Asset Management Leadership Orientation

Asset Management Leadership Orientation
Welcome to the Asset Management Leadership Orientation for PHA Boards. This training will provide an overview of HUD’s transition to asset management, and will specifically explore how asset management affects your role as PHA Board Members. February 12, DRAFT

Overview of PHA Board Training
Section 1: Overview of Asset Management Section 2: Building Blocks of Asset Management Section 3: The PHA as a Property Management Business Enterprise This training is divided into four sections: <advance 1> First, Section 1 will provide a general overview of asset management; <advance 2> Section 2 will then explore asset management in more detail, with a review of the 5 fundamental “building blocks” of asset management; <advance 3> Next, Section 3 will address how the PHA functions as a Property Management Business Enterprise as a result of asset management; and <advance 4> Finally, we’ll wrap up with Section 4 and summarize key points and take away items. At various points throughout this training, your facilitator will stop the DVD/PowerPoint presentation in order for you and your colleagues to discuss some of the ideas, situations, and issues presented. Section 4: Summary and Wrap-Up February 12, DRAFT

Section 1: Overview of Asset Management
Let’s get started with Section 1… February 12, DRAFT

Overview of Asset Management Learning Objectives
Explain “What is asset management?” Explain the difference between the existing agency focus and an asset management focus List the benefits of asset management from the board’s perspective Identify key dates associated with the transition to asset management Describe key roles and responsibilities under asset management Explain the PHA Board’s role as owner In this section, we will: <advance 1> Begin by defining the term asset management; <advance 2> Then, we’ll take a closer look at the difference between a traditional agency focus and an asset management focus; <advance 3> Next, we’ll spend some time discussing how the PHA board will benefit from asset management; <advance 4> We will discuss specific dates associated with the transition to asset management. <advance 5> Finally, we’ll examine the various roles and responsibilities under asset management, <advance 6> specifically, how the PHA Board will serve as the owner and provide oversight to the PHA. But first, Assistant Secretary Orlando Cabrera would like to provide some opening remarks on asset management. February 12, DRAFT

Assistant Secretary for Public and Indian Housing (PIH) at HUD
Welcome to the Asset Management Leadership Orientation for PHA Boards. My name is Orlando Cabrera, Assistant Secretary at the Department of Housing and Urban Development. I’d like to offer a brief introduction to the new and exciting world of asset management. The transition to asset management is one of the most significant events in the history of the public housing program. It fundamentally changes the way business is done. As PHA Board Members, you play an integral role in this new world and we’re excited to share the many ways in which this transition will benefit your organization and advance your goals. But first, let me share with you the basic premise of asset management and what it can really accomplish. Ultimately, asset management is about focusing on the performance of each asset and its position in the local affordable housing market. By focusing on performance, we can provide PHAs much greater flexibility. In all, it's about greater benefits for the residents of Public Housing. The residents are at the heart of asset management. That's something we'll never forget. As the former director of a state housing finance agency, I am truly excited about public housing’s conversion to asset management. With your help and support we are confident that we will achieve our mission to provide PHAs with greater flexibility which will ultimately allow us to focus on the performance of our assets and provide better housing for our residents. Orlando J. Cabrera Assistant Secretary for Public and Indian Housing (PIH) at HUD February 12, DRAFT

“PHAs shall manage their properties according to an asset management model, consistent with the management norms in the broader multi-family management industry. PHAs shall also implement project-based management, project-based budgeting, and project-based accounting, which are essential components of asset management.” Revisions to the Public Housing Operating Fund Program; Final Rule HUD, September 19, 2005 To build on Assistant Secretary Cabrera’s remarks, let’s take a closer look at an excerpt from the Public Housing Operating Fund Program Final Rule…“PHAs shall manage their properties according to an asset management model, consistent with the management norms in the broader multi-family management industry. PHAs shall also implement project-based management, project-based budgeting, and project-based accounting, which are essential components of asset management.” February 12, DRAFT

What is Asset Management?
A process of making investment decisions for a collection (portfolio) of assets, based on the mission, goals, and objectives of the owner, lender, sponsor, or regulatory body. But, what does asset management really mean? Basically, asset management is a specialized field of real estate management that involves the supervision of an owner’s real estate assets at the investment level. It is the process of overseeing property performance with the goal of enhancing value and maximizing ownership objectives; It is a practice that occurs over the life cycle of a property from acquisition to disposition; and It is a function that blends high-level strategic decision-making based on the mission and goals of the owner with day-to-day operational issues. February 12, DRAFT

Asset Management at HUD Background
1999: Congress directs that HUD contract with Harvard Graduate School of Design to conduct a study on costs incurred in operating well-run public housing 2003: Final cost study completed and released 2005: Based on cost study, revisions are made to PH Operating Fund Program and the new rule (24 CFR Part 990) is issued Provides a new formula for distributing operating subsidy to PHAs Establishes requirements for PHAs to convert to asset management So why are we undertaking this shift to asset management? Let’s take a look at the background behind this transition. <advance 1> In 1999, Congress directed that HUD contract with the Harvard University Graduate School of Design to conduct a study on the costs incurred in operating well-run public housing. The Harvard University Graduate School of Design performed extensive research on the question of what the expense level of managing well-run public housing should be. <advance 2> Their final report was completed and released in June of 2003. <advance 3> The results of the Harvard cost study led to revisions to the Public Housing Operating Fund Program and a new rule was issued in September, 2005. <advance 4> This new rule amends the regulations of the Public Housing Operating Fund Program to provide a new formula for distributing operating subsidy to public housing agencies. <advance 5> It also establishes requirements for PHAs to convert to asset management. HUD developed the final rule through the Negotiated Rulemaking process, which included active participation from PHAs, public housing residents, and other relevant parties prior to signing off on the Rule. These regulatory changes improve and clarify the current regulations governing the Operating Fund Program and take into consideration the recommendations of the Harvard cost study. February 12, DRAFT

PHA Operating Fund Final Rule: Small PHA Exception
PHAs with fewer than 250 units are not required to convert to asset management Small PHAs may choose to implement asset management and follow the key business rules like any larger PHA Asset management is ultimately about maximizing financial, physical, and management performance The requirements for smaller public housing authorities are unique in that certain requirements are not applicable to smaller PHAs. We’ll talk about this further now. <advance 1> PHAs with fewer than 250 units are not required to convert to asset management. However, PHAs with fewer than 250 units that do not choose to adopt asset management will still be subject to the new funding formula. They can also expect modest changes in financial reporting requirements in the upcoming years, but they will not be required to implement other key business rules associated with asset management. <advance 2> That said, some small PHAs may choose to implement asset management in order to realize the benefits of applying a management model that focuses on managing each asset and the resources available as effectively as possible. <advance 3> Ultimately, asset management is about maximizing financial, physical, and management performance which is beneficial regardless of PHA size. February 12, DRAFT

Kentucky PHAs – An Overview
Total number of PHAs in Kentucky: 104 Classification # % of Total Units Number of KY PHAs with < 250 units 82 79% Number of KY PHAs with 250 units or more 22 21% Number of KY PHAs that are gainers 66 63% Number of KY PHAs that are decliners 38 37% This chart provides an overview of the PHAs in Kentucky, including the number of PHAs in the state with additional information surrounding PHAs with less than 250 units as well as those with 250 units or more. In addition, the chart also depicts the number of gainers and decliners within the region, and their associated percentage of total units. February 12, DRAFT

Asset Management – A Shift in Focus
Previous Focus Revised Focus HUD HUD Reporting and Funding In general, asset management involves a shift in focus in terms of how services are arranged, financial reports are prepared, and performance is measured. <advance 1> In the old model, these activities were typically conducted at the overall agency wide level. <advance 2> With asset management, these activities will shift to the “asset” or “project” level. Essentially, we are shifting from a centralized model to a more decentralized model of management. In preparation for the conversion to asset management, PHAs were asked to examine their current portfolio and recommend project groupings to comprise their “AMPs” or Asset Management Projects. The AMP groupings were based upon various factors such as development size, physical proximity, resident’s served, and type of building. It is now at this AMP level where services will be arranged, financial reports will be prepared, and performance will be measured. Again, the basic premise of asset management is about focusing on each individual asset’s performance. While HUD will provide funding at the AMP level, and will be collecting AMP-level data, the PHA Board and Staff is still ultimately responsible for the AMP’s performance AMP 1 Public Housing Authority (PHA) Public Housing Authority AMP 2 AMP 3 February 12, DRAFT

