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National Apartment Association Education Institute Certified Apartment Property Supervisor.

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Presentation on theme: "National Apartment Association Education Institute Certified Apartment Property Supervisor."— Presentation transcript:

1 National Apartment Association Education Institute Certified Apartment Property Supervisor

2  Restrooms  Breaks  Lunch  Cellular Phones  Smoking 2

3 Apartment Investment Basics Mortgages, Financing & Taxes Managing the Budget Process Getting to the Bottom Line Analyzing Monthly Financial Statements Valuing Apartment Investments Maximizing Revenues 3

4  Name  Company  Number of Units  How Many Years In the Business  How long have you been a multi-site supervisor? 4

5  Participate fully.  Help us stay on track.  Be on time  Ask questions  Offer ideas and opinions as perceptions  Have fun. 5

6 6 Let’s Check Our Homework!

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8 Apartments have produced a higher total return, with less variance, than the average of all property types in the portfolios of pension funds and other large investors. Apts.All Prop. 1984-20049.3% 7.6% Total annual return National Council of Real Estate Investment Fiduciaries 8

9 AdvantagesDisadvantages Produce Regular Cash Payments Value IncreaseTax Benefits Can Be Purchased with Leverage Bad Liquidity Need To Actively Manage Risk 9

10  Business Risk  Financial Risk  Liability Risk  Inflation Risk  Interest Rate Risk  Property Damage Risk  Obsolescence Risk 10

11  Getting a specific rate of return  Generating regular cash flow  Refinancing  Renovating or retrofitting the property  Acquiring new properties  Selling existing properties ?????? 11

12  Keep the owner well informed  Factor the owner's goals into all key financial activities  Provide incisive and timely financial analysis  Recommend strategies and tactics  Take decisive and effective steps  Assess portfolio growth  Communicate 12

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14  Need for additional funds to purchase or develop an apartment community.  Use a loan in order to free money to diversify their investments.  Take advantage of the tax benefits that allow mortgage interest deductions and asset depreciation.  Enjoy the benefit from financial "leverage" 14

15 The use of borrowed funds to increase overall purchasing power  Positive Leverage means borrowing money at a lower interest rate than what the asset yields  Negative Leverage is borrowing money at a higher interest rate than what the asset yields Leverage is a unique element to real estate investments, not present in investments like stocks and bonds 15

16 The document that establishes the existence of debt between a lender and a borrower. Key provisions:  Amount borrowed  Rate of interest  Payment due dates  Loan maturity date (when all remaining amounts are due)  Reference to the real estate providing security for the loan  Specific terms relating to defaults, grace periods, and early payments  Details on how payments will be applied, usually in this order:  (1) to late payments, fees, and penalties;  (2) to interest; and  (3) to principal 16

17  Pay monthly amounts for property insurance, real estate taxes, and if required, mortgage insurance premiums (PITI)  Pay all other taxes, assessments, charges, and claims that have priority over the mortgage.  Have hazard insurance coverage  Keep the property in good condition  Get the lender's approval for any new owner  Assignment Clause 17

18  Non-Recourse Clause  Prepayment Rights  Loan Assumption Conditions 18

19  Fixed Rate Loans  Variable Rate Loans  Balloon Loans  Bullet Loans  Other Loans  Rollover Loans  Construction and Takeout Loans  Gap Loans  Wrap Loans 19

20  Economic Conditions  Inflation  Default Risk  Interest Rate Risks  Legislative or Regulatory Risks 20

21  Commercial Banks  Life Insurance Companies  Pension Funds  Investment Banks  Mortgage Brokers  Private Sources  Syndications 21

22  Government Sponsored Enterprises (GSE’s)  FNMA – Fannie Mae: Federal National Mortgage Association  FHLMC - Freddie Mac: Federal Home Loan Mortgage Corporation  FHA – Federal Housing Administration  LIHTC –Low Income Housing Tax Credit aka Section 42 22

23  LTV – Loan to Value:  Expressed as %  Formula: Loan amount/Property Value = LTV  Lenders prefer under 80%, may be 60%  DCR – Debt Coverage Ratio  Expresses the property’s ability to repay the loan  Formula: NOI/ADS (Annual Debt Service)=DCR  The closer the DCR is to 1 the riskier the loan 23

24  Federal, state, and local taxes significantly affect the return on investment available to the owner.  A baseline understanding of the tax laws and practices affecting apartments will increase financial literacy— and gain greater insight into how to help the owner achieve property or portfolio goals. Note: Tax laws are complex, and professional tax advice always needs to come from a tax attorney or tax accountant. Don’t give tax advice! 24

