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Presentation on theme: " Risks and Opportunities in Asset Management Today September 24, 2010 Vermont Housing & Conservation Board."— Presentation transcript:

1 Risks and Opportunities in Asset Management Today September 24, 2010 Vermont Housing & Conservation Board

2 The Risks 1.Low Average Property Size 2.Modest Staff Capacity 3.Overstaffing 4.Weak Market Conditions 5.Stalled Pipeline 6.Low Property Management Fees 7.Negative Bottom Line for Property Management Division 8.Negative Trends in Operating Advances to the Properties 9.Poor Stakeholder Reviews 10.Outdated/Insufficient Systems and Procedures 11.Unstructured Asset Management 12.Non Real Estate Culture 1

3 #1: Low Average Property Size Economies of scale are difficult to achieve: 100 vs. 20 unit property –Example 1 1 unit vacant in a 100 unit property = 1% vacancy rate. 1 unit vacant in a 20 unit property = 5% vacancy rate. –Example 2 Audit cost per property = $10,000 –100 units = $ 100 pupy –20 units = $500 pupy Self-managers of small properties seldom earn enough in fees to cover their central office cost. –Why? Property management does its work by the project but gets paid by the unit. –Example: 100 units x $400 pupy mgmt fee = $40, units x $400 pupy mgmt fee = $8,000 2

4 #1: Low Average Property Size Solutions –Establish threshold size for future projects –Seek adjacencies for future projects –Standardize design to increase replacement/repair efficiencies –Restructure financing of two or more smaller properties into one 3 Other ideas?

5 #2: Modest Staff Capacity Affordable housing is increasingly complex –Stakeholder requirements demand growing set of administrative and financial skills –Sustainable design can require sophisticated systems and increased reliance on contractors 4 -LIHTC projects need marketing savvy -Cant be run as a jobs program without additional resources

6 #2: Modest Staff Capacity Solutions –Do it right the first time Get the time-quality-cost balance right re: using staff vs. contracting out –Leadership is key Skilled Passionate Dedicated to outcomes Must have standing within organization and with stakeholders –Train, train, train 5 Time QualityCost

7 #3: Overstaffing Nonprofits tend to staff at higher levels than for profits on a per unit basis –May not have large enough portfolio over which to share minimum staffing thresholds –Tend to staff functions rather than use contractors –May promote on-the-job training that requires additional supervision – Hold onto under performing staff and hire additional staff to compensate – costly overall even if individual pay is modest 6

8 #3: Overstaffing Solutions –Conduct manpower analysis of what is done by staff and what is done by contractor Best solutions maximize occupancy and reduce costs –Learn staffing rules of thumb –Hire for skills and attitude –Understand staffing levels in proformas 7

9 #4: Weak Market Conditions Soft markets threaten proformas long term revenue assumptions –Difficult to get back on track –A real threat for LIHTC projects; less so for those with project- based subsidies –Market alternatives may include single family homes Units and features may be obsolete 8 May be more difficult to overcome in transitional markets

10 #4: Weak Market Conditions 9 Solutions –Learn market-rate leasing techniques Concessions Mini-models Special offers Evening and weekend hours Social networking –Know the competition and neighborhood –Reposition –Seek tenants with special needs you can fill

11 #5: Stalled Pipeline Self-managers need portfolio of 500+ units to be financially viable –New project pipelines are source not only of development fees, but of property management growth and financial health. –Absence of a robust pipeline is a real threat unless alternative resources are found. 10

12 #5: Stalled Pipeline 11 Opportunities –Build internal capacity if the stall is temporary Good time to update systems and technology –Outsource property management if it will take too long to get to scale –Consider managing for others (although only if you are already strong and have some over- capacity)

13 #6: Low Management Fees Below market management and other allowable fees are fairly common on a pupy basis –Management fees are often calculated as a percentage of collections. Low rents and high receivables effect management fees. –Initial fees sometimes set below market to achieve lower operating costs, particularly if self-manage. 12 Dont expect third party managers to automatically agree to below market fees.

