Introduction To Asset Management

Community Development Law Center 700 SW Taylor, Suite 310 Portland, OR 97205
and

Housing Development Center 2627 NE Martin Luther King Jr. Blvd. Portland, Or 97212
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Presenter Information
Community Development Law Center

700 SW Taylor, Suite 310 Portland, OR 97205 Charlie Harris 503.471-1182 charlie.harris@lasoregon.org Leon Laptook 503.471.1180 leon.laptook@lasorego.org Housing Development Center 2627 NE Martin Luther King. Jr. Blvd. Portland, OR 97212 503.335.3668 Robin Boice robin@hdc1.org Eli Spevak eli@hdc1.org

Acknowledgments
Thank you to Neighborhood Partnership Fund for sponsoring this

training and PDC for providing this space.

Thank you to HUD for the funding to make this training possible. The work that provided the basis for this publication was

supported by funding under an award with the US Department of Housing and Urban Development. The substance and findings of the work are dedicated to the public. The author and publisher are solely responsible for the accuracy of the statements and interpretations contained in this publication. Such interpretations do not necessarily reflect the views of the Government.
Thank you for taking time out of your busy work lives to attend!

I. What is Asset Management

Definition: A systematic plan for, and

ongoing oversight of, the management of one or more housing project(s) in furtherance of the projects goals and the organizations mission.

Asset Management is generally not what we thought of when we formed our CDCs. We focused on developing affordable housing. For many, Asset Management is a new line of business and requires thinking about how it fits with our organization's mission and goals.

Why is Asset Management Important

Difficult to house populations
Limited funds Limited ability to raise additional funds

Public agencies requiring maximum

accountability

Asset Management Specifically Involves

Making sure project: meets owners social goals remains financially viable maintains physical quality stays in compliance with legal requirements

Analysis of Project in Relation to Overall Portfolio

Housing Needs of Target Population versus

other Projects Need for Cash Flow Tenant Services Bookkeeping and Record-keeping Requirements

Skills Needed
Tact Poise Diplomacy Savoir-Faire

Judgment
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II. Asset Management Roles and Goals

People- keep owner, manager,tenants, funders

and community happy Money- Keep money flowing while keeping rents affordable Income Expenses Cash Flow Property- Keep project in good repair over life of the project
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Goals of Asset Management (contd)

Owner: wants mission fulfilled affordable housing for target population while fostering organizations financial health and community reputation Note: Non-profit organization does not mean no profit. Take out profit and you have non-organization

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General Goals of Asset Management (contd)

Property Manager: wants good

project with maximum fee for minimum hassle.

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General Goals of Asset Management (contd)

Target Population: wants affordable,

safe, secure living environment while being treated fairly. Tenants Applicants and potential tenants
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General Goals of Asset Management (contd)

Funders: want return on investment, compliance

with project requirements and reports Investors (limited partners) Lenders Government Agencies OHCS City or County IRS Foundations

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General Goals of Asset Management (contd)

Community:

city neighbors police social service agencies Want well designed, well maintained project that is an asset to the community.
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Differences from Property Management

PM- Rent Collection
AM- Policy on Late Payment Overlap- Tenant Relations

Workouts with Tenants *** PM- Record Keeping AM- Reporting to Lenders Overlap- Dealing with Regulations/Obligations
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Differences from Property Management (contd)

PM- Monthly Financial Reporting AM- Communicating with Investors

Hiring Accountants, Attorneys, etc. Cash Management Overlap- Annual Budgeting

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Differences from Property Management (contd)

PM- Management of Daily Operations
AM- Development of Strategic and

Property Goals Hire/Fire/ Evaluate Property Manger Hold/ Sell/Refinance Decisions Overlap- Security Crisis Management
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Differences from Property Management (contd)

PM- Project Maintenance
AM- Reserve Accounts Overlap- Capital Planning

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Clarify Areas of Overlap Between Owner and Property Manager

Marketing Units
Tenant Eligibility Determinations Project Budget

Property Taxes
Property and Liability Insurance Purchasing Supplies and Equipment

Resident Manager Hiring

Reporting and Record-keeping
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Board Roles
Who on Bd. is responsible (full Bd., committee,

one person?) What kind of info does Bd. receive, how often? What decisions does Board want involvement in: Hiring/evaluating Property Manager Tenant Selection Criteria Eviction Process/Grievance Procedure Budget Approval
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Staff Roles
Develop Management Plan
Budget with Property Manager. Monthly financials Annual Inspections Review of Compliance Requirements

Annual Property Manager evaluation

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Break 15 Minutes

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III. Sources of AM Responsibilities

Project Documents
Management Documents Financing Documents Construction Documents