Benefits of Asset Management
Improve operational efficiency and effectiveness Better preserve and protect each asset Provide appropriate mechanisms for monitoring performance at the property level Facilitate future investment and reinvestment in public housing As Assistant Secretary Orlando Cabrera mentioned earlier, there are many benefits of moving to the asset management model. As PHA Board Members responsible for providing oversight and ensuring the overall health of your PHA, the transition to asset management will provide you with numerous benefits. Let’s take a look at a few specifics: <advance 1> First, asset management will provide opportunities to improve the operational efficiency and effectiveness of managing public housing assets by providing more accurate information about the operating costs and performance levels of each public housing AMP. <advance 2> Managing public housing at the AMP level also allows us to better preserve and protect each asset. This oversight will also facilitate the ability to better maximize the (investment) value of each asset. <advance 3> Asset Management helps establish mechanisms for monitoring performance at the property level. <advance 4> Finally, asset management will allow the public housing program to grow, as it will facilitate future investment and reinvestment by public and private sector entities. These are just a few of the high-level benefits of moving to asset management. We’ll highlight a few more as we move throughout this course. February 12, DRAFT

A Look at Public Housing
Entity Role Function PHA Staff or Management Company (3rd Party) Operations Property Management PHA (Board) Owner Asset Management HUD-PIH Regulator Monitoring Asset management can’t be accomplished alone. The HUD Office of Public and Indian Housing, Public Housing Agencies, and especially the PHA Board of Commissioners all play an important role. The following diagram explains each role in more detail. <advance 1> Based upon the portfolio size, staffing capabilities, funding and other factors, many PHAs are able to wear two hats; functioning as both the owner and the management company. In this case, the PHA staff also perform the property management function, managing the day-to-day operations of the AMP. In other cases, PHA Boards of Commissioners may opt to hire third party management companies. <advance 2> As PHA Boards of Commissioners, you’ll play the role of owner, functioning as asset managers who oversee the performance of the property. You’ll make strategic decisions regarding the acquisition, disposition, and repositioning of properties. <advance 3>HUD-PIH field offices play the role of regulator, monitoring compliance with asset management rules and benchmarks. This monitoring is possible due to the ACC contract and receipt of subsidies. February 12, DRAFT

PHA Mission and Goal Drivers
Who to serve Quality of housing Standard of affordability Social goals Operational efficiencies Investment decisions should be dictated by the mission, not the reverse. Now let’s talk specifically about the mission and resulting goals of Public Housing Authorities. PHAs have the basic regulatory requirement to oversee that Public Housing is decent, safe, sanitary, and in good repair. Outside of this basic requirement, there can be a great deal of variation in how PHAs operate to achieve their various individual goals. Even within the same PHA, the mission can differ from community to community. As you know, PHA goals may vary in terms of: <advance 1> The target audience for the property; <advance 2> The level of quality of the housing provided; <advance 3> The level of affordability of the housing provided; <advance 4> The quantity and quality of social programs and services provided; and <advance 5> Efficiencies to strive for in terms of operations and management. For example, some PHAs target the lowest-level of the low-income range while others target a higher-level of the same income range; some PHAs choose to provide social services while others do not. <advance 6> In any case, investment decisions should be dictated by the mission of the PHA, and not the reverse. February 12, DRAFT

PHA Board: Owner Role Review activities for conformance with missions and goals Evaluate progress and recommend corrective action Monitor performance Stay up to date on industry information Foster relationships with key stakeholders So, what does the role of owner really mean? Basically, as an owner, you are responsible for overseeing the performance of the AMP, setting the direction, and ensuring that decisions meet the overall PHA mission and goals. Here are the high-level key ownership responsibilities under asset management: <advance 1> First and foremost, PHA boards will review activities and ensure they align with the overall mission and goals. Under asset management, PHAs will be responsible for preparing project-level budgets that serve as a guideline for operating an AMP. As the PHA board, or asset management owners, your role will be to review and approve those budgets. <advance 2> Another key responsibility will be to evaluate progress and recommend corrective action. This may involve developing goals for the property or making decisions on certain repairs. <advance 3> As the owners, you will also monitor project-level performance against measurable benchmarks, such as an AMP’s operating expenses per unit. This type of benchmark is used to compare properties both within and outside of your portfolio, and as owner’s you’ll want to monitor these figures closely. <advance 4> It is also important to stay up-to-date on industry information such as the overall real estate market including potential risks and other opportunities. <advance 5> Finally, Board members play a pivotal role in fostering relationships with key stakeholders. Throughout the asset management transition this will be even more important. Successfully fulfilling your owner role involves focusing on true asset management actions and involvement. On one extreme, boards may falter because they did not assume enough responsibility. For example, leaving budgets, key policy decisions such as AMP goals or tenant selection policies, and problem solving activities to others. Another common mistake is that the Board may over-monitor and/or micromanage; such as attempting to make operational decisions that are best handled by the management company or property manager. Successful boards should focus on the asset management responsibilities listed above, and discussed in more detail throughout this training. February 12, DRAFT

Workshop 1.1: Owner Assessment
What ownership responsibilities are we doing really well? On which ownership responsibilities can we better focus? How? In groups, please work to discuss and provide answers to the questions above. Before we get into the nuts and bolts of the training, let’s take a moment to explore the concept of your role as owners in more detail. In groups, answer these questions. Select two responses to each question and write them on a flip chart. At this time, pause this recording to complete this workshop. Re-start the recording when you are finished with the workshop. February 12, DRAFT

End of Section 1 This is the end of Section 1: Overview of Asset Management. February 12, DRAFT

Section 2: Building Blocks of Asset Management
Welcome to Section 2: Building Blocks of Asset Management. February 12, DRAFT

Building Blocks of Asset Management Learning Objectives
Define asset management and property management from a private-sector perspective and discuss how it relates to a Public Housing context Describe the five building blocks of asset management Project-based funding Project-based budgeting Project-based accounting Project-based management Project-based Performance assessment In this section, we will explore the concepts of asset management in more detail: <advance 1> First, we will define asset management and property management from a private-sector perspective and discuss how it relates in a Public Housing context. <advance 2> Next, we will review the five building blocks of asset management, or the initial priorities in terms of the overall asset management implementation. These five major elements include project-based funding, budgeting, accounting, management, and monitoring. Note that the project (or the AMP) is the focus of these buildings blocks. February 12, DRAFT

Hierarchy of Asset Management
As we transition to asset management, it may be helpful to refer to this diagram. In this hierarchy of asset management, there are multiple tiers, each having a core function and related activities. <advance 1> At the ground level are the daily operations of the property, such as collecting rents, leasing units, performing inspections, and conducting maintenance activities. In conventional terms, this is the site-based “property management” function. This level is where project-based accounting, budgeting, management, and funding will occur, as well as the development of site-level operating statements listing revenue, expenses, and balance sheets. <advance 2> <advance 3> The next tier in the hierarchy of asset management is project-based performance assessment. Here, projects are examined to assess quality, provide oversight and guidance, ensure compliance, and review management performance. <advance 4> <advance 5> At the top of the hierarchy is asset management. Here, strategic decisions are made in accordance with ownership objectives in areas such as mission and goals, capital planning, repositioning of properties, and policy-making. While many PHA Boards want to focus solely on this top level, all other levels must be in place and functioning properly as well—each level is dependant upon the previous one. <advance 6> It is important to note that property management is a sub-set of asset management. Remember that asset management involves the oversight of the property management function. February 12, DRAFT

Initial Priorities/Building Blocks
Project-based monitoring Project-based management Project-based accounting In order to reach that top-tier of asset management, the five building blocks of asset management listed here must be in place. Again, these are the initial priorities in the overall transition, and really set the foundation for the strategic aspects of asset management. Now, let’s review each of these building blocks in more detail… <advance 1> Starting with Project-Based Funding Project-based budgeting Project-based funding February 12, DRAFT

Project-Based Funding
New rule provides funding at the project-level as opposed to the PHA entity level HUD PHA OLD $ Subsidy <advance 1>The new rule provides funding at the project-level as opposed to the PHA entity level. <advance 2> Previously, funding was distributed by HUD to PHAs. PHAs then determined how to distribute those funds to each project. <advance 3> Under the new rule, HUD will distribute funding directly to the AMP in the form of a subsidy. PHAs will make income from fees and chargebacks paid by the AMP. Fees and chargebacks will be discussed in depth in the next section of this training. HUD AMP NEW PHA $ Subsidy $ Fees and Chargebacks February 12, DRAFT

Project-Based Funding
Separate subsidy form for each AMP Project Expense Level (PEL) is a major component Ensures appropriate resources are allocated to each AMP <advance 1> Under project-based funding, PHAs will complete a separate subsidy form for each AMP. <advance 2> In addition, a major component of an AMP’s subsidy calculation will be its Project Expense Level or PEL. The PEL is a model-generated estimate of the cost to operate the AMP. It is exclusive of utilities and taxes. It is based on the costs of operating other federally-assisted housing with similar characteristics. <advance 3> One of the biggest benefits to project-based funding is that it ensures appropriate resources are allocated to each AMP based on their unique unit characteristics (e.g. occupancy, unit use). February 12, DRAFT

