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Asset and Property Management: The Basics

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Asset and Property Management: The Basics

  1. 1. Asset and Property Management: The Basics December 1, 2005 Presenters: Leon Laptook, Director Community Development Law Center Charlie Harris, Senior Housing Program Manager, CASA of Oregon
  2. 2. This workshop is sponsored by the Neighborhood Partnership Fund, through a grant provided by the U.S Department of Housing and Urban Development
  3. 3. SESSION GOALS : <ul><li>Provide overview of real estate asset management functions </li></ul><ul><li>Provide tools for developing a systematic approach to asset management activities </li></ul><ul><li>Provide ideas for improving your relationship and communication with your property management firm </li></ul><ul><li>Provide practice analyzing project financials </li></ul><ul><li>Have some fun, win some fabulous prizes </li></ul>
  4. 4. Agenda <ul><li>Introductions </li></ul><ul><li>Overview </li></ul><ul><li>Regulatory Issues </li></ul><ul><li>Property Management </li></ul><ul><li>Resident Services </li></ul><ul><li>Lunch </li></ul><ul><li>Financial Performance </li></ul><ul><li>Record-Keeping, Monitoring </li></ul><ul><li>Wrap-up, Evaluation, Adjourn </li></ul>
  5. 5. With a project that looks like this how could anything go wrong?
  6. 6. Section One-Overview
  7. 7. Definitions <ul><li>The active and strategic pursuit of an owner’s long term social, physical and financial goals from predevelopment through the administration and disposition of a property portfolio. </li></ul><ul><li>A systematic plan for, and ongoing oversight of, the management of one or more housing project(s) in furtherance of the project’s goals and the organization’s mission. </li></ul>
  8. 8. Key Characteristics of Asset Management <ul><li>Social, physical and financial goals </li></ul><ul><li>From predevelopment through disposition </li></ul><ul><li>Long term perspective </li></ul><ul><li>Environmentals can easily change over the life of a project </li></ul><ul><li>Affordable housing has a unique set of constraints </li></ul>
  9. 9. ‘ Asset Management Happens’ <ul><li>Cannot decide ‘not to do’ asset management. It happens whether anyone is paying attention or not. </li></ul><ul><ul><li>Failing to act has the same effect as actively deciding to shorten the life of the asset </li></ul></ul>
  10. 10. Asset Management Responsibilities <ul><li>Oversight of property management activities </li></ul><ul><li>Regulatory compliance </li></ul><ul><li>Oversight of physical condition of the property- with a focus on longer term planning </li></ul><ul><li>Financial performance </li></ul><ul><li>Resident services </li></ul>
  11. 12. Skills Needed <ul><li>Tact </li></ul><ul><li>Poise </li></ul><ul><li>Diplomacy </li></ul><ul><li>Savoir-Faire </li></ul><ul><li>Judgment </li></ul>
  12. 13. Roles and Goals <ul><li>Owner: wants mission fulfilled </li></ul><ul><ul><li>affordable housing for target population while fostering organization’s financial health and community reputation </li></ul></ul><ul><li>Property Manager: </li></ul><ul><ul><li>wants good project with maximum fee and minimum hassle. </li></ul></ul>
  13. 14. <ul><li>Target Population: wants affordable, safe, secure living environment while being treated fairly. </li></ul><ul><ul><li>Tenants </li></ul></ul><ul><ul><li>Applicants and potential tenants </li></ul></ul><ul><li>Funders: want return on investment, compliance with project requirements and reports </li></ul><ul><ul><li>Investors (limited partners) </li></ul></ul><ul><ul><li>Lenders </li></ul></ul><ul><ul><li>Government Agencies </li></ul></ul><ul><ul><li>Foundations </li></ul></ul>
  14. 15. <ul><li>Community: </li></ul><ul><ul><li>city </li></ul></ul><ul><ul><li>neighbors </li></ul></ul><ul><ul><li>police </li></ul></ul><ul><ul><li>social service agencies </li></ul></ul><ul><li>Want well designed, well maintained project that is an asset to the community. </li></ul>