14 #6: Low Management Fees 13 Opportunities –Know the market – if self- manage, may be able to raise fees for in-house property management division HUD Field Office Fee Schedule Local LIHTC underwriting standard –Learn what it costs on a pupy basis to run your property management division. Compare to achievable fees.

15 #7: Negative Prop Mgmt Bottom Line Virtually impossible for nonprofit to have break- even property management division –Average property size is too small – Size matters!! Property management does its work by the property, but gets paid by the unit. –Avg fee = $450 pupy –350 units in 10 properties = $157,500 –900 units in 10 properties = $405,000 Many self-managers do not count all of their indirect costs. –Should be a planned decision to cover a negative bottom line from other sources. 14

16 #7: Negative Prop Mgmt Bottom Line Solutions –Consider using third- party manager until reach break-even size and/or generate sufficient revenue to have full complement of qualified staff. –Maximize fees –Keep payroll expenses at 75% or less of revenues. 15 Non-Profit IREM Revenues100% - Payroll75% - 80% 63% - Other25% = Bottom Line 0 – (5%)12% Typical non-profit property management division

17 #8: Negative Trends in Operating Advances to Properties Advances to the properties can take different forms –Deferred developer fees –Outright loans –If self-manage: Unpaid management, bookkeeping and other fees Site payroll –What else? Growing due to related party advances weaken the organizations balance sheet 16

18 #8: Negative Trends in Operating Advances to Properties Solutions –Make paying back advances a priority – plan for them –Determine whether or not any reserves are available –If self-manage renegotiate management agreements so payment of management fees is closer to top rather than bottom of order of monthly payments –Make repayment part of refinancing 17

19 #9: Poor Stakeholder Reviews Stakeholders scrutiny is increasing – they do have watch lists –Substandard performance can yield financial and other penalties –Substandard performance can yield increased inspections and reporting –Poor reviews can halt approvals on pipeline projects 18 What else?

20 #9: Poor Stakeholder Reviews 19 Solutions –Pass their tests! Inspect ahead of time Take corrective action ahead of time Use third-party inspectors for physical and file reviews –Establish measurable standards – SMART –Establish stakeholder point of contact –Communicate before something goes wrong

21 #10: Outdated/Insufficient Systems & Procedures Not often a priority until broken –Reactive, fire-fighting styles have little time for procedural upgrades When a change is needed, often bring inside main office rather than solve at site level – accuracy may improve but timeliness may suffer Redundancy is prevalent 20 Found in organizational cultures where constant upgrading/refining is not regular and ongoing

22 #10: Outdated/Insufficient Systems & Procedures 21 Opportunities –Upgrade/update during periods of slow growth –Determine what works best centrally and what works best at the site Use technology instead of FedEx to move documents –Invoices –Income Certs/Recerts –Establish company intranet for standard forms/updates –Scanners, pdas –Get help! Its a big job.

23 #11: Unstructured Asset Management Functions are assigned but not prioritized or coordinated –No overarching strategy that directs and links the functions. –Handoffs are not formalized. Example – deal components not well tracked or understood over time creating unintended consequences – like a default AM FunctionAssigned to Performance Monitoring/Analysis Prop Ops Investor Relations Finance Compliance Prop Ops Capital Planning Develop Managing ongoing deal elements/fees Finance Board reporting Exec Dir Risk management Finance 22 Partial list of Asset Management Functions

24 #11: Unstructured Asset Management Solutions –Board sets broad goals for portfolio re: Financial performance Physical condition Mission objectives Stakeholder requirements –Board defines role of asset management and how its carried out: Board committee Staff committee Staff position 23

25 #12: Non-Real Estate Culture Organizations practices are not aligned to deliver on portfolio underwriting assumptions or stated goals – Being the landlord may conflict with social objectives – Absence of capacity thwarts best intentions –Stakeholders back away 24 Failure to act as performance and value deteriorate over time.

26 #12: Non-Real Estate Culture Solutions –Know your deal! Get immersed in the details –Establish and monitor performance benchmarks –Trend balance sheets and operating statements –Know how to make adjustments –Create multi-year projections –Establish contingencies –Have a reserve strategy 25.

27 26 What other challenges have you faced? What were your solutions and/or your opportunities?

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