Project-based monitoring Project-based management Project-based accounting <advance 1> Along with project-based funding, PHAs will be required to perform project-based budgeting, our next building block. Project-based budgeting Project-based funding February 12, DRAFT

Project-Based Budgeting
New rule requires PHAs to prepare project-based budgets Budgeted amounts shall readily reconcile to FDS Must be approved by PHA Board HUD plays advisory role Used for PHA planning purposes <advance 1> Essentially, Project-Based Budgeting means that budgets will now be completed at the AMP-level as opposed to the PHA entity-wide level. <advance 2> HUD will not prescribe a specific budget format, but the budget should reconcile to the updated Financial Data Schedule (FDS). <advance 3> The final budgets will require PHA board approval prior to the start of each fiscal year. However, these budgets will not require HUD-approval, except in the case of troubled AMPs. <advance 4> In general, HUD will play an advisory role by answering questions and providing guidance as needed. <advance 5> Primarily, project-based budgets will be used for internal PHA planning purposes. February 12, DRAFT

What is a Project-Based Budget?
Itemized projection of income and expenses over a specific period Guideline for operating the property Why are project-based budgets useful? Measure of property’s financial health Measure of staff performance Projection of future income and expenses Since project-based budgeting is such a fundamental component in the transition to asset management, let’s take a few moments to review some general AMP budgeting principles. First, let’s define a budget. <advance 1> A budget is an itemized projection of income and expenses over a specific period of time. In conventional housing management, budgeting is done for each individual AMP. Each asset’s financial performance is tracked individually and reported to the owner. This allows both the manager and the owner to make the best decisions for the property. Budgets often are customized to represent the diverse needs and activities of a business. For example, in Public Housing there will be separate budgets for each AMP, the PHA Central Office Cost Center, and the Capital Fund. <advance 2> A budget serves as a guideline for operating a AMP. It provides expected revenue figures as well as targeted expense amounts. Now that we have discussed what the AMP level budget is, lets take a closer look at how this budget will be useful in managing a portfolio of AMPs. <advance 3> A budget gives us a sense of the AMP’s financial health by monitoring the flow of cash through the property. It can be used to compare budgeted amounts to actual amounts or the current year’s figures to previous years’ figures. Budgets indicate whether operations are efficient and on target with our goals for the AMP. <advance 4> Budgets can also measure the performance of the on-site staff and the management company. For example, staff who manage the maintenance function effectively may be able to turn-over units more quickly, allowing for more rental income. <advance 5> And finally, budgets are often used to project future income and expenses. While budgets cannot predict the future, they can be used to make fairly accurate projections based on what we know about the past performance of the AMP. February 12, DRAFT

Sample Conventional Budget
Gross Potential Income (GPI) - Vacancy and Collection Loss + Miscellaneous Income = Effective Gross Income (EGI) - Operating Expenses = Net Operating Income (NOI) - Reserves for Replacement - Annual Debt Service (ADS) = Cash Flow Now let’s take a look at a typical conventional budget structure. Of course, budgets may vary by company and by AMP, but this is a standard operating budget used in real estate management. <advance 1> We start with Gross Potential Income, or GPI. GPI is the maximum rent that can be derived from 100% occupancy and 100% collection of rents over the course of a financial period. To compute GPI, assume that all units are occupied, all rents are paid in full, and all payments are received on time. <advance 2> Of course, we all know that this isn’t always the case. So we must deduct for vacancy and collection loss. Vacancy and collection loss reflects lost income due to: physical vacancy, which is available but unoccupied space, economic vacancy, which is loss from concessions or space not available for lease (e.g. special use units), and collection loss, which is delinquent or uncollectible rent. <advance 3> Next, we add miscellaneous income. Miscellaneous income comes from any source other than rent. In the private sector, some sources of miscellaneous income include: parking fees, laundry machines, vending machines, forfeited security deposits, and late fees. <advance 4> This brings us to Effective Gross Income, or EGI. EGI is the actual amount collected in all categories of income. This figure becomes the source of funds used to pay the AMP’s operating expenses. <advance 5> As you know, operating expenses are the normal, day-to-day expenses of running an AMP. Categories of operating expenses can be customized to reflect the AMP’s needs and plans. <advance 6> After subtracting the total operating expenses from Effective Gross Income, we arrive at Net Operating Income, or NOI. NOI is an important gauge of the AMP’s financial strength. It is also used to determine the AMP’s value. The larger the NOI, the greater the amount that can be spent on future AMP improvements. <advance 7> At this point, many real estate managers deduct for reserves. Reserves for replacement are a form of savings used to cover future capital improvements. Reserves are typically considered a line item that occurs after NOI. <advance 8> Annual Debt Service, or ADS is deducted at this point in conventional housing to pay the AMP’s loan principal and interest each year. Note: ADS may not be applicable to all PHAs. <advance 9> After all of the income and expense figures are accounted for, we arrive at the bottom line: cash flow. Cash flow is an indicator of financial health and shows that the AMP successfully met its major obligations, such as operating expenses and debt service. February 12, DRAFT

Same Budget, Different Perspectives
Monthly Yearly PUM PUPY GPI $5,000 $60,000 $50 $600 Vacancy & Collection Loss $7,200 $6 $72 Misc. Income $100 $1,200 $1 $12 EGI $4,500 $54,000 $45 $540 Operating Expenses $1,500 $18,000 $15 $180 NOI $3,000 $36,000 $30 $360 So here is how a typical budget might look using a number of different perspectives. In the table shown, monthly, yearly, and per unit figures are displayed. P-U-M, or “pum” as you may know, represents a “per unit per month” figure while P-U-P-Y, or “puppy,” stands for “per unit per year.” Note that this figure can also be known as P-U-P-A, or “per unit per annum.”. So according to this budget, we have a Net Operating Income, or NOI annually of $36,000. This means that we have a monthly NOI of $3,000. But what if we wanted to compare how units at another AMP were performing against our units at this AMP? Well, we know that at this AMP, we have a per unit per year NOI of $360, which equates to a monthly per unit NOI of $30. Per unit analysis allows us to perform an “apples-to-apples” comparison between the AMPs the PHA owns and manages. As you can see, different representations of the same data can be made, depending on what the budget analyst is interested in reviewing. February 12, DRAFT

Ratios Used for Expense Benchmarking
Operating Expense Ratio (%) = per Unit ($) = Several variables may impact benchmarks Expense benchmarks can be used to compare efficiencies across properties Operating Expenses Income Operating Expenses Number of Units So, as Board members responsible for approving project-level budgets, how do we know whether our AMP’s expenses are appropriate when compared to our income? There are two key benchmarks that are used to tell us just that. <advance 1> The Operating Expense Ratio divides expenses by income to arrive at a percentage. The lower the ratio, the more efficient the operation. In Public Housing, the Operating Expense Ratio is currently close to 99% because income just covers expenses and there is no debt service. <advance 2> Operating Expense per Unit divides expenses by the number of units to arrive at a dollar amount. <advance 3> Common variables affecting both of these benchmarks include: the AMP’s age; taxes; the number of floors, and the number of larger units with more bedrooms. <advance 4> Both the Operating Expense Ratio and the Operating Expense per Unit figure can be used to compare AMPs both within and outside of your portfolio. February 12, DRAFT

Workshop 2.1: Expense Benchmarks
Consider data from two similar apartment buildings shown on the next slide Calculate the Operating Expense Ratio and Operating Expense/Unit Ratio In groups, identify the most efficient property based on your results What factors should be considered when evaluating the results? Let’s practice assessing project performance using some of these benchmarks. <advance 1> First, review basic budget information for two similar apartment buildings shown on the next slide. <advance 2> On your own, calculate the Operating Expense Ratio and Operating Expense per Unit Ratios using the calculations we just reviewed. <advance 3> Next, divide into groups and identify the most efficient property based on your results. <advance 4> Discuss what factors should be considered when evaluating the results, and write your responses for further group discussion. February 12, DRAFT

Workshop 2.1: Expense Benchmarks
Hamilton Place Southside Apartments # of Units 20 10 Income $175,000 $160,000 Operating Expenses $75,000 $80,000 OpEx Ratio OpEx/ Unit At this time, pause this recording to complete this workshop. Re-start the recording when you are finished with the workshop. We learned from previous slides that the Operating Expense Ratio (%) is calculated by dividing Operating Expenses by Income. This determines how much of our income is allocated towards operations. The lower the number, the higher the AMP’s income. In addition to learning about the Operating Expense Ratio, we also learned that Operating Expense per Unit is calculated by dividing Operating Expenses by the number of units. In this instance, we can see that Hamilton Place not only has a better Operating Expense Ratio, but their Operating Expense per Unit is also less than half of Southside Apartments’, so we can conclude that Hamilton Place likely has greater efficiencies than Southside. 42.8% 50% $3,750 $8,000 February 12, DRAFT