  15. 16. Section Two- Regulatory Compliance Matters
  16. 17. Key Documents <ul><li>Binder with details on funder requirements </li></ul><ul><ul><li>Loan Agreements, Trust Deeds, Promissory Notes, Grant Agreements, etc. </li></ul></ul><ul><li>Calendar indicating reporting dates, deadlines, etc. </li></ul>
  17. 18. Financing Documents <ul><li>Grant Agreements (e.g. HOME, Housing Trust Fund) </li></ul><ul><li>Loan Documents (Promissory Note, Loan Agreement , Trust Deed) </li></ul><ul><li>Partnership Agreement (LIHTC) </li></ul><ul><li>Declarations of Land Use Restrictive Covenants </li></ul>
  18. 19. Federal and State Laws <ul><li>Laws related to financing subsidies </li></ul><ul><li>Oregon Residential Landlord Tenant Act (ORS Chapter 90) </li></ul><ul><li>Fair housing laws- Make sure your staff and property manager get training </li></ul><ul><li>Americans With Disabilities Act </li></ul>
  19. 20. Typical Requirements <ul><li>Tenant Eligibility (income, rents, targeted population) </li></ul><ul><li>Occupancy Requirements </li></ul><ul><li>Financial (insurance, DCR, Deposits to Reserves) </li></ul><ul><li>Reporting, Monitoring (funders, IRS, etc.) </li></ul>
  20. 21. Tenant Eligibility <ul><li>Tenant incomes </li></ul><ul><li>Applicant pool- target population </li></ul><ul><li>Verification, certification and recertification </li></ul><ul><li>Waiting Lists </li></ul><ul><li>Length of affordability restrictions </li></ul>
  21. 22. Occupancy Requirements <ul><li>Good Cause Eviction (HOME, RD, LIHTC) </li></ul><ul><li>Grievance Procedure </li></ul><ul><li>Lease Provisions </li></ul>
  22. 23. Financial Requirements <ul><li>Limits on cash flow </li></ul><ul><li>Debt coverage ratio </li></ul><ul><li>Insurance requirements </li></ul><ul><li>Deposits to reserves and escrows </li></ul><ul><li>Right to transfer property </li></ul>
  23. 24. Record Keeping Requirements <ul><li>Income and expense reports for funders </li></ul><ul><li>Annual audit requirements </li></ul><ul><li>Retention of files time frames </li></ul>
  24. 25. Section Three- Oversight of Property Management
  25. 26. Property Management Oversight Key Documents <ul><li>Management Plan and Policies </li></ul><ul><li>Management Contract </li></ul><ul><li>Lease </li></ul><ul><li>Occupancy Rules </li></ul>
  26. 27. Physical Condition of Property Documents <ul><li>Inspection Plan </li></ul><ul><li>Maintenance Plan </li></ul><ul><ul><li>emergencies; turnover- vacancy repair and re-occupancy; routine; preventative; tenant-requested </li></ul></ul><ul><li>Emergency Plans </li></ul><ul><li>Insurance Policies </li></ul><ul><li>Capital Needs Assessment and Plan </li></ul>
  27. 28. Oversight of Physical Assets <ul><li>Relation to Design </li></ul><ul><li>Relation Between Physical Problems and Financial Problems </li></ul>
  28. 29. Section Four- Resident Services
  29. 30. Resident Services Key Documents <ul><li>Relevant Parts of Funding Applications </li></ul><ul><li>Resident Services Plan </li></ul><ul><li>Agreements with other entities for provision of resident services </li></ul>
  30. 31. Section Five- Financial Performance
  31. 32. Key Documents <ul><li>Annual Budget </li></ul><ul><li>Monthly Financial Statements </li></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Rent Roll </li></ul></ul><ul><li>Annual Audit </li></ul>
  32. 33. Baseline Financial Viability <ul><li>Cover operating expenses </li></ul><ul><li>Keep project out of default </li></ul><ul><ul><li>Make required debt payments to lenders, primary and subordinate </li></ul></ul><ul><ul><li>Make required reserve contributions </li></ul></ul><ul><ul><li>Meet minimum debt coverage requirements of lender </li></ul></ul>
