1. Section 2: Asset Management Building Blocks

2. Asset Management Building Blocks Learning Objectives Introduce the five building blocks of asset management Introduce the five building blocks of asset management

3. Initial Priorities/Building Blocks Project-based funding Project-based funding Project-based budgeting Project-based budgeting Project-based accounting Project-based accounting Project-based management Project-based management Project-based performance assessment

4. Project-Based Funding Separate subsidy form for each project Separate subsidy form for each project Project Expense Level (PEL) is a major component Project Expense Level (PEL) is a major component Ensures appropriate resources are allocated to each AMP Ensures appropriate resources are allocated to each AMP Project-based funding Project-based funding

5. The Flow of Funds Property Management Fee Asset Management Fee Bookkeeping Fee Fee-for-Service Program Mgmt. Fees. HUDPHA OLD $ HUD AMP NEW PHA/COCC $ Subsidy $ Fees

6. Components of Formula Funding To understand the amount of funds available to any project, one must understand the following: To understand the amount of funds available to any project, one must understand the following:  Project Expense Level (PEL)  Utility Expense Level (UEL)  Add-Ons  Frozen Formula Income  Proration

7. Project Expense Level (PEL) Model-generated estimate of cost to operate a project on a per unit basis, exclusive of taxes, utilities, and add-ons Model-generated estimate of cost to operate a project on a per unit basis, exclusive of taxes, utilities, and add-ons Amount expressed in PUMs (per unit month) Amount expressed in PUMs (per unit month) Major coefficients that have a large impact on PEL Major coefficients that have a large impact on PEL  Unit Size (Bedroom Mix)  Local Market  Age of Property  Occupancy Type (Family vs. Elderly) National average was $ 325 PUM in 2007 (excluding New York City Housing Authority) National average was $ 325 PUM in 2007 (excluding New York City Housing Authority)

8. Utility Expense Level (UEL) Represents the average utility consumption for a project over the past three years, multiplied by recent utility rates Represents the average utility consumption for a project over the past three years, multiplied by recent utility rates Amount expressed in PUMs Amount expressed in PUMs National average was $125.95 PUM in 2007 National average was $125.95 PUM in 2007 Assigned UEL will vary by project Assigned UEL will vary by project

9. 2007 Add-Ons Add-OnsAmountPUM Self-Sufficiency $ 13,093,430 $ 1.00 Energy Loan Amortization $ 16,844,422 $ 1.29 Payment in Lieu of Taxes $ 95,199,853 $ 7.26 Cost of Independent Audit $ 17,159,716 $ 1.31 Resident Participation $ 24,860,325 $ 1.90 Asset Management Fee $ 42,777,668 $ 3.26 IT (Info. Technology) Fee $ 26,215,754 $ 2.00 Asset Repositioning $ 43,329,841 $ 3.31 Total Add-Ons $279,481,009$21.32

10. Frozen Formula Income Equal to a project’s rental income reported on 2004 financial statements, adjusted for changes in utility allowances Equal to a project’s rental income reported on 2004 financial statements, adjusted for changes in utility allowances Effective for 2007 through 2009 Effective for 2007 through 2009 National average was $181.09 PUM in 2007 National average was $181.09 PUM in 2007

11. Proration Each year, total subsidy eligibility is compared with appropriations for the Operating Fund program; the difference is proration Each year, total subsidy eligibility is compared with appropriations for the Operating Fund program; the difference is proration Expressed as a percentage Expressed as a percentage Example: Example:  Eligibility = $4.0 billion  Appropriation = $3.6 billion  Proration = 90%

12. Determining Project Funding Project Expense Level (PEL) + Utilities Expense Level (UEL) + Add-ons = Formula Expenses - Formula Income = Subsidy Eligibility - Proration = Actual Subsidy + Rental Income + Other Income + Transfers = Effective Income Effective Income - Operating Expenses = Net Income

13. Project-Based Budgeting Used for planning purposes Used for planning purposes Budgeted amounts must reconcile to FDS Budgeted amounts must reconcile to FDS Must be approved by PHA Board Must be approved by PHA Board Not subject to HUD approval Not subject to HUD approval Project-based funding Project-based budgeting Project-based budgeting

14. Project-Based Budgeting (continued) What are project-based budgets? Itemized projection of income and expenses over a specific period Itemized projection of income and expenses over a specific period Guideline for operating the project Guideline for operating the project