Where Can I Find Benchmarks?
IREM Income/Expense Analysis® Reports Housing Finance Agencies NeighborWorks (small properties) Rural Development Local and Regional Market Studies Online Property Integrated Information Suite (OPIIS) There are a variety of sources of these expense benchmarks available, as you can see here. One such resource are the Institute of Real Estate Management’s “Income/Expense Analysis Reports.” The Institute of Real Estate Management, or IREM, collects income and expense data for multiple property categories, including conventional apartments and federally assisted apartments. Note that by submitting data before the annual March 1st deadline, all contributors receive a free copy of that year’s Income/Expense Analysis for the property type they submitted. Benchmark information can also be obtained through Housing Finance Agencies You can also obtain information on benchmarks through NeighborWorks (for small properties), Rural Development and Local and Regional Market studies. Another efficient and effective method of obtaining benchmark information is to use the OPIIS system. While OPIIS is not available to PHAs at this time, HUD may make the data available in the future. In the meantime, your MF Hub/PC would be able to access this information on your behalf. February 12, DRAFT

Why Project-Based Budgeting?
Knowledge about PHA management funds Control over resource allocation Organization of AMP-level financials Communication of strategic goals Opportunity to affect change in the community Efficiency of property management There are many benefits of developing and managing project-level budgets <advance 1> First of all, project-level budgets provide knowledge about how PHA management funds are allocated, how they are being used, how they will be used, and whether individual AMPs are achieving certain operating goals. Knowing the amount of resources available is the first step toward effectively utilizing them. <advance 2> Also, PHA management can control how it will spend its resources to meet AMP needs by specifying the amount of dollars available for specific operational functions like maintenance, landscaping, etc. <advance 3> Project-based budgeting also facilitates the organization of AMP-level financial data and records, which will assist in the development of accounting and auditing records. <advance 4> Also, budgeting enables PHA management to communicate strategic goals and priorities to their AMP-level staff. As PHA board members, knowing that this type of information will now be more easily communicated is extremely exciting. <advance 5> Project-based budgeting also provides a great deal of opportunity to further affect change within the community. PHA and AMP-level staff may be able to take advantage of business or community activities if it knows it has the necessary resources to engage in those activities or can reallocate resources as necessary. <advance 6> Finally, through better organization of its financial data, PHA management will be able to complete necessary tasks more quickly and effectively. For example, information requested by creditors or tax officials will be easier to compile. In addition, a detailed budget may indicate where revenues are not being maximized or expenses can be lowered. February 12, DRAFT

Project-based monitoring Project-based management Project-based accounting <advance 1> The next building block is project-based accounting. Project-based budgeting Project-based funding February 12, DRAFT

Project-Based Accounting
Year-end AMP statements submitted to HUD Can only charge AMPs for services actually received Fees must be considered reasonable Provides necessary information to make decisions in the best interest of the AMP PHA Board members will review AMP-level financial statements Similar to Project-Based Budgeting, Project-Based Accounting ensures that financial statements are completed at the AMP-level. <advance 1> As with other federally-assisted housing programs, PHAs will be required to submit year-end financial statements on each AMP to HUD. These financial statements will include revenue, expenses, and balance sheet items. <advance 2> Further, PHAs will only be able to charge AMPs for services actually received. In accounting for AMP costs, for example, PHAs will not be permitted to spread the cost of central maintenance across all AMPs in their portfolio. <advance 3> Lastly, any overhead fees, and any fees for centrally-provided AMP management services, must be considered reasonable. This means that the costs must not exceed what other efficient operators would incur for those same services in the local market. <advance 4> In terms of benefits, project-based accounting provides the ability to track financial performance at the AMP-level. Ultimately, this provides the necessary information to make more effective decisions at the AMP-level. <advance 5> As PHA Board Members, it will be important to review AMP-level financial statements in order to assess performance and make appropriate decisions. Project-Based accounting will be discussed further in Section 3 of this training. February 12, DRAFT

Project-based monitoring Project-based management Project-based accounting <advance 1> The project-based management building block allows projects to operate using a conventional property management approach. Let’s take a closer look… Project-based budgeting Project-based funding February 12, DRAFT

Project-Based Management (PBM)
Arrange AMP management services in the best interest of the AMP Assign management personnel to each AMP <advance 1> Under the new rule, PHAs must arrange AMP management services “in the best interests of each project.” In other words, an AMP must receive the same level of service from a central landscaping crew as could be obtained through the market or by handling the work with on-site staff. It is important to note that if the service provided by the PHA is of lower quality or more expensive than other property management companies, the AMP staff may choose to contract the work out to a third party vendor that offers the services at a better price. <advance 2> Additionally, PHAs must assign management personnel, such as a housing manager, to each AMP. The primary responsibility of this staff person will be the day-to-day operation of that AMP. Depending on the size of the PHA, it may not make sense for every AMP to have its own Housing Manager. Site-based staffing decisions will depend on individual AMP characteristics (namely, size), but that AMP-based staff is the norm in asset/project-based management. In other words, to the extent possible, front line services should be performed on-site. February 12, DRAFT

Project-Based Management (PBM)
The provision of property management services that are tailored to the unique needs of each AMP, given the resources available to that AMP. Under PBM, these property management services are arranged, coordinated, or overseen by management personnel who have been assigned responsibility for the day-to-day operation of that AMP and who are charged with direct oversight of operations of that AMP. More specifically, project-based management is characterized as “the provision of property management services that is tailored to the unique needs of each AMP, given the resources available to that AMP. Under project-based management, these property management services are arranged, coordinated, or overseen by management personnel who have been assigned responsibility for the day-to-day operation of that AMP and who are charged with direct oversight of operations of that AMP.” It is important to note that in conventional real estate management, “project-based management” is the same thing as “property management”. February 12, DRAFT

Project-Based Management Example
You own a group of restaurants. Would you have a budget for each restaurant? Would you hire a manager for each restaurant? What roles would you assign to on-site staff vs. central staff? Let’s suppose you own a group of restaurants. <advance 1> Would you have a budget for each one? Absolutely! You would do this because it is critical you know the income, expenses, and overall performance of each restaurant. <advance 2> Would you hire a manager for each restaurant? Yes! You would want an on-site staff person to be responsible for the day-to-day operations of the business. <advance 3> What roles would you assign to on-site staff? What roles would you assign to central staff? For example, perhaps onsite staff would be responsible for purchases up to a certain amount, while central staff approved larger purchases, such as a new piece of equipment for the restaurant. The same is true of property, or project-based management. February 12, DRAFT

Common Characteristics of PBM
Each AMP has an operating budget to be approved by the owner The AMP is assigned dedicated management and maintenance personnel who frequently work on-site If an AMP is too small to afford full-time staff, the AMP may have part-time or shared staff Now that we know the basic definition of project-based management, let’s look at some common characteristics of this approach: <advance 1> Under project-based management, each AMP typically has an operating budget that is approved by the owner, in this case, the PHA Boards. <advance 2> Also, the AMP is commonly assigned dedicated staff, including a manager, who work on-site. <advance 3> In some cases, the AMP may be too small to afford full-time staff. In this case, staff may be part-time, or may be shared with other AMPs. February 12, DRAFT

Common Characteristics of PBM (Continued)
Site personnel have significant authority and responsibility over the day-to-day operations Most property management tasks are handled or coordinated by the on-site staff Procurement is done by on-site management and reviewed by supervisor The person primarily in charge of the AMP on a day-to-day basis, including maintenance, is the housing manager <advance 1> The on-site personnel have significant authority and oversee the day-to-day operations at the AMP. <advance 2> In fact, under project-based management, most property management tasks are handled or coordinated by the on-site staff. <advance 3> This often includes procurement. Under project-based management, procurement of items up to a certain amount is done by on-site management and reviewed by a supervisor. <advance 4> Finally, under project-based management, the person primarily in charge of the AMP on a day-to-day basis, including maintenance, is the housing manager. While project-based management does not require that all property management services be performed on-site, a decentralized model will often best serve the interests of the AMP. As a result, project-based management frequently introduces an organizational model different from what many PHAs may practice now. February 12, DRAFT