  33. 34. Additional Project Financial Goals <ul><li>Deposit additional funds in replacement reserves for long term capital needs </li></ul><ul><li>Fund asset management costs </li></ul><ul><li>Cover resident services costs </li></ul><ul><li>Fund or maintain operating reserves </li></ul><ul><li>Support for your organization </li></ul><ul><ul><li>subsidize other projects </li></ul></ul><ul><ul><li>subsidize other lines of business </li></ul></ul><ul><ul><li>fund a portion of general operating costs </li></ul></ul>
  34. 35. Key Risks to Financial Viability <ul><li>Revenue Risks </li></ul><ul><li>Operating Expense Risks </li></ul><ul><li>Initial Debt Structuring </li></ul>
  35. 37. Revenue Risks <ul><li>Insufficient Rent Increases </li></ul><ul><li>Rent Collection Problems </li></ul><ul><li>Vacancies </li></ul><ul><li>“ Economic Vacancy”= Uncollected rents plus rent lost by vacancies </li></ul>
  36. 38. Comparison of Cash Flows
  37. 39. Operating Expense Risk <ul><li>Utility Cost Increases- double whammy! </li></ul><ul><ul><li>Increased operating expense </li></ul></ul><ul><ul><li>Increased utility allowance, less rent </li></ul></ul><ul><li>Maintenance Costs Above Budget </li></ul><ul><ul><li>High turnover </li></ul></ul><ul><ul><li>Under-rehabbed properties </li></ul></ul><ul><ul><li>High usage population </li></ul></ul><ul><ul><li>Poor management oversight </li></ul></ul><ul><li>Unforeseen/Unbudgeted Costs </li></ul>
  38. 40. Debt Structure Issues <ul><li>Faulty underwriting assumptions, sometimes uncorrectable even with best management: </li></ul><ul><ul><li>rents projected higher than market </li></ul></ul><ul><ul><li>operating expenses projected too low </li></ul></ul><ul><ul><li>insufficient reserve contributions or insufficient start-up reserves </li></ul></ul><ul><ul><li>debt payments too high/insufficient cash flow </li></ul></ul>
  39. 41. Review of Basic Documents <ul><li>Budget </li></ul><ul><li>Income and Expense Report </li></ul><ul><li>Rent Roll </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Annual Audit and Tax Return </li></ul><ul><li>Organization’s Financial Statements </li></ul>
  40. 42. Budget <ul><li>Prepare with property manager; Board should review and approve </li></ul><ul><li>Basis for determining whether actual expenses for upcoming year are reasonable </li></ul><ul><li>Sources of data for budget </li></ul><ul><li>Annually update </li></ul><ul><li>Rent increases- Allowable maximum rents; utility allowance updates; need; market </li></ul><ul><li>Replacement reserve & operating reserve needs </li></ul>
  41. 43. Budget (cont’d) <ul><li>Identify Trends: </li></ul><ul><li>Calculate CDN or other industry standards </li></ul><ul><li>Expenses that are consistently higher/lower than budget or other projects </li></ul><ul><li>Annual rent collection as percent of rents, how much past due, written off debt </li></ul><ul><li>Vacancies- specific units or unit types </li></ul><ul><li>Capital needs assessment- inspection findings </li></ul>
  42. 44. Budget (cont’d) <ul><li>Issues of concern/findings in audit? </li></ul><ul><li>Trends indicated policy or management changes? </li></ul><ul><li>Capital improvement plan- Longer term planning? </li></ul><ul><li>Financial concerns- corrected through management changes, capital spending, changes to debt structure? </li></ul><ul><li>Longer term financing requirements- LIHTC year 15, OAHTC year 20, interest rate savings? </li></ul>
  43. 45. Income and Expense Report <ul><li>Primary tool to determine project health </li></ul><ul><li>Must be detailed and include current period, year to date, comparison to budget </li></ul><ul><li>Review monthly </li></ul><ul><li>Usually prepared on cash basis; need statement of accrued but unpaid expenses </li></ul><ul><li>Don’t be afraid to ask questions </li></ul>
  44. 46. Income and Expense Report (cont’d) <ul><li>Income: Compare Gross rental income and Net rental income to see vacancy loss </li></ul><ul><li>Add “other income” to get Effective Gross Income </li></ul>