State and Federal Laws

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Management Documents
Management Plan
Management Agreement Lease and Occupancy Rules Schedules for Maintenance and Capital

Replacement

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Construction Documents
Plans and Specifications Property Related Surveys

Warranties

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Financing Documents
Grant Agreements (e.g. HOME, Housing

Trust Fund) Loan Documents (Promissory Note, Loan Agreement , Trust Deed) Partnership Agreement (LIHTC) Declarations of Land Use Restrictive Covenants
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Federal and State Laws

Laws related to financing subsidies
Oregon Residential Landlord Tenant Act

(ORS Chapter 90) Fair housing laws- Make sure your staff and property manager get training Americans With Disabilities Act

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IV. Typical Requirements

Tenant Eligibility (income, rents, targeted

population) Occupancy Requirements Financial (insurance, DCR, Deposits to Reserves) Reporting, Monitoring (funders, IRS, etc.)
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Typical Requirements
Tenant Eligibility

Tenant incomes Applicant pool- target population Verification, certification and recertification Waiting Lists Length of affordability restrictions
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Typical Requirements (contd)

Occupancy Requirements

Good Cause Eviction (HOME, RD, LIHTC) Grievance Procedure Lease Provisions

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Typical Requirements (contd)

Financial

Limits on cash flow Debt coverage ratio Insurance requirements Deposits to reserves and escrows Right to transfer property
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Typical Requirements (contd)

Record Keeping, Reporting and Monitoring

Requirements Income and expense reports to funders retention of files time frames

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Lunch Please Return in One Hour

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V. Oversight of the Money Financial Viability

Baseline Financial Viability Cover operating expenses Keep project out of default Make required debt payments to lenders, primary and subordinate Make required reserve contributions Meet minimum debt coverage requirements of lender
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Additional Project Financial Goals

Deposit additional funds in replacement reserves

for long term capital needs Fund asset management costs Cover resident services costs Fund or maintain operating reserves Support for your organization
subsidize other projects subsidize other lines of business fund a portion of general operating costs
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Key Risks to Financial Viability

Revenue Risks Operating Expense Risks

Initial Debt Structuring

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Revenue Risks
Insufficient or Rent Increases
Rent Collection Problems Vacancies

Economic Vacancy= Uncollected rents

plus rent lost by vacancies

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Comparison of Cash Flows

Comparison of Cashflow with 2%, 3% & Every Other Year Annual Increases (Every other year at 5% Increase)
15,000 10,000

Net Cash Flow after Second Mortgage Payments

5,000

Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 (5,000)

(10,000)

(15,000)

(20,000)

(25,000)

(30,000)

(35,000)
3% Annual Rent Increase 2% Annual Rent Increase 5% Increase Every Other Year

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Operating Expense Risk

Utility Cost Increases- double whammy!

Increased operating expense Increased utility allowance, less rent

Maintenance Costs Above Budget

High turnover Under-rehabbed properties High usage population Poor management oversight
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Unforeseen/Unbudgeted Costs

Debt Structure Issues

Faulty underwriting assumptions,

sometimes uncorrectable even with best management:

rents projected higher than market operating expenses projected too low insufficient reserve contributions or insufficient start-up reserves debt payments too high/insufficient cash flow
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Oversight of the Money Basic Documents

Budget
Income and Expense Report Rent Roll

Balance Sheet
Annual Audit and Tax Return

Organizations Financial Statements

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Budget
Prepare with property manager; Board should

review and approve Basis for determining whether actual expenses for upcoming year are reasonable Sources of data for budget Annually update Rent increases- Allowable maximum rents; utility allowance updates; need; market Replacement reserve & operating reserve needs
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Budget (contd)
Budgeting process is a good

time to do a review of financial performance

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Budget (contd)
Identify Trends:
Calculate CDN or other industry standards Expenses that are consistently higher/lower than

budget or other projects Annual rent collection as percent of rents, how much past due, written off debt Vacancies- specific units or unit types Capital needs assessment- inspection findings
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Budget (contd)
Issues of concern/findings in audit?
Trends indicated policy or management changes? Capital improvement plan- Longer term planning?