25  Property taxes are one of the two largest expenses for an apartment community.  They provide the major source of funds to provide local government services used by apartment communities.  Property taxes—and sometimes water and sewer fees imposed by local government— usually have a lien priority, even over mortgages. 25

26  Depreciation or Cost Recovery  The Capital Gains Tax Rate  1031 Exchange  The Concept of Basis  Adjusted basis  Recoverable basis  Original basis 26

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28 A budget is an itemized summary of estimated income and expenses for a defined period of time, most often one year. Provides the "window" on property operations Principal source of information relating to a property's financial performance. There are three types of budgets:  Lease-up budgets  Operating budgets  Renovation or modernization budgets 28

29  Budgets monitor a property’s performance  By regularly comparing actual income and expenses to the budget, income shortfalls and expenses overruns can be spotted and corrective measures taken.  May also be used to evaluate the performance of personnel 29

30 A budget begins with the owner's operational and financial goals. Does the owner want to:  Receive a specific rate of return?  Generate cash flow?  Renovate or upgrade a property?  Sell a property? Goals must be understood BEFORE beginning to prepare the annual operating budget, 30

31 Step 1: Forecast Income Step 2: Project Anticipated Expenses Step 3: Consider the “What if…?” Scenarios 31

32  Extrapolation:  Estimating a number based on information you already know.  May be used for income or expense categories  Annualization:  Estimating a number by averaging year to date income or expense and multiplying to make a full year.  Care must be taken to exclude one time or unusual occurrences  Better to use historical data for the same months in the prior year instead. 32

33  Start early  Use property personnel  Gather meaningful, specific supporting documentation that must accompany budgets  Supply property team with the right budget tools  Consider holding a budget workshop  Distribute copies of the budget 33

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35  Accounting deals with the entire system for providing financial information—from the design of the systems through its operation to interpretation of the data.  Bookkeeping is the routine, day-to-day recordkeeping that’s a necessary part of accounting. 35

36  Accrual basis accounting.  All income and expenses in the period they are earned or incurred, regardless of when they are actually received or paid.  Gives a more realistic and controlled picture of net operating income in the period, and is the most common type of accounting used in multifamily residential management.  Cash basis accounting.  All income and expenses when they are actually received or paid, which causes widely fluctuating numbers.  Cash basis accounting may give a distorted picture of profitability at a given point in time.  Is it more important to know when rent is incurred, or just noting the cash received when it was paid? 36

37  Gross Operating Income (GOI) - all the money a property records, including rent and other income.  Net Operating Income (NOI) gross income less operating expenses. 37

38  Fixed Expenses  Variable Expenses Where should smart managers focus? What are the two largest expense categories as a percent of Gross Potential Rent (GPR)? 38

39  Often called the operating statement or profit and loss statement,  Measures performance over a given period of time.  Key indicator of a property’s financial position  Defines progress, trends, relationship to the competitive market place, and the continuing ownership strategy. 39

40 Shows the financial status of a property at a moment in time.  Assets are all the cash on hand, the things the property owns and the accounts receivable.  Liabilities are the debts and obligations owed, such as loans and the accounts payable at the property.  Equity is the sum of Assets less Liabilities 40

41  Gross Potential Rent, or GPR  Total rent that would be generated from the property if all the units were occupied.  GPR combines the sum of occupied units at current lease rates, plus vacant units at market rates.  All income and expenses are measured and evaluated as a percent of GPR.  Gross Potential Rent is NOT Market Rent  Often called scheduled rent, which is the total annual income you’d receive if 100% of all units were occupied and paying market rents. 41

42  A variance from Market Rent due to the Lease Rents residents pay at the time of move-in.  As market rents go up, loss to lease increases; as market rents are lowered, the loss to lease is reduced.  There will always be a gap between market rent and gross potential rent. WHY?  Market Rent less Gross Potential Rent) / Market Rent = % Loss to Lease 42

43  Total value of rent loss from vacant units  Cost of concessions given  Collection loss as a result of writing off bad debt  Total amount of rent loss from any non-revenue units. 43

44  Effective gross income (EGI) is the amount of gross potential rent (GPR) less vacancy, concession, and collection loss (VAC).  Effective gross income is also called net rental income or total rental income. It represents only rental income.  Formula: GPR - VAC = EGI. 44

45  Other income (OI) is any money collected for items other than rent.  Includes collections from Laundryvendingdeposit forfeits parking amenity charges late fees pet fees application fees administrative fees cablelease premium fees  Other income can add up to an additional 5% to 10% of the total property income. 45

