Best Practices of Asset Management Asset Managing Your Portfolio: Presented by: David Fromm,...

Best Practices of Asset Management

Asset Managing Your Portfolio:

Presented by: David Fromm, NeighborWorks® America

Creating Value as an Asset Manager

The top ten asset management tasksTop ten indicators valued by asset

managersMost common problems in affordable

housingMost valued partnerships and whyHow to get the most from your property

management firmHow to participate in pre-development as

well as workout/disposition strategies

NeighborWorks® America September 2012

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NeighborWorks® America

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1. Tickler File/Planning Schedule

2. Operating Budget Variance Review

3. Balance Sheet Review

4. Portfolio Review5. Property Manager

Review

6. Staffing the Board’s Asset Management Function

7. Evaluate New Projects

8. Monitor Owner Fees and Incentives

9. Gather and Interpret Key Data

10.Initiate Work Out Plans

Top Ten Monthly Tasks

1. Tickler File/ Planning Calendar

Annual BudgetReportsAnnual AuditTax ReturnsReal Estate Tax

AgreementsOwner

obligations/loan requirements/ warranties


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1. Tickler File/ Planning Calendar

Capital PlanIncome

CertificationsProperty

InspectionsCorp. report to

Secretary of StateContracts


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2. Operating Budget: Variance Review

Evaluate performance against benchmarks Revenues Expenses

Make recommendations in MAJOR revenue and cost drivers


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3. Balance Sheet Review

Changes/size of Cash balances Accounts

receivable Accounts payable Reserve Balances

Ratios Working capital Current ratio Owner’s equity Debt to equity


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4. Portfolio Review

Pick ways to analyze PUPY, PUM, PBR, % Type, Location, Size

Monitor for compliance (debt service coverage ratios, cash flow)

Analyze trendsLink mission,

obligations and opportunities


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5. Property Manager Review

Evaluate based on annual management plan and budget

Meet formally, monthly or quarterly

Specific areas: Financial Compliance Physical Social (“double bottom

line”)


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6. Staff the Board’s Asset Management Function

Property and portfolio performance against Board’s goals

Economic performance of properties

Impact of properties on organization: $ +

Overall performance of property manager

Current trends effecting properties


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7. Evaluate New Projects

Realistic operating assumptions: NOI

DesignReserve requirementsCash flow expectationsDebt structureReporting and compliance

requirementsMarket conditionsService programmingFees: prop and asset

mgmtStaffing


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8. Monitor Owner Fees and Incentives

Asset management function often covered by these fees

Communicate expectations clearly to property manager

Alert ED and Board to any change in projections


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9. Gather and Interpret Key Data

Public lawsRegulations and

programsReal estate market

conditions and opportunities (refi opportunities)

Adequacy of insurance


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10. Initiate Workout Plans

Identify key players

Create planIdentify “workout

team”Select workout

leaderMonitor progress


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Top Ten Indicators

1. Debt Service Coverage (DSC)

2. Rent Increase Implemented

3. Cash Flow4. Compliance with

Annual Budget5. Stakeholder

Satisfaction

6. Unit Turnovers on Schedule

7. Rent Collection8. Portfolio Review

and Board Requirements

9. Capital Needs and Reserve Balances

10. Property Standards


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1. Debt Service Coverage (DSC)

Debt Service Coverage (DSC) Indicates how well the

property can meet its hard debt requirements. A DSC of 1.2 is good. May be less in higher cost markets

DSC Calculation = NOI/Annual Hard Debt (Principal + Interest)

Key indicator tracked by investors and lenders

Anything over 1.0 indicates positive cash flow

Is a work out needed?


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2. Rent Increase Implemented

Rent Increases Annual On time Track with pro forma Increasing rents 2%

has TWICE the impact of reducing ALL costs


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3. Cash Flow

Cash Flow Defined in partnership

and/or regulatory agreement; definition is not universal; good asset managers hit the cash flow targets

Often only source of asset management fees

Often source of deferred developer fees


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4. Compliance with Annual Budget

Annual Budget Reflects annual

financial plan for the property

Review monthly or quarterly, depending on property

Make adjustments to meet NOI target; don’t wait until the end of the year

Watch revenue and expense changes with greatest impact


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5. Stakeholder Satisfaction

3rd Party Relationships Accurate and timely

reports, budgets Successful physical

and financial inspections

No audit findings No mortgage

defaults Positive resident

survey


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6. Unit Turnovers On Target


21Unit Turnovers

High turnovers increase vacancy losses and increase operating costs (double whammy)

Slow re-occupancy is unrecoverable revenue

Indicator of potential problems: Property condition/safety Stiffer competition/more

attractive alternatives Deteriorating economy Poor management

Quick turns and low vacancies add revenue: occupancy is KEY

7. Rent Collection

Rent Collection MUST be consistent,

fair and timely Once residents get one

month behind, very difficult to catch up

Create realistic collection TARGET and check collections weekly (even daily) until in line

Bad debts are rarely collectible and rarely budgeted in pro formas


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8. Portfolio Review and Board Requirements

Portfolio Review Analyze performance

and trends in entire portfolio as well as individual properties

May be meeting Board goals for properties but some stronger properties could help weaker ones

Goals for residents


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9. Capital Needs and Reserve Balances

Capital Needs and Reserve Balances Capital Needs

Assessment (C N A) is current and on track with plan

Reserve and operating balances in line with needs

Operating reserve target: 3 - 6 months of operating expenses


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10. Property Standards

Property Standards Curb appeal Professionalism and

appearance of staff Common area

upkeep Signage Private area upkeep

(patios, balconies) “Look Up” test


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Most Common Problems In Affordable Housing

The Market

The Financing

The Management

Physical Condition

•Property notcompetitive

• Overleveraged• Subsidy and/or other restrictions

• Functionally obsolete• Hazardous• Deferred maintenance

• Unresponsive• Combative• Not skilled enough


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Most Valued Asset Management Partnerships

Property Manager Has most impact on a

day-to-day basis Affects portfolio

capacity of the asset manager If asset manager can not

handle 15 - 20 properties because of property management demands, consider doing your own management unless there’s an independent resource to pay for asset management.

