsidy and rent) </li></ul>
    83. 83. What is Classified as a Fee Expense? <ul><li>Certain personnel costs, including: </li></ul><ul><ul><li>Executive Director </li></ul></ul><ul><ul><li>Regional Managers </li></ul></ul><ul><ul><li>Human Resource </li></ul></ul><ul><ul><li>Finance and accounting </li></ul></ul><ul><li>Equipment, furniture, and services necessary to sustain COCC </li></ul><ul><li>Central servers and software supporting COCC </li></ul><ul><li>Refer to Table 7.2 of the Supplement to PIH Notice 2007-09 </li></ul>
    84. 84. What is Classified as a Front-Line Expense? <ul><li>Onsite personnel </li></ul><ul><ul><li>Housing Manager </li></ul></ul><ul><ul><li>Maintenance Technician </li></ul></ul><ul><ul><li>Resident Services </li></ul></ul><ul><li>Equipment, furniture, and services required to maintain site-based office </li></ul><ul><li>AMP utility costs </li></ul><ul><li>Refer to Table 7.2 of the Supplement to PIH Notice 2007-09 </li></ul>
    85. 85. Summary and Online Resources
    86. 86. Benefits of Asset Management <ul><li>Improved services provided to each AMP </li></ul><ul><li>Organizational structure allows for greater efficiency </li></ul><ul><li>Onsite staff provide greater service to tenants </li></ul><ul><li>System enhancements will allow PHAs to operate more efficiently </li></ul>
    87. 87. Online Resources http://www.hud.gov/offices/pih/programs/ph/am <ul><li>Revisions to the Public Housing Operating Fund Program; Final Rule - 24 CFR Part 990 </li></ul><ul><li>Preparing for Asset Management Under the New Public Housing Operating Fund Rule (24 CFR 990): A Planning Document </li></ul><ul><li>Demonstration of a Successful Conversion to Asset Management (Stop-Loss) Submission Kit Year 2 </li></ul><ul><li>Demonstrating Successful Conversion to Asset Management: A Site Visit to the Charlotte Housing Authority </li></ul>
    88. 88. Online Resources (continued) http:// www.hud.gov/offices/pih/programs/ph/am <ul><li>PIH Notice 2007-09, Changes in Financial Management and Reporting for Public Housing Agencies Under the New Operating Fund Rule (24 CFR Part 990), issued April 10, 2007 </li></ul><ul><li>Asset Management Help Desk </li></ul><ul><ul><li>Email: [email_address] </li></ul></ul><ul><ul><li>Toll-Free Telephone: 1-800-511-8478 </li></ul></ul>
    89. 89. End of Section 3

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