Why Practice PBM? Maximizes performance at all levels
Local staff are closer to market changes and community issues On-site staff can “keep an eye on things” Response to resident issues is faster and more personal Management company can keep a smaller central staff and thus reduce fees for the AMPs So why practice project-based management? There are a number of reasons why it is ideal for AMPs to be managed on-site: <advance 1> First, giving the highest level of responsibility to the staff closest to the AMP maximizes performance at all levels. While these individuals may not have the highest ranking position within the PHA, they are often the ones with the most knowledge of and experience with the AMP. This approach allows the on-site staff to manage the AMP operations and the supervisory staff to supervise several assets at once. <advance 2> Also, within a city, you may find different sub-markets. On-site staff members are closer to the issues affecting the local community. Localized staff can make decisions and give recommendations based on their personal experience with and knowledge of the local market. <advance 3> Of course, on-site staff are able to “keep an eye on things” at the AMP much better than remote staff. Allowing the on-site staff to make decisions affecting the AMP without having to wait for the supervisor or home office increases response time. <advance 4> As you may presume, customer service is better performed at the site-level. Residents would rather speak with on-site decision-makers face-to-face. Immediate action can be taken by on-site staff regarding resident issues. <advance 5> Lastly, there is an economic factor at play—if all decisions were made by the owners and management companies, they would need a much larger staff. This, in turn, would affect the management fees being charged to the AMPs. February 12, DRAFT

Workshop 2.2: Common Tasks
The table on the following slide list tasks commonly associated with managing Public Housing. As a class, determine whether each task should be performed on-site or by the management company under project-based management. Let’s take a closer look at some common management tasks. <advance 1> The table on the following slide lists a number of tasks commonly associated with managing Public Housing. <advance 2> As a class, determine whether each task should be performed on-site or by the management company under project-based management. February 12, DRAFT

Workshop 2.2: Common Tasks
On-Site Mgmt Company Leasing units and enforcing the lease Processing families for admission and submitting forms as required Grant-writing and other predevelopment activities Reviewing project-level budgets and reports Inspecting units, structures, and systems on a frequent basis Taking applications for admission Interacting with local government and HUD Overseeing the portfolio including tracking occupancy trends Preparing budgets for the property Purchasing and ordering goods/services Deciding when a property needs revitalization, demolition, or disposition        At this time, pause this recording to review the tasks listed. Re-start the recording when you are ready to move on to the next set of tasks. In this slide, the Management Company is the PHA or a third-party Management Company hired by the PHA. The answers for these tasks are provided below: Leasing units and enforcing the lease: ON-SITE Processing families for admission and submitting forms as required: ON-SITE Grant-writing and other predevelopment activities: MANAGEMENT COMPANY Reviewing project-level budgets and reports: MANAGEMENT COMPANY Inspecting units, structures, and systems on a frequent basis: ON-SITE Taking applications for admission: ON-SITE Interacting with local government and HUD: MANAGEMENT COMPANY Overseeing the portfolio including tracking occupancy trends: MANAGEMENT COMPANY Preparing budgets for the property: ON-SITE Purchasing and ordering goods/services: ON-SITE Deciding when a property needs revitalization, demolition, or disposition: MANAGEMENT COMPANY     February 12, DRAFT

Project-based monitoring Project-based management Project-based accounting Our last building block is project-based monitoring. Project-based budgeting Project-based funding February 12, DRAFT

Project-Based Monitoring
Each AMP will be evaluated on financial, managerial, and physical condition HUD will perform management reviews on each AMP New project-based performance assessment system will be implemented <advance 1> As part of Project-Based Monitoring, each AMP will be evaluated by HUD on its financial and management performance in addition to its physical condition, which is measured at an AMP level by a physical inspection. <advance 2> A central part of this new performance measurement structure will be a system of on-site management reviews of each AMP performed by HUD Hub/PC Staff. <advance 3> Finally, a new project-based performance assessment system will be implemented. At this point the Public Housing Assessment System, or PHAS, examines mostly PHA-wide and not AMP-specific activities. However, HUD will revise PHAS to emphasize AMP-based performance monitoring and evaluation. Ultimately, the PHA and the HUD Hub/PC will interact in much the same way as before in terms of reporting and monitoring performance. Under asset management, it will be focused at the AMP-level instead of the PHA entity wide level. February 12, DRAFT

Implementation Schedule
Project-Based PHA Fiscal Year End Jun 30 Sep 30 Dec 31 Mar 31 Funding CY 2008 CY 2008 CY 2008 CY 2008 Budgeting, Accounting, & Management Jul 1, 2007 Oct 1, 2007 Jan 1, 2008 Apr 1, 2008 The phase-in of the above “building blocks” will proceed according to the following schedule: <advance 1> Project-based Funding: In Calendar Year 2008, the new funding formula for determining subsidies will be applied at the AMP level. A separate subsidy form will be completed for each AMP in the summer and fall of A PHA with ten projects would therefore complete ten subsidy forms. <advance 2> Project-based Budgeting, Accounting, and Management: The new project-based accounting, budgeting, and management requirements will be effective for PHAs whose fiscal years begin July 1, 2007, and thereafter. In the initial year of compliance, PHAs will be required to develop project-based budgets, approved by their Boards prior to the start of the fiscal year. At year-end, PHAs will be required to submit AMP-level financial statements. PHAs should take the necessary steps to achieve project-based budgeting and accounting well before their relevant deadline to ensure compliance. <advance 3> Project-based Monitoring: HUD plans to implement a new project-based performance assessment system no later than the second year of project-based accounting. Each AMP will be evaluated not just on its physical condition but based on its financial and management performance as well. These new requirements are contained in the Supplement to HUD Handbook REV., CHG-1, Financial Management Handbook. Project-Based Monitoring No later than the second year of project-based accounting (exact date to be determined) February 12, DRAFT

End of Section 2 This is the end of Section 2: Building Blocks of Asset Management. February 12, DRAFT

Section 3: The PHA as a Property Management Business Enterprise
Welcome to Section 3: The PHA as a Property Management Business Enterprise February 12, DRAFT

The PHA as a Property Management Business Enterprise: Learning Objectives
Discuss the concept of a management company and how the PHA will be functioning like a management company Explain how management companies are organized Discuss possible organizational models for the PHA Explain the concept and requirements of the Central Office Cost Center (COCC) under the new rules Describe how property management fees and asset management fees flow into the PHA Discuss the potential for PHA income generation through these fees Asset Management provides a real opportunity for PHAs to maximize available opportunities and embrace an entrepreneurial mindset. In this section, we’ll take a closer look at those opportunities and explore the PHA as a Property Management Business Enterprise. <advance 1> First, we will discuss the concept of a management company and how the PHA will be functioning like a management company under asset management. In other words, how the PHA will oversee the operations of its various projects. <advance 2> Next, we’ll take a closer look at how management companies are organized, and <advance 3> discuss possible organizational models for the PHA. <advance 4> Then, we’ll review the concept of the “C-O-C-C”, or Central Office Cost Center. Basically, the COCC is the term used to describe the business unit within the PHA that earns income from fees or revenue from other business activity (management fee, bookkeeping fee, etc.). <advance 5> Specifically, we’ll discuss how property management fees and asset management fees flow into the PHA, as well as <advance 6> the potential for PHA income generation through these fees. February 12, DRAFT

The Conventional Management Company
Organization that specializes in the management of properties for others Can be an internal function or done via external, third-party fee management May have other lines of business <advance 1> A management company is an organization that specializes in the professional management of properties for a client or owner. In this section, we will refer to the term “management company” as the entity responsible for overseeing the day-to-day management of the property. <advance 2> In the private sector, this could be a true management company or a property management division within a real estate management company. For Public Housing, this could be done by the PHA or a third party management company. <advance 3> Note that a real estate management company has other lines of business, such as construction or development. Public Housing also has other areas of business, such as Section 8 programs. February 12, DRAFT

Sample Organizational Chart: Small Management Company
Board of Directors Executive Director Site Coordinator Facilities Manager Admin Assistant (Part-time, 20 hrs) Let’s take a look at a sample organizational chart for a small not-for-profit management company. This company focuses on special needs housing and can be likened to a small housing authority. The company has a portfolio of 81 units at 5 properties. Here we have a Board of Directors which oversees an Executive Director. Reporting to the Executive Director are a part-time Administrative Assistant, a Site Coordinator, and a Facilities Manager. The responsibilities of the Administrative Assistant include: rent collection, accounts payable, tenant selection, tenant complaints, and managing work orders. Thus, there are a total of 3.5 full-time employees (or full-time equivalents, FTEs) at the management company overseeing 81 units. From this, we can draw certain staffing ratios, in this case, there is a 1 FTE to 81 unit ratio for the full-time Site Coordinator. Portfolio: 81 units, 5 properties, 3.5 FTEs February 12, DRAFT

