2. Introductions Your name Where you work Your job responsibilities How long you have been in the industry What you hope to get from this class Course 8: Financial Mgmt

3. Agenda Investments Adding Value to the Investment Economic Analysis of a Property Budgets Property Valuation Course 8: Financial Mgmt

4. Chapter 1: Investments We will discuss: -What are investments and whether to make them -Advantages and disadvantages of investing in multifamily housing -Different types of ownership and methods of financing Course 8: Financial Mgmt

5. Definition: Investment An investment is the use of funds to earn a profit. Course 8: Financial Mgmt

6. Four (4) Factors in Investment Risk – low risk = low return high risk = high return Income – may depend on risk involved Growth – means a potential to increase in value >NOI = greater value Liquidity - ability to convert to cash Course 8: Financial Mgmt

7. Owner’s Objectives Why is it important to know the owner’s investment objectives for the property you manage? Course 8: Financial Mgmt

8. Activity #1: How the Four Factors Affect Investments How do general economic and market conditions affect investments? Why is it important to know the owner’s objectives for the property you manage? Course 8: Financial Mgmt

9. Performance Measures Rate of return on investment (ROI) Cash-on-cash return Capitalization rate Internal rate of return (IRR) Course 8: Financial Mgmt

10. ROI Rate of return on investment = percentage of return on each dollar invested Cash flow/Investment = ROI Course 8: Financial Mgmt

11. Capitalization Rate NOI/Purchase Price = Cap Rate NOI/Cap Rate = Value Course 8: Financial Mgmt

12. Exercise We paid $7,000,000 for a property and the NOI is $500,000. What is the cap rate? Divide NOI by 6% Course 8: Financial Mgmt

13. Remember Lower cap rate = higher value Higher cap rate = lower value Course 8: Financial Mgmt

14. Advantages of Investments Advantages include: –Periodic cash payments –Potential for increase in value –Reduction in income taxes due to depreciation –Ability to invest using borrowed funds Course 8: Financial Mgmt

15. Disadvantages of Investments Disadvantages include: –Real estate is not a liquid asset –Active participation is often required –Potential for risk (natural disasters, changes in market conditions) Course 8: Financial Mgmt

16. Forms of ownership Direct ownership/sole proprietor Partnership Limited liability partnership Limited liability corporation S corporation Joint venture Real Estate Investment Trusts (REITs) Tenants in Common (TICs) Course 8: Financial Mgmt

17. Types of mortgages Fixed rate Variable rate Balloon Bullet loan Course 8: Financial Mgmt

18. Where to obtain a mortgage Commercial banks Finance companies Savings and loan institutions Insurance companies Pension funds Mutual funds Federal government (Freddie Mac, Fannie Mae) Course 8: Financial Mgmt

19. Skill Check #1 Chapter 1- Investments Course 8: Financial Mgmt

20. Chapter 2 Adding Value to the Investment Course 8: Financial Mgmt

21. Adding Value: CAM Responsibilities 1.Generating and collecting as much income as possible 2.Controlling expenses 3.Meeting the financial goals of the investment Course 8: Financial Mgmt

22. Additional ways to add value: Reduced staff turnover and lower personnel costs Reduced resident turnover with better customer service Aggressive rental rates set by unit type New income sources through resident services Better collection of resident charges Course 8: Financial Mgmt

23. Sources of Income Rent Administrative Fees Parking/Garage fees Pet fees Laundry room/Vending Late fees/collection fees Clubhouse rental/video rental Car wash Cable/Internet/ Phone Course 8: Financial Mgmt

24. Types of Expenses Maintenance Administrative Salaries/Personnel Taxes Insurance Utilities Contract services Advertising and Marketing Course 8: Financial Mgmt

25. 3 Factors That Affect Rental Income Competitive rental rents Physical occupancy Collection percent or economic occupancy Course 8: Financial Mgmt

26. Concession Impact Market rent = $700 Concession = one month rent What is the Effective Rent? Course 8: Financial Mgmt

27. Law of Supply and Demand If the demand is high and the supply is low, higher prices can be obtained. If demand is low and the supply is high, rents must be made competitive to attract residents. Course 8: Financial Mgmt

28. Economic Conditions Population growth Household formation Job creation Course 8: Financial Mgmt

29. Balancing rental rates and vacancies The goal is to maximize income not occupancy Pricing too high may cause longer vacancy Pricing too low means you are losing money while the unit is occupied Course 8: Financial Mgmt

30. Increasing rental rate Market value = $800 Raise rent 10% = $880 Vacancy = 15 days What is the cost of the vacancy? At the new rate, how long before you recover the vacancy loss? Course 8: Financial Mgmt