Financial concerns- corrected through

management changes, capital spending, changes to debt structure? Longer term financing requirements- LIHTC year 15, OAHTC year 20, interest rate savings?
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Income and Expense Report

Primary tool to determine project health
Must be detailed and include current period,

year to date, comparison to budget Review monthly Usually prepared on cash basis; need statement of accrued but unpaid expenses Dont be afraid to ask questions
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Income and Expense Report (contd)

Income: Compare Gross rental income and

Net rental income to see vacancy loss Add other income to get Effective Gross Income

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Income and Expense Report (contd)

Operating Expenses

know whats included in each line item whats reasonable (compare to budget) reason for variances Some common issues for high turnover and vacancies: look at waiting list; reasons for applicant denials and tenant move-outs; make-ready time
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Income and Expense Report (contd)

repairs and maintenance insurance property taxes- exempt? If not exempt, valuation issues? Include expenses manager may not pay-audit, resident services coordinator, tax credit monitoring Reserves: operating, replacement, tax and insurance escrows Know whats included in loan payment-mortgage P &I, reserves, fees, escrows?
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Income and Expense Report (contd)

Net Operating Income= effective gross

income minus operating expenses Debt Service Coverage= Net Operating Income divided by Debt Service
1.2 to 1.3 1.1 to 1.2 less than 1.1 less than 1.0 Excellent Good Poor Major Problem
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Rent Roll
Use the Rent Roll in conjunction with the

Income and Expense Report to get detail on vacancies (which units are vacant and for how long), and rents collected. Vacancy Rate= # of vacant units total # of units Most underwriting pro formas assume a 5% vacancy rate
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Balance Sheet
The project balance sheet describes the

relative financial position of the project at a given point in time. It consists of assets, liabilities, and owners equity. Profits or losses from the income and expense report cause changes in the owners equity on the balance sheet.
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Industry Standards
CDNs Industry Goals for Property & Asset Management CDN Goals related to Financial Performance FOCUS AREA Operating Expenses Debt Service Coverage Ratio (NOI / DS) Operating Reserves STANDARD Monitoring & Feedback loop in place 1.2 to 1.3 is good 3 Months of expenses & debt service available Sufficient to fund projected repairs & replacements projected over the next five years greater than or equal to 96% greater than or equal to 96% within 5% of annual budget

Deposits to Replacement Reserves

Occupancy (# units occupied / # of units) Rent Collection (NRI / GRI) Maintenance expenses

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Annual Audit and Tax Return

Prepared on an accrual basis
May re-categorize capital expenses and

repairs Owners Board should review and approve Annual Audit; have auditor present

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Organizations Financial Statements

Need to ensure that organizations statements

accurately incorporate project statements Issues: cash v. accrual basis allocation of costs between project and organization when does project cash flow appear on organizations statements
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Break 15 Minutes

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VI. Oversight of the Physical Property

Maintenance Plan/Capital

Replacements Inspections Relation to Design Relation Between Physical Problems and Financial Problems
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VII. Monitoring, Reporting, Recordkeeping

Use of compliance charts Rent Restriction- sources of restriction, levels, duration,referencing documents reporting information- with contact persons, referencing documents payment requirements- amounts, duration, starting dates, contingent payment calculations, contact persons
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Monitoring, Reporting, Record-keeping (cont)

Calendar with required reporting forms

Files and filing whats in tenant files whats in project files how long to keep files Dont expect uniformity among funder

reporting requirements
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VIII. Organizational Approaches to Asset Management

Staff, Board, Property Manager Roles
Paying for Asset Management

Integration with Housing Development

Activities Tools and Systems

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Staffing and Paying for Asset Management

How much money do you need to cover

your costs? Who will do asset management? Sources- out of project budget, organization budget, other sources of funding.
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Integration with Housing Development Activities

Take development of operating budget

seriously:
define on site staffing/ costs/ foregone rent evaluate actual maintenance costs of similar projects and populations build in asset management fee as an expense dont underestimate needed reserve contribution
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Integration with Housing Development Activities (contd)

Design with maintenance and utility costs

in mind Require developers to provide compliance charts as part of their scope of development work (whether in-house or out-sourced)
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Integration with Housing Development Activities

Structure the right debt payment: Net cash flow

needs to provide:
Cushion for variances in revenues and expenses Cover any asset management, resident services or reserve contribution not included in operating expenses Meet other cash flow expectations of your org.
For extremely low income, 1.10 debt coverage is

not enough
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Debt Coverage and Cash Flow

SUMMARY Average Net Cash Flow in dollars per year per unit Percent of the operating expenses (if operating expenses are $2971 per unit) Percent of anticipated net revenues, assuming 5% vacancy @ 30% $ 72 @ 50% $ 339 @ 60% $ 473

3.2%

11.4%

15.9%

2.3%

5.0%

5.7%

Operating Expenses assumed at $2,971 per unit per year. Shows average of one through four bedroom units, except for the 30% column. The 30% category excludes one-bedroom units, which cannot support $2971 per unit in expenses.

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Tools and Systems

Property Management Plan
Asset Management Plan Capital Replacement Schedule

Asset Management Database

Project Binders

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Wrap-up
Next Training: Developing an Asset Management Plan and Dealing with Troubled Projects January 14 and 15, 2002
Technical Assistance Request Forms Thank you for attending!

Thank you for filling out evaluations!

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