Sample Organizational Chart: Large Management Company
President Office Admin CFO Dir. of Compliance VP Operations Resident Srvs. Dir. Property Accountants (3) Admin Assistant HR Manager Compliance Specialists (3) Property Supervisors (4) Now let’s take a look at a larger management company. This is a sample organizational chart for a management company managing affordable housing. This company has a portfolio of 3,650 units at 35 properties. Here we have a President overseeing a number of executives as well as an Office Administrator. The Chief Financial Officer, the Director of Compliance, and the Vice President of Operations also have a number of staff. When compared to the smaller management company we just reviewed, this management company has a larger staff, more hierarchical levels, and more divisions. In this case, there are a total of 18 full-time employees at the management company overseeing 3,650 units. From this, we can again draw certain staffing ratios. For example, there are 4 Property Supervisors overseeing 3,650 units, for a ratio of roughly 1 FTE to 900 units. Notice that on-site managers, maintenance, and other site-level staff are not included here, because this is an organizational chart for the management company only. However, there is a central Resident Services Director. The services that this staff person provides are either included in the management fee or are charged back to the property. We will talk about this more momentarily. Portfolio: 3,650 units, 35 properties, 18 FTEs February 12, DRAFT

The Conventional Management Company: Roles
President/CEO of real estate management firm Director of property management Regional property manager(s) Human Resource Staff Accounting and Bookkeeping Staff Administrative Staff In the private sector, typical management company roles include: <advance 1> A President or CEO, who oversees the firm from a strategic perspective; <advance 2> A Director of Property Management, who directs the activities of the management company on a day-to-day operational and strategic basis; and <advance 3> A Regional Property Manager, or Managers, who oversee a number of projects and staff in the area. Additional roles may include <advance 4> Human Resources Staff provide infrastructure HR support (benefits, payroll, etc.) to PHA staff. <advance 5> Accounting and Bookkeeping Staff monitor financials and prepare reports, <advance 6> while the Administrative Staff work to assist other staff members with their functions and responsibilities while also focusing on their own individual tasks. Notice that we do not see the role of Site Manager on this list. This is because a Site Manager is based at the AMP level. February 12, DRAFT

PHA as the Management Company
Board of Commissioners Executive Directors Management Company/ COCC As the Board of Commissioners, you’ll help guide the PHA in selecting an appropriate organizational model. In some cases, the PHA staff may perform the property management function, managing the day-to-day operations of the property. In other cases, you may opt to hire third-party property management companies to perform this function. Alternatively, PHA staff may perform property management for some AMPs while a third-party property management company performs these functions for other AMPs in the PHA’s portfolio. This is a hybrid model. The chart depicted provides a high level illustration of what a Public Housing Authority performing as the management company might look like under asset management principles. The management company can either be a function of the PHA, or a separate entity. The management company or entity is comprised of PHA staff under the direction of the PHA Executive Director. The management company includes the COCC function. As a function of the PHA, the PHA would perform property management activities. AMP 1 AMP 2 AMP 3 February 12, DRAFT

PHA Hires 3rd Party Management Company
Board of Commissioners Executive Directors COCC Management Company If the PHA hires a separate organization to perform property management functions, then the illustration above would be appropriate. Notice that some AMPs are privately managed and others are not. This is the hybrid model and reflects a scenario in which the PHA Board determines property management may be more efficiently performed by a third-party management company for some of the AMPs in its portfolio. The PHA Board may determine in-house staff are better suited to perform property management for one or more of its AMPs because of the unique characteristics of this property or these properties. For example, the AMP may be troubled or serve a certain clientele requiring substantial human service programming of which the PHA staff are more familiar. It is critical to note that as PHA board members, you will be ultimately responsible for determining the best model for your unique AMP portfolio. Once again, the PHA’s mission will dictate the most appropriate organizational model. AMP 1 AMP 2 AMP 3 February 12, DRAFT

Organizational Model Key Decision Factors
PHA Mission and Goals Portfolio Size and Proximity Experience Quality Cost Non-personnel costs Personnel costs Recurring expenses So, what organizational model should your PHA adopt? There are many factors impacting this decision such as <advance 1> The overall PHA mission and goals. Is the focus on profit, service, or something else? Also, what is the desire for day-to-day involvement? <advance 2> The portfolio size and proximity is also a factor, as well as <advance 3> experience and <advance 4> quality. For example, do you need specialized service or expertise? <advance 5> Another important factor is cost, including non-personnel and personnel costs as well as recurring expenses. The decision to perform property management in-house vs. using a third-party management firm depends on many factors and will be different for everyone. February 12, DRAFT

The Flow of Funds HUD PHA $ Subsidy HUD AMP PHA $ Subsidy
OLD $ Subsidy HUD AMP NEW PHA $ Subsidy $ Fees and Chargebacks Now that we’ve spent some time looking at the concept of a management company, let’s see how the management company earns income in the public housing world. Recall our flow of funds diagram. In the new model, the operating subsidy is paid directly to the AMP. The AMP then pays fees to the PHA. <advance 1> Under the new rule, this payment comes in the form of: the management fee, the asset management fee, the bookkeeping fee, fee-for-service, and chargebacks. This is the income of the management company in the Public Housing world. Management Fee Asset Management Fee Bookkeeping Fee Fee-for-Service Chargebacks February 12, DRAFT

Central Office Cost Center (COCC)
Business unit within the PHA that earns income from fees or revenue from other business activity Simplifies administrative requirements Provides greater flexibility to support mission of PHA COCC Fees Management Fee Bookkeeping Rule Asset Management Fee <advance 1> This income goes directly into the management company’s Central Office Cost Center, or COCC. For PHAs, there are a number of benefits in implementing the central office cost center approach: <advance 2> First, it greatly simplifies administrative requirements related to the accounting of overhead costs. These fees will be used in lieu of complex systems for allocating overhead expenses. <advance 3> Secondly, the central office cost center provides PHAs with greater flexibility. PHAs will be free to determine how to use its fee income. This allows the PHA to further support its individual mission and goals. Now let’s discuss each of these fees in more detail. February 12, DRAFT

Management Fee PHAs are required to charge each project a “reasonable” management fee to fund the operation of the central office Replaces traditional PHA overhead allocations Average management fee in HUD’s multifamily housing programs was $35 PUM (2004) Let’s start with the management fee. <advance 1> The new rule requires PHAs to charge each project a “reasonable” management fee to fund the operation of the central office as compensation for overseeing the operations of the project. <advance 2> In essence, this management fee replaces traditional PHA overhead allocations. <advance 3> Nationally, the average management fee paid in 2004 in HUD’s Multifamily Housing programs for unlimited dividend and non-profit sponsors was $35 PUM. The range of fees paid will vary by market. Additional notes/information can be obtained from Operating Subsidy Training (Module 5 – Fees and Assignment of Costs): PHAs may use any of the following methods to determine the reasonableness of the property management fee: Property Management Fee Established for Each HUD Multifamily Field Office – 120% of Mean: The office of Multifamily Housing establishes fee ranges for federally subsidized properties that reflect 120% of the mean property management fee for profit-motivated properties that are well managed, in good physical condition, and are managed by independent agents with no identity-of-interest involvement. Property Management Fee Established for Each HUD Multifamily Field Office – 80th Percentile: The 80th percentile excludes programs such as cooperatives and nursing homes. Other Compelling Data: Prior to the establishment and use of reasonable fees based on “other compelling data”. For example, PHAs may use the fees charged by private management companies operating public housing in their local area. PHAs will need the Department’s approval to use this method. February 12, DRAFT

Bookkeeping Fee Fee charged to AMPs for project accounting function provided by COCC ($7.50 PUM) Average bookkeeping fee in HUD’s multifamily housing programs was approximately $3.50 PUM (2004) <advance 1> In addition to a management fee, PHAs will be permitted to charge a fee for the project accounting function (bookkeeping) provided by the COCC in the amount of $7.50 PUM. This bookkeeping fee includes salaries of appropriate staff, the establishment, maintenance and contorl of accounting systems, or contracts for accounting services. <advance 2> Prior to the advancement of automated systems, most bookkeeping activities in Multifamily Housing were performed on-site. Today, the accounting for project funds is a task that is done mostly through a management agent’s central office, which is often charged to the project as a bookkeeping fee. In 2004, the average bookkeeping fee in HUD’s Multifamily Housing programs was about $3.50 per unit per month. PHAs will report the management fee and the bookkeeping fee as separate line items on each project’s financial statements. For all practical purposes, the management fee and the bookkeeping fee represent the reimbursement to the managing entity for the oversight of the property and the production of all related financial statements. Both management and bookkeeping fees will be earned monthly based on the number of occupied units and “allowable” vacancies. Similar to the previous slide, additional notes/information can be obtained from Operating Subsidy Training (Module 5 – Fees and Assignment of Costs) February 12, DRAFT