31. Lowering rental rate Market value = $800 Lower rent 10% = $720 Loss per month = $80 Loss per year = $960 What would you lose if you did not lower the price and the apartment sat vacant for a month? Course 8: Financial Mgmt

32. Before adjusting rent, analyze the 4 P’s: People Product Promotion Price Course 8: Financial Mgmt

33. Determining Pricing Conduct a market analysis Use an automated revenue management system Course 8: Financial Mgmt

34. When to consider a rent increase When any floor plan remains 95% or more occupied or that remains full even when the community turnover ratio averages below 55% When rents fall below levels indicated by a comparative rent analysis Anytime a community is full Upon owner request Course 8: Financial Mgmt

35. Rental increases: Current residents Increase rent as leases expire, OR Increase rent selectively on expired leases using a quantifiable, non-discriminatory standard (years of residence or number of previous renewals) Consider a renewal rate that is slightly lower than the new market rate as an incentive to stay Provide 60 days notice prior to the effective date of the increase Course 8: Financial Mgmt

36. Managing Occupancy: Reports Occupancy reports Rent roll Delinquency report Deposit/Income reports Concession report Demographics report Course 8: Financial Mgmt

37. Managing Occupancy: Methods Calculate occupancy trend Manage lease expirations Calculate turnover ratio Course 8: Financial Mgmt

38. Expenses Fixed – property taxes, insurance Variable –utilities, turnover costs, etc. Capital- appliances, HVAC, etc. Replacement Reserve Account Debt service Course 8: Financial Mgmt

39. Cost Benefit Analysis Potential Expense –Dollars –Time –Image Potential Benefit –Income –Time –Employee satisfaction –Market position –Image Course 8: Financial Mgmt

40. Accounting Practices Budget control log Invoices Purchase discounts Check request or payment vouchers Petty cash Resident records Resident security deposit Collection of former resident accounts Course 8: Financial Mgmt

41. Skill Check #2 Chapter 2: Adding Value to the Investment Course 8: Financial Mgmt

42. Chapter 3 Economic Analysis of a Property Course 8: Financial Mgmt

43. Economic Analysis When analyzing a property, ask -How well has a property performed over a specific time period? -Where does a property stand at a given date in time? Course 8: Financial Mgmt

46. Accounting methods Accrual- records all income and expenses in period they were earned or incurred, regardless of when received or paid Cash- records all income and expenses when they are actually received or paid Course 8: Financial Mgmt

47. Cash Flow The amount of money left after all sources of income are collected and operating expenses, capital expenses and debt service have been paid Often referred to as the operating statement Course 8: Financial Mgmt

48. Gross Potential Rent (GPR) Current rent charged at 100% occupancy- combines the sum of occupied units at current lease rents plus vacant units at market rents 100% of possible income All other income and expenses measured and evaluated as % of GPR Course 8: Financial Mgmt

49. Market Rent Total annual income received if 100% of all units were occupied and paying market rents Course 8: Financial Mgmt

50. Loss to Lease Variance between market rent and lease rent Market rent that is “lost” due to lease rents at rates lower than the market rate For many companies it is a separate line item on the operating statement Course 8: Financial Mgmt

51. Loss to Lease Example Annual market rent of $1,375,025 with a loss to lease of $125,700 has a loss to lease of 9.1% 125,700/ 1,375,025=.0914 or 9.1% GPR of $1,249,325; market rent of $1,375,025 less “loss of $125,700 Course 8: Financial Mgmt

52. Vacancy, Concession, and Collection Loss (VAC) Total value of rent loss from vacant units, concessions given, collection losses from bad debt write-off, rent loss from non- revenue units Standard for uncollectible/bad debt- 2% of GPR VAC can be higher than10% of GPR Course 8: Financial Mgmt

53. EFFECTIVE GROSS INCOME (EGI) GPR less vacancy, concessions, and collection loss. Also called net rental revenue or total rental income Represents all rent and only the rent income at the property GPR-VAC= EGI Course 8: Financial Mgmt

54. OTHER INCOME (OI) Income from items other than rent Laundry, cable, parking, amenity charges, pet fees, application fees, administrative fees, lease premium fees, late fees Fee policies established by owner or manager Up to 10% of GPR- NAA survey in 2010 7.2% of GPR or $753 per unit Course 8: Financial Mgmt

55. GROSS OPERATING INCOME (GOI) EGI + OI = GOI Property’s total revenue Available to pay property’s operating expenses, capital improvements, and debt service Course 8: Financial Mgmt