46  Total amount of all money the property collects.  Also known as Total Revenue or Total Income.  GOI is the sum of the Effective Gross Income (EGI) and other income (OI).  Formula: EGI + OI = GOI. 46

47 All expenses, fixed and variable, that are paid to manage the property. Typical expense categories are: Salary and personnel costsInsurance TaxesUtilities Management feesAdministrative costs MarketingContract services Repairs and maintenance Note: Capital expenses and replacement reserve payments (if required) are not typically considered operating costs. 47

48  Net operating income (NOI) is gross operating income (GOI) less operating expenses (OE).  NOI is the critical number on the operating statement. Income producing properties are valued based on a derivative of NOI  Formula: GOI - OE = NOI. 48

49  Similar to net operating income except that capital expenses (including replacement reserve payments) and debt service are subtracted.  Usually represents the property’s distributable cash.  A cash flow statement is another measure used to show financial performance.  Statements can include before-tax cash flow (BTCF) or after-tax cash flow. 49

50  Capital expenses or capital expenditures (CE) are large property expenditures.  They include non-recurring major expenses, such as replacing a roof, adding a swimming pool, and otherwise improving the property in ways intended to add to its life.  Capital expenses have a “useful economic life.”  They are depreciated over an "expected" life rather than in a single year. 50

51 An RRA is money set aside in a special account for the replacement costs of items that wear out and must be replaced periodically carpetingroofs boilers parking lot repavingexterior painting. Many lenders require that property owners set up a replacement reserve account (RRA) and make certain minimum payments. 51

52  Debt service (DS) is the mortgage or loan payment (principal plus interest)  Most fixed-rate loans have the same amount due monthly  Properties may have multiple loans or mortgages on the property 52

53 Along with NOI and cash flow, other financial calculations indicate more about a property's financial performance. These calculations are:  Break-Even Occupancy Percentage  Break-Even Rent per Square Foot  Economic Occupancy Percentage  Rate of Return on Investment  Cash-on-Cash Return  Operating Expense Ratio 53

54  Break-even occupancy represents the occupancy level needed to produce enough income to pay the operating expenses and debt service of a property—the minimal requirements to keep a property operating.  Formula: (OE + DS)/GOI. 54

55  The break-even rent per square foot calculates the rent per square foot needed to pay the operating expenses and debt service of your property.  Formula: (OE + DS)/total square feet. 55

56  Economic occupancy reflects only the actual revenue being realized.  Economic or physical for overall property performance?WHY?  Variances between physical and economic occupancy/vacancy can be a measure of management efficiency, as well as one of overall market conditions.  Formula:EGI/GPR= EO% 56

57  Measures the financial performance of the investment.  ROI is the percentage of return—or yield—on the total amount invested for a given time period.  It does not take consider the time value of money—that a dollar today is worth more than a dollar tomorrow.  Formula: NOI/Equity Investment = ROI. 57

58  Cash-on-cash return measures the cash flow received against the original cash invested.  It’s a useful method of measuring return on investment for financial institutions and investors interested in purchasing or evaluating a property.  Formula: Cash Flow / Total Initial Investment. 58

59  Calculates the percentage of the gross potential rent needed to pay operating expenses.  Also known as expense-to-income ratio  A tool to measure how well a property is managed.  Often compared to those of other properties in the area—or national averages—to evaluate success.  Formula: OE/GPR 59

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61  The chart of accounts lists account codes for each income and expense item and defines what should be posted for each account.  The chart of accounts provides the basis for budgeting, variance reporting, journal entries, and financial statements.  A portfolio of properties may use one chart of accounts, or different ones, depending on owner entity and lender requirements. 61

62  The general ledger is a group reporting of accounts that support the major financial statements.  The formal record for all financial transactions for the property  Transfers journal data from the book or page where accounting entries are posted.  The sub-accounts (or ledgers) are assigned names or numbers and provide details of financial activities that occurred.  These sub-accounts are often called the chart of accounts.  It is much like a check register of expenses 62

63 A variance is the difference between a budgeted income or expense number and the actual income or expense in a particular month or year-to-date. Best practices require:  Keeping track of budget variances.  Using them to prepare a new forecast of future results.  Analyzing and explaining variances to the owner.  Taking action when necessary. 63

64  Analyze the variance: What is the source, what is the cause?  Explain the “reason” for the variance  Explain what effect it will have on future months  Recommend action to correct the variance  Seek to see if this variance is part of a trend 64

