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  • 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.
  • Accompanying PowerPoint file

    1. 1. Section 2: Asset Management Building Blocks
    2. 2. Asset Management Building Blocks Learning Objectives <ul><li>Introduce the five building blocks of asset management </li></ul>
    3. 3. Initial Priorities/Building Blocks Project-based funding Project-based budgeting Project-based accounting Project-based management Project-based performance assessment
    4. 4. 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
    5. 5. 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
    6. 6. 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>
    7. 7. 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>
    8. 8. 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>
    9. 9. 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
    10. 10. 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>
    11. 11. 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 = $3.6 billion </li></ul></ul><ul><ul><li>Proration = 90% </li></ul></ul>
    12. 12. Determining Project Funding <ul><li>Project Expense Level (PEL) </li></ul><ul><li>+ Utilities Expense Level (UEL) </li></ul><ul><li>+ Add-ons </li></ul><ul><li>= Formula Expenses </li></ul><ul><li>- Formula Income </li></ul><ul><li>= Subsidy Eligibility </li></ul><ul><li>- Proration </li></ul><ul><li>= Actual Subsidy </li></ul><ul><li>+ Rental Income </li></ul><ul><li>+ Other Income </li></ul><ul><li>+ Transfers </li></ul><ul><li>= Effective Income </li></ul>Effective Income - Operating Expenses = Net Income
    13. 13. Project-Based Budgeting <ul><li>Used for planning purposes </li></ul><ul><li>Budgeted amounts must reconcile to FDS </li></ul><ul><li>Must be approved by PHA Board </li></ul><ul><li>Not subject to HUD approval </li></ul>Project-based funding Project-based budgeting
    14. 14. Project-Based Budgeting (continued) <ul><li>What are project-based budgets? </li></ul><ul><li>Itemized projection of income and expenses over a specific period </li></ul><ul><li>Guideline for operating the project </li></ul>
    15. 15. Sample Conventional Budget <ul><li>Gross Potential Income (GPI) </li></ul><ul><li>- Vacancy and Collection Loss </li></ul><ul><li>+ Miscellaneous Income </li></ul><ul><li>= Effective Gross Income (EGI) </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>= Net Operating Income (NOI) </li></ul><ul><li>- Reserves for Replacement </li></ul><ul><li>- Annual Debt Service (ADS) </li></ul><ul><li>= Cash Flow </li></ul>
    16. 16. Ratios Used for Expense Benchmarking <ul><li>Operating Expense </li></ul><ul><li>Ratio (%) = </li></ul><ul><li>Operating Expense </li></ul><ul><li>per Unit ($) = </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
    17. 17. 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>
    18. 18. 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
    19. 19. 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>
    20. 20. 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>
    21. 21. 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
    22. 22. 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>
    23. 23. 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>
    24. 24. 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
    25. 25. 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
    26. 26. 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
    27. 27. 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>
    28. 28. 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>
    29. 29. 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>
    30. 30. 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>
    31. 31. 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>
    32. 32. 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>
    33. 33. 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
    34. 34. 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
    35. 35. 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>
    36. 36. 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>
    37. 37. 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>
    38. 38. 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>
    39. 39. 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>
    40. 40. 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>
    41. 41. End of Section 2

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