56. OPERATING EXPENSES(OE) All expenses fixed and variable incurred in the course of managing the property Controllable and uncontrollable expenses Capital expenses and reserve for replacement costs are not typically considered operating expenses Course 8: Financial Mgmt

57. NET OPERATING INCOME(NOI) GOI-OE=NOI Applying cap rate to NOI allows you to determine property value using the income approach Course 8: Financial Mgmt

58. OPERATING EXPENSE RATIO Expense to income ratio Evaluation tool to measure property performance and expense control % of GPR used to pay operating expenses Ratio depends on age, location, property type, and expense classification OE/GPR= operating expense ratio 2010 NAA survey showed national OE ratio of 40% Course 8: Financial Mgmt

59. CAPITAL Expenses (CE) Also called capital improvements Includes non recurring expenditures like appliances, roofing, carpet replacement, etc. intended to add to the life of the property and its fixtures Offer ability to depreciate over time Course 8: Financial Mgmt

60. DEBT SERVICE Mortgage or loan payment- principal and interest payment Fixed rate mortgages usually have level monthly payments that amortize the loan Course 8: Financial Mgmt

61. Break-even Occupancy Ratio (OE + DS) ÷ GOI 1,803,800 +1,278,000= 3,081,800 3,081,800 ÷ 4,359,000 = 71% Course 8: Financial Mgmt

62. Break-even rent per sq. ft. (OE + DS) ÷ total square feet $1,803,800 + $1,278,000= $3,081,800 $3,081,800 ÷ 760,000 = $4.05 Course 8: Financial Mgmt

63. CASH FLOW CALCULATION Gross Potential Rent (GPR) -Vacancy, Concessions, collection losses (VAC) = Effective Gross Income (EGI) + Other Income (OI) = Gross Operating Income (GOI) - Operating Expenses (OE) = Net Operating Income (NOI) - Capital Expenses (CE), Reserve Payments (RR), and Debt Service (DS) = CASH FLOW Course 8: Financial Mgmt

64. Activity #3: Cash Flow Calculate the cash flow of the NAA Apartments Course 8: Financial Mgmt

65. The General Ledger Provides more detail of major financial statements Chart of Accounts Know cut-off date for invoices to be submitted Course 8: Financial Mgmt

66. Skill Check #3 Chapter 3: Economic Analysis of a Property Course 8: Financial Mgmt

67. Chapter 4 Budgets Course 8: Financial Mgmt

68. Purpose of a budget 1.To estimate expected income and expenses to determine what occupancy levels will be needed to cover expenses and provide a return on investment 2.To monitor the property’s performance 3.To evaluate performance of personnel Course 8: Financial Mgmt

69. Lease-up Budget Special attention paid to activities and costs associated with attracting residents, signing leases and generating income Information used for projecting expenses depends on your and your supervisor’s previous experience Course 8: Financial Mgmt

70. Modernization Budget Reflects larger allocations for capital expenses and labor Must be flexible if the work is dependent on contractors schedules and vendors supplies May include periods of no rental income while work is being done in part or all of the building May be prepared separately from the operating budget of a property and be for a short time only Course 8: Financial Mgmt

71. Stabilized Operating Budget Reflects varying expenses from month to month Examples: –Utilities for heating would be higher in winter months –Utilities for cooling would be higher in summer months –Snow removal would be posted only for winter months Course 8: Financial Mgmt

72. Tips for developing budgets Use round numbers Use current figures Prepare early Seek input Extrapolation/Annualization Course 8: Financial Mgmt

73. CAM Responsibilities Managing the budget Analyzing variances Explaining variances Recommending action Course 8: Financial Mgmt

74. Skill Check #4 Chapter 4: Budgets Course 8: Financial Mgmt

75. Chapter 5 Property Valuation Course 8: Financial Mgmt

76. Property Valuation Is the process of determining the value of a property in order to make financial decisions regarding the property Course 8: Financial Mgmt

77. The Cost Approach Estimates the current cost of reproducing or replacing the improvements, minus the loss in value from depreciation due to age, condition or obsolescence, plus land value Important when there is no market activity and a sales approach cannot be used to value a property Course 8: Financial Mgmt

78. The Sales Comparison Approach In this approach, the market value of a property is directly related to the prices of comparable competitive properties Most useful when there are several similar properties in the local market that have been recently sold or are currently for sale Course 8: Financial Mgmt

79. The Income Capitalization Approach This approach uses methods, techniques and math procedures to –analyze a property’s ability to generate income and –convert future earnings to present-day dollars Course 8: Financial Mgmt

80. Capitalization Value = NOI/Overall capitalization rate Course 8: Financial Mgmt

81. Skill Check #5 Chapter 5: Property Valuation Course 8: Financial Mgmt