Asset Management (AM) Fees
PHAs can charge each project a “reasonable” AM fee, subject to the availability of excess cash Represents payment for those tasks that would be residual if all property management functions were contracted to a third-party PHA can charge the project up to $10 PUM based on ACC units <advance 1> Under the new rule, PHAs, may also charge each project a “reasonable” AM fee, subject to the availability of excess cash. To determine if a project has sufficient “excess cash” to pay this asset management fee, HUD will use a calculation similar to the computation of “surplus cash” in HUD’s Multifamily Housing programs, which is a balance sheet approach. Therefore, as long as the project has sufficient funds in its reserves, the PHA could charge the project an asset management fee. <advance 2> Conceptually, this asset management fee represents payment to the PHA for those tasks of ownership that would be residual if all property management functions were contracted to a third-party. In such instances, the owner would still need to perform such tasks as approving the annual budget for the property, ratifying any recommendations for rent increases, and overseeing the performance of the property manager. <advance 3> HUD will generally consider an asset management fee charged to each property of $10 per unit per month as reasonable. Asset management fees, up to the allowed per unit per month amount, will be paid based on the number of ACC units. This is different from management fees, which will be paid based on the number of occupied units and allowable vacancies in the project. For additional notes/information on Asset Management Fees, please reference the Operating Subsidy Training (Module 5 – Fees and Assignment of Costs) February 12, DRAFT

Front-Line Expenses vs. Management Fee
Unlike in the past, front-line expenses vs. central office expenses will need to be separated Front-Line Expense: An expense of the project/program Accounted for at the property level Management Fee Expense: An expense of the management company Central Office expenses If PHAs will now be required to charge each project a management fee, what services are expected in exchange for that fee? What costs are “front-line” expenses that can be charged as a project expense and what costs are to be funded from the management fee? In the past, PHAs never had to distinguish in their financial statements those costs that were related to the direct operation of the properties or front-line costs, from those costs that were related to corporate support, or management fee costs. PHAs were required only to prepare a consolidated financial report. Moving forward, however, expenses will be separated as either front-line costs or management fee costs. Examples of front-line costs include the compensation paid to on-site housing management and maintenance staff as well as the cost of goods and services used to maintain the property. Examples of costs to be paid from the management fee include the cost of the regional manager and other corporate support. February 12, DRAFT

What Services are Included in the Management Fee?
General Corporate Oversight Regional Manager Human Resources Project Bookkeeping and Accounting Financial Reporting Services covered by the Management Fee include general oversight, the regional manager, human resources, bookkeeping and accounting, and financial reporting. But what about corporate legal expenses? Legal expenses may pertain to site-level activities like evictions, tenant grievances, or landlord-tenant disputes. So, should corporate legal expenses be classified as a front-line expense or a management fee? Let’s take a look at this and other potentially difficult-to-categorize expenses. February 12, DRAFT

Corporate Legal Expenses
Only legal expenses directly related to the operation of a project can be charged as a front-line expense Projects cannot be charged legal retainers Any charges to the project for in-house legal staff must be based on the services received <advance 1> In the case of legal expenses, under the new rule, only those expenses directly related to the operation of an AMP, such as eviction services or tenant grievances, can be charged as a front-line expense. <advance 2> Projects cannot be charged legal retainer fees, the fee which retains an attorney for legal counsel. <advance 3> Any charges to the AMP for in-house legal staff must be based on the services received. This can be measured by actual timesheets. February 12, DRAFT

Central Warehouses With prior HUD approval, the costs of a central warehouse can be charged as a front-line cost PHA must demonstrate that the costs are less than what the project would otherwise incur if the goods were obtained by on-site staff Next let’s consider central warehouse expenses, like the procurement and storage of goods for an AMP. Should central warehouse expenses be classified as a front-line expense or a management fee? <advance 1> Under the new rule, central warehouse costs can be charged as a front-line expense, with prior HUD approval. <advance 2> HUD will grant approval to do so if the PHA can demonstrate that the costs of central procurement and/or storage are less than what the project would otherwise incur if the goods were obtained by on-site staff The goal throughout this transition is to perform most tasks at the site-level, but if it is not feasible for the AMP to store items at the site-level, the central warehouse model may be used. February 12, DRAFT

Centralized Wait List and Leasing
PHAs have only recently been permitted to establish site-based waiting lists PHAs that maintain centralized waiting lists may pro-rate the costs to each project based on average turnover, or some other reasonable method In all instances, the costs must be reasonable and necessary So what about the centralized wait list? How should this and other centralized leasing expenses be categorized? <advance 1> While few conventional housing operators maintain centralized leasing functions, PHAs have only recently been permitted to establish site-based waiting lists. Thus, this will be an area of transition for PHAs. <advance 2> PHAs that choose to maintain centralized waiting lists and admissions may pro-rate the costs of that function to each AMP either based on average turnover, or some other reasonable method. <advance 3> In all instances, the costs must be reasonable and necessary. February 12, DRAFT

Centralized Maintenance Services
When a PHA is the most responsible low-bidder, they can charge the bid price When a PHA provides a specialized service centrally, they may charge the market price, based on actual costs When a PHA has centrally-provided routine maintenance services, they may only charge the direct cost of the employee with no mark-up And lastly, what about maintenance services, which can range from exterminations to plumbing and trash collection? <advance 1> In the case of maintenance, when work is bid out and the PHA is the most responsible low-bidder, the PHA can charge the bid price to the AMP. <advance 2> When the PHA provides a specialized service centrally, it may charge the market price for that service or labor to the AMP, based on actual costs. <advance 3> When the PHA has centrally-provided routine maintenance services, they may only charge the direct cost of the employee, in other words, salary and benefits with no mark-up. HUD guidance on the full list of activities and their categorization can be found in your workbook. Note that the goal is to do most tasks at the site level, if possible. Also, keep in mind that there is a difference between “scattered sites” and centralized costs. Scattered sites act as one project while centralized costs serve multiple projects. February 12, DRAFT

Workshop 3.1: Management Fee vs. Front-Line Expenses
The tables on the following slide list various activities and expenses associated with managing public housing. In groups, determine whether each activity should be considered a management or front-line expense. The concept of front-line expenses vs. management fee expenses is one of the greatest areas of confusion with the shift to asset management. Let’s take a closer look and work through some examples. The tables on the following slides list a number of activities and expenses commonly associated with managing Public Housing. In groups, determine whether each activity should be categorized as a management fee expense or a front-line expense. February 12, DRAFT

Activity/Expense Management Front-Line Information Technology License agreements and maintenance service contracts Full cost of the Help Desk Risk Management Central Risk Management Personnel Project specific premiums/Self-insured retentions   At this time, pause this recording to review the tasks listed. Re-start the recording when you are ready to move on to the next set of tasks. Answers: Information Technology License agreements and maintenance service contracts: FRONT LINE Full cost of the Help Desk: MANAGEMENT Risk Management Central Risk Management Personnel: MANAGEMENT Project specific premiums/Self-insured retentions: FRONT LINE   February 12, DRAFT

Activity/Expense Management Front-Line Audit Work with auditors for audit preparation Actual audit cost Share of the personnel costs for permanent and part-time staff assigned to COCC Legal fees directly related to the operation and management of HCV program    Answers: Audit Work with auditors for audit preparation: MANAGEMENT Actual audit cost: FRONT LINE Share of the personnel costs for permanent and part-time staff assigned to COCC : MANAGEMENT Legal fees directly related to the operation and management of HCV program: FRONT LINE  February 12, DRAFT

Activity/Expense Management Front-Line All bank charges related to HCV Cost of insurance related to COCC buildings, equipment and personnel Actual personnel costs for individuals assigned directly to AMP site Central servers and software that supports COCC Advertising costs such as an AMP-specific procurement action, etc.    Answers: All bank charges related to HCV: FRONT LINE Cost of insurance related to COCC buildings, equipment and personnel: MANAGEMENT Actual personnel costs for individuals assigned directly to AMP site: FRONT LINE Central servers and software that supports COCC: MANAGEMENT Advertising costs such as an AMP-specific procurement action, etc.: FRONT LINE   February 12, DRAFT

