Asset Managing Your Portfolio:

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Asset Managing Your Portfolio
Best Practices of Asset Management
Presented by David Fromm, NeighborWorks America
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Creating Value as an Asset Manager

• The top ten asset management tasks
• Top ten indicators valued by asset managers
• Most common problems in affordable housing
• Most valued partnerships and why
• How to get the most from your property management
  firm
• How to participate in pre-development as well as
  workout/disposition strategies

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Top Ten Monthly Tasks

1. Tickler File/Planning Schedule
2. Operating Budget Variance Review
3. Balance Sheet Review
4. Portfolio Review
5. Property Manager Review

• Staffing the Boards Asset Management Function
• Evaluate New Projects
• Monitor Owner Fees and Incentives
• Gather and Interpret Key Data
• Initiate Work Out Plans

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1. Tickler File/ Planning Calendar

• Annual Budget
• Reports
• Annual Audit
• Tax Returns
• Real Estate Tax Agreements
• Owner obligations/loan requirements/ warranties

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1. Tickler File/ Planning Calendar

• Capital Plan
• Income Certifications
• Property Inspections
• Corp. report to Secretary of State
• Contracts

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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
• Owners 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 trends
• Link 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 Boards Asset Management
Function

• Property and portfolio performance against
  Boards 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
• Design
• Reserve requirements
• Cash flow expectations
• Debt structure
• Reporting and compliance requirements
• Market conditions
• Service programming
• Fees prop and asset mgmt
• Staffing

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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 laws
• Regulations and programs
• Real estate market conditions and opportunities
  (refi opportunities)
• Adequacy of insurance

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10. Initiate Workout Plans

• Identify key players
• Create plan
• Identify workout team
• Select workout leader
• Monitor progress

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Top Ten Indicators

• Debt Service Coverage (DSC)
• Rent Increase Implemented
• Cash Flow
• Compliance with Annual Budget
• Stakeholder Satisfaction

1. Unit Turnovers on Schedule
2. Rent Collection
3. Portfolio Review and Board Requirements
4. Capital Needs and Reserve Balances
5. 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 dont 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

• Unit 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
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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 not
• competitive

• Unresponsive
• Combative
• Not skilled enough

• Functionally
• obsolete
• Hazardous
• Deferred
• maintenance

• Overleveraged
• Subsidy and/or
• other restrictions

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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 theres an independent resource to pay for
  asset management.

• Lenders Investors
• Best financial terms dont 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
  youre getting your moneys 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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Getting the Most from Your Property Management
Firm

• 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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Getting the Most from Your Property Management
Firm

• 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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Getting the Most from Your Property Management
Firm

• 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 dont 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

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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

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5. SKILLS REQUIRED (cont)

• 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 propertys 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

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5. SKILLS REQUIRED (cont)

• Ability to see a propertys 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

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KNOW THY DEAL

• Sponsor
• Developer
• General Partner
• Limited Partners/ Investors
• Property Manager
• Lenders
• Regulators
• Residents

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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

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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)

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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

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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