15. Sample Conventional Budget Gross Potential Income (GPI) 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

16. Ratios Used for Expense Benchmarking Operating Expense Ratio (%) = Operating Expense per Unit ($) = Several variables may impact benchmarks Several variables may impact benchmarks Expense benchmarks can be used to compare efficiencies across properties Expense benchmarks can be used to compare efficiencies across properties Operating Expenses Income Number of Units

17. Workshop 2.1: Expense Benchmarks Consider data from two similar apartment buildings shown on the next slide Consider data from two similar apartment buildings shown on the next slide Calculate the Operating Expense Ratio and Operating Expense/Unit Ratio Calculate the Operating Expense Ratio and Operating Expense/Unit Ratio In groups, identify the project with the lowest costs In groups, identify the project with the lowest costs What other factors should be considered when evaluating the results of this cost comparison? What other factors should be considered when evaluating the results of this cost comparison?

18. Workshop 2.1: Expense Benchmarks Hamilton Place Southside Apartments # of Units 2010 Income$175,000$160,000 Operating Expenses $150,000$145,000 OpEx Ratio OpEx/Unit 86%91% $7,500 $14,500

19. Calculating Expense Benchmarks Hamilton Place: Operating Expense Ratio: $150,000 (Operating Expense)/$175,000 (Income) = 86% Operating Expense per Unit: $150,000 (Operating Expense)/20 (Number of Units) = $ 7,500 Southside Apartments: Operating Expense Ratio: $145,000 (Operating Expense)/$160,000 (Income) = 91% Operating Expense per Unit: $145,000 (Operating Expense)/10 (Number of Units)= $ 14,500

20. Where Can I Find Benchmarks? Project Expense Levels (PELs) Project Expense Levels (PELs) Project Level Data Project Level Data IREM Income/Expense Analysis ® Reports IREM Income/Expense Analysis ® Reports www.irem.orgwww.irem.org Housing Finance Agencies Housing Finance Agencies NeighborWorks (small properties) NeighborWorks (small properties) Rural Development Rural Development Local and Regional Market Studies Local and Regional Market Studies

21. Project-Based Accounting Year-end project statements submitted to HUD Year-end project statements submitted to HUD Can only charge projects for services actually received Can only charge projects for services actually received Fees must be considered reasonable Fees must be considered reasonable Project-based funding Project-based budgeting Project-based accounting Project-based accounting

22. Project-Based Accounting (continued) For conventional properties, the financial performance of each property is tracked individually and reported to the owner For conventional properties, the financial performance of each property is tracked individually and reported to the owner This allows the manager and owner to make the best possible decisions for each individual property This allows the manager and owner to make the best possible decisions for each individual property Similarly, PHAs will assemble project level financial data Similarly, PHAs will assemble project level financial data

23. Project-Based Accounting Under the Final Rule Annual year-end financial statements on each AMP will be required  Revenues, expenses, balance sheet  To be included with the Financial Data Schedule (FDS)  FDS will also be revised to include a column for the COCC

24. Entity-Wide FDS Financial Reporting Model (Existing) Balance Sheet Program Total Operating Fund Capital Fund Section 8 Voucher Program Rural Housing Statement of Net Assets Assets$10,000,000$500,000$250,000$750,000$11,500,000 Liabilities$5,000,000$100,000$200,000$250,000$5,550,000 $5,000,000$400,000$50,000$500,000$5,950,000 Liabilities and Net Assets Liabilities and Net Assets $10,000,000 $10,000,000$500,000$250,000$750,000$11,500,000

25. Asset Management Project FDS Financial Reporting Model (New) Financial Statement Asset Management Projects Total Project 1 Project 2 Project 3 Balance Sheet Assets$3,434,000$3,253,000$3,131,000$9,818,000 Liabilities$1,649,000$1,521,500$1,503,500$4,674,000 Equity$1,785,000$1,731,500$1,627,500$5,144,000 Operating Statement Revenue$588,200$527,500$536,300$1,652,000 Expenses$462,400$429,000$421,600$1,313,000 Net Income $125,800$98,500$114,700$339,000

26. Project-Based Management Arrange services in the best interest of the project Arrange services in the best interest of the project Assign management personnel to each project Assign management personnel to each project Project-based funding Project-based budgeting Project-based accounting Project-based Project-based management management

27. Project-Based Management (PBM) “The provision of property-management services that is tailored to the unique needs of each property, given the resources available to that property...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 property and who are charged with direct oversight of operations of that property.” “The provision of property-management services that is tailored to the unique needs of each property, given the resources available to that property...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 property and who are charged with direct oversight of operations of that property.” 24 CFR 990 24 CFR 990