  45. 47. Income and Expense Report (cont’d) <ul><li>Operating Expenses </li></ul><ul><ul><li>know what’s included in each line item </li></ul></ul><ul><ul><li>what’s reasonable (compare to budget) </li></ul></ul><ul><ul><li>reason for variances </li></ul></ul><ul><li>Some common issues </li></ul><ul><ul><li>for high turnover and vacancies: look at waiting list; reasons for applicant denials and tenant move-outs; make-ready time </li></ul></ul>
  46. 48. Income and Expense Report (cont’d) <ul><ul><li>repairs and maintenance </li></ul></ul><ul><ul><li>insurance </li></ul></ul><ul><ul><li>property taxes- exempt? If not exempt, valuation issues? </li></ul></ul><ul><ul><li>Include expenses manager may not pay-audit, resident services coordinator, tax credit monitoring </li></ul></ul><ul><ul><li>Reserves: operating, replacement, tax and insurance escrows </li></ul></ul><ul><ul><li>Know what’s included in loan payment-mortgage P &I, reserves, fees, escrows? </li></ul></ul>
  47. 49. Income and Expense Report (cont’d) <ul><li>Net Operating Income= effective gross income minus operating expenses </li></ul><ul><li>Debt Service Coverage= Net Operating Income divided by Debt Service </li></ul><ul><ul><li>1.2 to 1.3 Excellent </li></ul></ul><ul><ul><li>1.1 to 1.2 Good </li></ul></ul><ul><ul><li>less than 1.1 Poor </li></ul></ul><ul><ul><li>less than 1.0 Major Problem </li></ul></ul>
  48. 50. Rent Roll <ul><li>Use the Rent Roll in conjunction with the Income and Expense Report to get detail on vacancies (which units are vacant and for how long), and rents collected. </li></ul><ul><li>Vacancy Rate= # of vacant units total # of units </li></ul><ul><li>Most underwriting pro formas assume a 5% vacancy rate </li></ul>
  49. 51. Balance Sheet <ul><li>The project balance sheet describes the relative financial position of the project at a given point in time. </li></ul><ul><li>It consists of assets, liabilities, and owner’s equity. </li></ul><ul><li>Profits or losses from the income and expense report cause changes in the owner’s equity on the balance sheet. </li></ul>
  50. 52. Industry Standards
  51. 53. Annual Audit and Tax Return <ul><li>Prepared on an accrual basis </li></ul><ul><li>May re-categorize capital expenses and repairs </li></ul><ul><li>Owner’s Board should review and approve Annual Audit; have auditor present </li></ul>
  52. 54. Organization’s Financial Statements <ul><li>Need to ensure that organization’s statements accurately incorporate project statements </li></ul><ul><li>Issues: </li></ul><ul><ul><li>cash v. accrual basis </li></ul></ul><ul><ul><li>allocation of costs between project and organization </li></ul></ul><ul><ul><li>when does project cash flow appear on organization’s statements </li></ul></ul>
  53. 55. Section Six- Record Keeping, Reporting, Monitoring
  54. 56. Monitoring, Reporting, Record-keeping <ul><li>Use of compliance charts </li></ul><ul><ul><li>Rent Restriction- sources of restriction, levels, duration,referencing documents </li></ul></ul><ul><ul><li>reporting information- with contact persons, referencing documents </li></ul></ul><ul><ul><li>payment requirements- amounts, duration, starting dates, contingent payment calculations, contact persons </li></ul></ul>
  55. 57. Monitoring, Reporting, Record-keeping (cont’d) <ul><li>Calendar with required reporting forms </li></ul><ul><li>Files and filing </li></ul><ul><ul><li>what’s in tenant files </li></ul></ul><ul><ul><li>what’s in project files </li></ul></ul><ul><ul><li>how long to keep files </li></ul></ul><ul><li>Don’t expect uniformity among funder reporting requirements </li></ul>
  56. 58. PRESENTER CONTACT INFORMATION <ul><li>Leon Laptook, Director </li></ul><ul><li>Community Development Law Center </li></ul><ul><li>921 SW Washington, Suite 454, Portland, OR 97205 </li></ul><ul><li>503-471-1180; leon.laptook@lasoregon.org </li></ul><ul><li>Charlie Harris, Housing Development Manager </li></ul><ul><li>CASA of Oregon </li></ul><ul><li>212 East 1st Street </li></ul><ul><li>Newberg, OR 97132 </li></ul><ul><li>503-537-0319; charris@casaoforegon.org </li></ul>

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