65 Re-forecasting allows you to:  Assess how the property is expected to perform for the balance of the year in relation to the original budget.  Determine whether you need to make further changes in income and expenses in future forecasts.  Understand your property and the impact of occupancy conditions on property performance. Remember: The budget is not changing! The actual year-to date income and expense results are being projected for the remaining months in the year. 65

66 Financial reports can help evaluate team performance.  Can poor employee performance be part of the reason for not meeting budget?.  Can strong employee performance be part of a reason the property performs well?  Can a strong staff still not meet budget? 66

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68 Understanding property value will aid in management decisions and analyzing and interpreting financial data.  What price to offer when buying a property.  What price to ask when selling a property.  Establish a basis for real property exchanges.  What terms of sale for a proposed transaction.  Estimate the value to get a mortgage loan.  Estimate the value to refinance a mortgage loan. 68

69 Cost Approach Sales Approach Income Capitalization Approach 69

70 The cost approach estimates the current cost of reproducing or replacing the improvements (buildings), minus the loss in value from depreciation due to age, condition, or obsolescence. It also includes the value of land, but does so separately. The cost approach looks at the current cost of the “bricks and sticks” to rebuild the property. This includes “Direct” Costs and “Indirect” Costs. 70

71 The sales comparison approach assumes the market value of a property is directly related to the prices of comparable, competitive properties.  Works best when there are several similar properties in the local market that have been recently sold or are currently for sale.  The key is to correctly identify "comparable" and "competitive," i.e. high-rise vs. garden-style. 71

72 The income capitalization approach is the most common method for determining value for any income-producing property  It estimates property value by applying a current capitalization (cap) rate to the annual stabilized NOI  Higher earnings translate into higher value. The more NOI, the higher the property value  Income-producing property is often purchased as an investment. 72

73  The cap rate reflects the investor's desired rate of return for that apartment investment and is expressed as a decimal or percent  The basic formula is I/R = V, where I is NOI, R is the capitalization rate, and V is the property value or cost.  Formula:NOI/Cap Rate = Value 73

74 Ultimately the Cap Rate is determined by the purchaser, some factors that may affect this are:  Location  Supply and Demand  Interest Rates  History  Desired Return  Alternative Investment Opportunities 74

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77  Rent typically accounts for 90%-95% of total property revenue.  There are two ways to maximize this most important revenue stream:  (1) charging the optimal amount of rent  (2) increasing the property's effective rent 77

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79  Give no concessions or reduce the amount of the concession given  Do not waive move-in day rent to meet an occupancy goal  Guarantee rent prices only for people on a deposit- paid priority wait list  Consider adding rent premiums  Remember to keep advertising resources up to date. (Web sites and others) 79

80 Looking for higher occupancy in the range of 97%-98% or taking lower occupancies with higher rents? Evaluate:  What is the current average occupancy in the market and submarket?  What are the trends in both the market and the submarket?  Is occupancy trending up or down?  How do the properties’ current occupancies compare to both the market and submarket?  What occupancy is needed to make budgeted revenue?  How will you accomplish it? 80

81 “The goal is not 100% Occupancy, it is to maximize revenue.” 81

82  Target levels are determined by market analysis economic conditions rental supply and demand, competitive properties desired occupancy goals to drive revenue.  Properties are expected to reach those occupancy levels and continue to move up to higher performance levels. Level 1 performance might be 96%-98% occupancy Level 2 might be 92%-95% occupancy Level 3 might be 87%-91% occupancy Level 4 might be anything below 87%.  Action plans are required and based on the level at which the property should perform. 82

83 “Every day an apartment home is unoccupied, revenue is lost forever.” 83

84 Constantly seek opportunities to increase other income. In the 2010 NAA Survey, Other Income represented 7.1% of GPR.  Increase Fees, application, administrative, etc.  Charge for Services Such as Utility Sign-up  Parking  Water, Sewer, Trash  Amenities 84

85  Often called “yield management” systems  Came from the hospitality and airline industries  Uses databases of information to forecast supply and demand  Prices units “daily” to maximize the yield  The market on that day and at that time determines unit pricing 85

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88 Apartment Investment Basics Mortgages, Financing & Taxes Managing the Budget Process Getting to the Bottom Line Analyzing Monthly Financial Statements Valuing Apartment Investments Maximizing Revenues 88

89  This plan is yours and yours alone  You decide on which leadership areas you want to work.  You set the number of goals  You decide on the action steps and timeline. 89

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