28. Why Practice PBM? Maximizes performance at all levels Maximizes performance at all levels Local staff are closer to market changes and community issues Local staff are closer to market changes and community issues On-site staff can monitor the project On-site staff can monitor the project Response to resident issues is faster and more personal Response to resident issues is faster and more personal

29. Common Characteristics of PBM Each project has an operating budget to be approved by the owner Each project has an operating budget to be approved by the owner The project is assigned dedicated management and maintenance personnel who frequently work on site The project is assigned dedicated management and maintenance personnel who frequently work on site If a project is too small to afford full-time staff, the project may have part-time or shared staff If a project is too small to afford full-time staff, the project may have part-time or shared staff

30. Common Characteristics of PBM (Continued) Site personnel have significant authority and responsibility over the day-to-day operations Site personnel have significant authority and responsibility over the day-to-day operations Most project management tasks are handled or coordinated by the on-site staff Most project management tasks are handled or coordinated by the on-site staff Procurement is done by on-site management and reviewed by supervisor Procurement is done by on-site management and reviewed by supervisor The person primarily in charge of the project on a day-to-day basis, including maintenance, is the site manager The person primarily in charge of the project on a day-to-day basis, including maintenance, is the site manager

31. Project-Based Management Example You own a group of restaurants. Would you have a budget for each restaurant? Would you have a budget for each restaurant? Would you hire a manager for each restaurant? Would you hire a manager for each restaurant? What roles would you assign to on-site staff vs. central staff? What roles would you assign to on-site staff vs. central staff?

32. Workshop 2.2: Assignment of Common Tasks The table on the following slide list tasks commonly associated with managing Public Housing The table on the following slide list tasks commonly associated with managing Public Housing As a group, determine whether each task should be performed on-site or centrally under project-based management As a group, determine whether each task should be performed on-site or centrally under project-based management

33. Workshop 2.2: Assignment of Common Tasks (Answers) TaskOn-SiteCentral Leasing units and enforcing the lease Processing families for admission and submitting 50058 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

34. Project-Based Performance Assessment Revise PHAS to emphasize AMP performance Revise PHAS to emphasize AMP performance Development of internal PHA monitoring mechanisms Development of internal PHA monitoring mechanisms Project-based funding Project-based budgeting Project-based accounting Project-based management Project-based performance assessment

35. HUD Oversight and the Public Housing Assessment System (PHAS) Each project will be evaluated on financial, managerial, and physical aspects in addition to use of Capital Funds Each project will be evaluated on financial, managerial, and physical aspects in addition to use of Capital Funds New system will: New system will:  Be consistent with the norms in multifamily housing  Avoid PHA self-certifications  Rely on existing data sources  Emphasize on-site management reviews

36. Internal PHA Monitoring Mechanisms Develop mechanisms to collect data to measure actual AMP performance against goals Develop mechanisms to collect data to measure actual AMP performance against goals Goals must be clearly articulated in annual plans and budgets. For example, budget goals may include monthly income and expenditures. Goals must be clearly articulated in annual plans and budgets. For example, budget goals may include monthly income and expenditures.

37. Project Goals In order to measure performance, goals must be articulated In order to measure performance, goals must be articulated Annual budget preparation includes goals: Annual budget preparation includes goals:  Rent collections  Vacancies  Unit turnarounds  Inspections  Maintenance services

38. Sample Monthly Project Review 5 th of month: Financial statements made available 5 th of month: Financial statements made available 7 th of month: Manager ’ s monthly Project Report due to Regional Manager 7 th of month: Manager ’ s monthly Project Report due to Regional Manager 9 th of month: Meeting with Site Manager and Regional Manager to review performance 9 th of month: Meeting with Site Manager and Regional Manager to review performance 10 th of month: Regional Manager forwards narrative variance report to Director of PM and ED, accompanying monthly financial report 10 th of month: Regional Manager forwards narrative variance report to Director of PM and ED, accompanying monthly financial report 12th – 15 th of month: ED reviews performance with Board and Committees 12th – 15 th of month: ED reviews performance with Board and Committees

39. Long-term Capital Planning and Asset Repositioning Key information needed: Physical needs assessment Physical needs assessment Market data Market data Asset value Asset value Funding sources Funding sources

40. Long-Term Capital Planning and Asset Repositioning: Strategies Asset strategies: Hold/defer Hold/defer Hold/modernize Hold/modernize Refinance Refinance Sale/disposition/demolition Sale/disposition/demolition Each strategy must be compared against the mission and goals of the agency

41. End of Section 2