Lenders & Investors Best financial terms

don’t always make the best partner; evaluate long term compliance and oversight relationship & costs

Have significant influence on your reputation (pro and con)


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Most Valued Asset Management Partnerships

Board of Directors Set property goals Evaluate disposition

strategies

Finance Managers Negotiate property

vs organizational financial needs

Housing Development Staff Influence new

project design, budget, staffing plan, resident mix, marketability

Other


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Getting the Most from Your Property Management Firm

Understand what it costs to operate a property management firm to better evaluate whether or not you’re getting your money’s worth. 63% to 75% of fee revenue goes to support non-site staffing, including supervisory and accounting.

Understand that a management company seeks long term relationships. A management company loses money in the first year, breaks even in the second and begins to make some money in the third year of a contract.


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The Management Contract should detail expectations of management company re: meetings, overseeing capital

projects, reporting, staffing. If you want reports

different than standard reports, specify. If you want a say in who the staff is, specify.

Dealing with residents: clarify how resident complaints will be handled.


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Meet monthly and have a standing agenda that includes budget variance

review, resident issues, capital projects, upcoming

compliance/inspection activities.

Walk the property and look at all vacant unit


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Test early and often for redundancies of effort by property and asset managers.

Appreciate that this is very hard work and it is very easy to fail.

Cultivate a long term relationship(s). The more you shop around and make management company changes, the fewer “good” managers will want to work with you.

Communicate, communicate, communicate.


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How to Participate in New Developments

Help develop “standards” for new or redeveloped developments based on portfolio experiences and best practices: Number of units Management and other fees (bookkeeping, asset

mgmt) Number of bedrooms/unit Operating costs (per unit and as a percentage of

revenues) Geography (property without a site office must be

within a 30 to 45 minute drive of another property)


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How to Participate in New Developments

Help develop “design standards” for new/ redeveloped properties Site office location and size Unit mix (what works in the market) Materials used (durability) Maximizing energy efficiency Safety Parking and trash removal (two major problems

hard to cure if you don’t get it right the first time)


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5. SKILLS REQUIRED

Ability to evaluate reports of third party professionals re: physical condition; reasonably knowledgeable about physical standards; ability to identify and prioritize maintenance deficiencies

Ability to analyze property documents (eg - be able to determine mortgage loan requirements and monitor for compliance)

Financial Analysis: spreadsheets, comparisons, variances; knowledge of standards (pupy, pum, %)

Functional knowledge of property management operational benchmarks

5. SKILLS REQUIRED (cont)

Ability to evaluate adequacy of insurance coverage, exposure posed by outstanding law suits, potential claims not yet filed (eg. Safety locks on windows)

Ability to monitor third party property contracts for responsibilities, payment schedules, deadlines, term, default, termination provisions

Knowledge of local real estate market (be able to evaluate ability to increase rents)

Ability to monitor changes in public laws that impact property operations; follow newspapers and industry publications


Ability to comply with or monitor compliance accuracy and timeliness of reporting requirements to state and local governments, investors, private and public lenders. Also must monitor completion and submission of annual audit to appropriate parties.

Understand property’s position vis a vis an entire portfolio

Ability to evaluate the Property Management Agent objectively within market choices

Ability to determine whether property results are acts performed exclusively by Property Management Agent or other forces are involved


Ability to see a property’s “big picture” by identifying major cost and performance drivers: not just variances between budgets and actuals

Ability to negotiate performance standards appropriate for property and Board goals

Ability to motivate and provide incentives to Property Manager

Ability to summarize analysis succintly, in writing and graphic form, and in person for Board

Technical skills to prepare, usually with Property Management Agent, annual budget and capital schedule

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KNOW THY DEAL:

DEAL BOOK summarizes: Structure of ownership

Partners Fees & Incentives Liabilities & Warranties

Sponsor guarantees Structure of Debt Compliance Requirements Underwriting & Operating

Assumptions Cash Flow Expectations Key Dates Cliffs Disposition Plan

KNOW THY DEAL:

SponsorDeveloperGeneral PartnerLimited Partners/

InvestorsProperty ManagerLendersRegulatorsResidents

KNOW THY DEAL:

Equity Sources Low Income Housing

Tax Credits Public Investment Private Investment Grants Cash Reserves

Debt Sources Banks State Housing Finance

Agency HUD CRA pools

KNOW THY DEAL:

Partnership Agreement Regulatory Agreement Loan documents, promissory

notes and mortgages Subsidy contract(s) Programmatic contracts Management Plan Operating Pro Forma

Initial Budget Multi-year Projections

Investment Pro Forma (sources and uses)

Property Management Contract

Ground Lease (if applicable)

KNOW THY DEAL:

KEY document that summarizes how asset is projected to perform financially

Identifies projected benchmarks for Annual rent increases Modest annual

operating increases Debt service coverage

requirements Reserve funding

The End Game

Be pro-active: have an asset management plan for each development Know Thy Deal Trend and re-project the pro forma every few years Perform Capital Needs Assessments every 5 years Monitor/manage investor capital accounts – they do! Trend and re-project the pro forma every few years Demonstrate to stakeholders that you are planning for

the future Leave plenty of time to assemble the work-out team

and necessary resources


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Best Practices of Asset Management Asset Managing Your Portfolio: Presented by: David Fromm,...

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