Fee-for-Service/Chargebacks
Fee-for-service: market rate charged for services rendered Chargeback: actual cost charged Administrative: pro-rated across projects if reasonable and necessary Maintenance: option of charging actual costs or a fee-for-service There are a few more ways that fees for services can flow back into the PHA COCC. For example, what if a maintenance mechanic was deployed from the central office but actually performed work at different projects? How would the cost be charged to the project or projects? <advance 1> There are certain costs that can be considered fee-for-service expenses. Under fee-for-service, the PHA charges the project based on a market price for the work received, regardless of actual costs to the agency. <advance 2> Other times, actual expenses, based on timesheets and work orders, are charged back to the project. These are known as a “chargebacks.” The rules governing which costs can be charged to projects, and the method of charging expenses, vary slightly depending on the classification of work as either administrative or maintenance. <advance 3> Regarding administrative tasks, PHAs can prorate costs of centralized waiting lists, resident programs, and protective services, including appropriate supervisory staff. The charge must be reasonable, necessary, and not cost more than if it were performed on-site. <advance 4> In the case of specialized maintenance, PHAs will have the option of charging either actual costs or a “fee-for-service.” Under fee-for-service, the PHA charges the project based on a market price for the work received, regardless of actual costs to the agency. For example, suppose a PHA competes against private vendors for the job of painting vacant units and is the most responsible, lowest bidder. In this instance, the PHA can charge the project the bid price for each vacant unit that it paints, rather than the actual costs. February 12, DRAFT

Other Income Sources Subsidy Examples:
Capital Fund administration Section 8 management Mixed Finance Section 202 management Development fees earned from non-public housing OMB Circular A-87, 24 CFR part 85 Entrepreneurial Examples: Shopping Mall (Austin, TX PHA) In addition to what we have just discussed, PHAs may have other lines of business that will also bring in revenue. <advance 1> These may include fees associated with Capital Fund administration, Section 8 management, and Section 202 management. <advance 2> According to OMB Circular A-87, the “Cost Principles for State, Local and Indian Tribal Governments” and 24 CFR Part 85, “Administrative Requirements for Grants and Cooperative Agreements to State, Local, and Federally Recognized Indian Tribal Governments,” any internal fees charged by the management company’s central office cost center for services rendered will be considered non-program funds provided that the fees charged are reasonable. Thus, the PHA is free to use those funds as it sees fit, assuming no state or local restrictions apply. In other words, by disbursing Operating Subsidy straight to the AMPs and letting the PHAs charge the AMPs for service, the PHAs now have much greater flexibility over funds. The funds are no longer federal and subject to federal subsidy requirements. They are now local funds received by the PHA. As you can see, there are many opportunities for PHAs to generate income, and approach asset management with an entrepreneurial spirit. February 12, DRAFT

Sample PHA Revenue from Fees
Fee Calculation Amount Management Fee $40 x 1,000 units x 12 months x 97% occupancy $465,600 Bookkeeping Fee $7.50 x 1,000 units x 12 months x 97% occupancy $87,300 Asset Management Fee $10 x 1,000 units x 12 months $120,000 Extermination Fee-for-Service $3 x 1,000 units x 12 months $36,000 To summarize, let’s take a look at the fee revenue portion of a PHA’s central office cost center. This particular PHA has 1,000 units and maintains 97% occupancy. <advance 1> In this case, the maximum management fee established by the local Field Office is 40 dollars per unit per month. So, we have 40 dollars times 1,000 units times 12 months at 97% occupancy. This totals 465,600 dollars. <advance 2> Next, we have a bookkeeping fee of 7 dollars and 50 cents times 1,000 units times 12 months at 97% occupancy for a total of 87,300 dollars. <advance 3> To this we add the asset management fee of 10 dollars per unit per month x 1,000 units x 12 months for a total of 120,000 dollars. Remember that asset management fees are paid based on the number of ACC units, unlike the management and bookkeeping fees, which are paid based on the number of occupied units. <advance 4> And finally, the only property management service that this PHA performs centrally is extermination, which it does on a fee-for-service basis of $3 per unit per month. All other property management services are performed on-site. So, we take 3 dollars times 1,000 units times 12 months for a total of 36,000 dollars. <advance 5> Therefore, this PHA would earn 708,900 dollars in fees for the operation of its projects, exclusive of any other miscellaneous income that the PHA may earn for say, the administration of the Capital Fund Program. Total $708,900 February 12, DRAFT

End of Section 3 This is the end of Section 3: The PHA as a Property Management Enterprise. February 12, DRAFT

Section 4: Summary and Wrap-Up
Welcome to Section 4: Summary and Wrap-Up February 12, DRAFT

Summary and Wrap-Up Learning Objectives
Identify revisions to PHAs and Board actions as a result of the transition to asset management Provide suggestions for follow-up activities to conduct with PHA and other board members Now that we’ve reviewed the basics of asset management…what are the next steps? As PHA Board Members, you’ll continue to work closely with PHA leadership to discuss these items in more detail and solidify your plans. In this section, we will: <advance 1> Identify revisions to PHAs and Board actions as a result of the transition to asset management. As we’ve seen, there are many benefits to the asset management transition, but it will require change. <advance 2> We will provide suggestions for follow-up activities to conduct with your PHA and other board members. February 12, DRAFT

PHA Enhancements Services Provided Organization Structure
Staff Knowledge System Enhancements Throughout this training, we’ve explored various high-level benefits of the move to asset management. Let’s get more specific and think about your PHA. What can you expect in terms of future enhancements? <advance 1> First of all, the project-level focus with asset management allows PHAs to provide services in the best interest of each individual project, taking cost and responsiveness into consideration. Additionally, asset management paves the way to provide additional housing opportunities. <advance 2> The bottom line is that asset management enables PHAs to operate more efficiently. However, this won’t happen overnight and it may be necessary to examine various organizational models and adjust them to accommodate a more project-based management approach. Remember that HUD is measuring results rather than process so it will not dictate how PHAs should be organized, except where performance is unsatisfactory. As a result, each PHA has the flexibility to determine appropriate organizational models that best meet the needs of each project. <advance 3> With more activities performed at the project-level, PHA staff will take on more meaningful responsibilities and activities. Sure, training will be required, but this shift will foster true accountability and opportunity. HUD has already provided substantial training in the completion of AMP-level subsidy forms and AMP-level financial reporting, which began last summer and is on-going. <advance 4> Finally, due to the nature of project-based accounting and financial reporting changes related to asset management, changes may need to occur in management information systems such as accounting and IT. These new systems will provide the necessary information to make decisions in the best interest of the project. February 12, DRAFT

Follow-Up Activities Determine organizational form that PBM will take at your PHA Develop staffing plan under PBM Examine current overhead costs Construct preliminary project budgets Determine new accounting, IT, and other support Develop an implementation schedule      Many of you have already been working closely with your PHAs and taken preliminary steps towards the transition to asset management. As you continue this planning, here are some additional activities that you and your PHA may want to complete together.  February 12, DRAFT

Asset Management Resources
Asset Management Website: Asset Management e-Newsletter: If you haven’t received this already, you can access it via the Asset Management Website, or you can contact your Field Office counterpart and ask that they send it to you Asset Management Help Desk: HUD will provide you with a number of resources to assist with the transition to Asset Management. <advance 1> Your one stop reference source for all Asset Management information will be the HUD Asset Management website, located at the address listed here. <advance 2> You’ll also want to stay tuned for the monthly Asset Management e-Newsletter which will provide up-to-date information about the transition. <advance 3> In order to assist PHAs, PHA Boards, Field Office staff, and others with the transition to asset management, HUD developed an Asset Management Help Desk that will launch in March of 2007. Coming Soon! February 12, DRAFT

Asset Management Reference Material
24 CFR Part Final Rule Preparing for Asset Management Under the New Public Housing Operating Fund Rule (24 CFR 990): A Planning Document Demonstration of a Successful Conversion to Asset Management (Stop-Loss) Submission Kit Demonstrating Successful Conversion to Asset Management: A Site Visit to the Charlotte Housing Authority Supplement to HUD Handbook REV., CHG-1, Financial Management Handbook Along with the HUD Resources that are available, the following reference material can be used in order to answer some of your questions regarding the transition to Asset Management. <advance 1> The first resource is the Final Rule itself, “24 CFR 990”, which provides direct information regarding project-based budgeting and reporting requirements for PHAs. <advance 2> “Preparing for Asset Management Under the New Public Housing Operating Fund Rule (24 CFR 990): A Planning Document” focuses on program reforms associated with asset management and is intended to help prepare for the transition. <advance 3> The “Demonstration of a Successful Conversion to Asset Management (Stop-Loss) Submission Kit” includes instructions and related submission requirements for PHAs that want to apply to have their losses stopped under the new Operating Fund formula by demonstration of successful conversion to asset management. <advance 4> “Demonstrating Successful Conversion to Asset Management: A Site Visit to the Charlotte Housing Authority” summarizes the results of a site visit to the Charlotte Housing Authority in Charlotte, North Carolina. <advance 5> Finally, the “Financial Management Handbook” provides key dates and guidelines around the transition to asset management. February 12, DRAFT

End of Section 4 This is the end of Section 4: Summary and Wrap-Up.
February 12, DRAFT

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