Www.vivaconsult.com Risks and Opportunities in Asset Management Today September 24, 2010 Vermont Housing & Conservation Board.

www.vivaconsult.com

Risks and Opportunities in Asset Management Today

September 24, 2010

Vermont Housing & Conservation Board

The Risks

1. Low Average Property Size

2. Modest Staff Capacity

3. Overstaffing

4. Weak Market Conditions

5. Stalled Pipeline

6. Low Property Management Fees

7. Negative Bottom Line for Property Management Division

8. Negative Trends in Operating Advances to the Properties

9. Poor Stakeholder Reviews

10.Outdated/Insufficient Systems and Procedures

11.Unstructured Asset Management

12.Non Real Estate Culture

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#1: Low Average Property Size

• Economies of scale are difficult to achieve: 100 vs. 20 unit property– Example 1

• 1 unit vacant in a 100 unit property = 1% vacancy rate.

• 1 unit vacant in a 20 unit property = 5% vacancy rate.

– Example 2• Audit cost per property =

$10,000– 100 units = $ 100 pupy– 20 units = $500 pupy

• Self-managers of small properties seldom earn enough in fees to cover their central office cost.– Why? Property

management does its work by the project but gets paid by the unit.

– Example:• 100 units x $400 pupy

mgmt fee = $40,000• 20 units x $400 pupy mgmt fee = $8,000

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#1: Low Average Property Size

• Solutions – Establish threshold size

for future projects– Seek adjacencies for

future projects– Standardize design to

increase replacement/repair efficiencies

– Restructure financing of two or more smaller properties into one

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Other ideas?

#2: Modest Staff Capacity

• Affordable housing is increasingly complex– Stakeholder

requirements demand growing set of administrative and financial skills

– Sustainable design can require sophisticated systems and increased reliance on contractors

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-LIHTC projects need marketing savvy-Can’t be run as a jobs program without additional resources

#2: Modest Staff Capacity

• Solutions– Do it right the first time

• Get the time-quality-cost balance right re: using staff vs. contracting out

– Leadership is key• Skilled• Passionate• Dedicated to outcomes• Must have standing within

organization and with stakeholders

– Train, train, train

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Time

Quality Cost

#3: Overstaffing

• Nonprofits tend to staff at higher levels than for profits on a per unit basis– May not have large

enough portfolio over which to share minimum staffing thresholds

– Tend to staff functions rather than use contractors

– May promote on-the-job training that requires additional supervision

– Hold onto under performing staff and hire additional staff to compensate – costly overall even if individual pay is modest

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#3: Overstaffing

• Solutions– Conduct manpower analysis

of what is done by staff and what is done by contractor

• Best solutions maximize occupancy and reduce costs

– Learn staffing rules of thumb– Hire for skills and attitude– Understand staffing levels in

proformas

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#4: Weak Market Conditions

• Soft markets threaten proforma’s long term revenue assumptions– Difficult to get back on

track– A real threat for LIHTC

projects; less so for those with project-based subsidies

– Market alternatives may include single family homes

• Units and features may be obsolete

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• May be more difficult toovercome in transitional markets

#4: Weak Market Conditions

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• Solutions

– Learn market-rate leasing techniques

• Concessions• Mini-models• Special offers• Evening and weekend hours• Social networking

– Know the competition and neighborhood

– Reposition

– Seek tenants with special needs you can fill

#5: Stalled Pipeline

• Self-managers need portfolio of 500+ units to be financially viable– New project pipelines

are source not only of development fees, but of property management growth and financial health.

– Absence of a robust pipeline is a real threat unless alternative resources are found.

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#5: Stalled Pipeline

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• Opportunities– Build internal capacity if

the stall is temporary• Good time to update

systems and technology

– Outsource property management if it will take too long to get to scale

– Consider managing for others (although only if you are already strong and have some over-capacity)

#6: Low Management Fees

• Below market management and other allowable fees are fairly common on a pupy basis– Management fees are

often calculated as a percentage of collections. Low rents and high receivables effect management fees.

– Initial fees sometimes set below market to achieve lower operating costs, particularly if self-manage.

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Don’t expect third party managers to automatically agree to below market fees.

#6: Low Management Fees

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• Opportunities– Know the market – if self-

manage, may be able to raise fees for in-house property management division

• HUD Field Office Fee Schedule

• Local LIHTC underwriting standard

– Learn what it costs on a pupy basis to run your property management division. Compare to achievable fees.

#7: Negative Prop Mgmt Bottom Line

• Virtually impossible for nonprofit to have break-even property management division– Average property size

is too small – Size matters!!

• Property management does its work by the property, but gets paid by the unit.

– Avg fee = $450 pupy– 350 units in 10

properties = $157,500– 900 units in 10

properties = $405,000

• Many self-managers do not count all of their indirect costs.– Should be a planned

decision to cover a negative bottom line from other sources.

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#7: Negative Prop Mgmt Bottom Line

• Solutions– Consider using third-

party manager until reach break-even size and/or generate sufficient revenue to have full complement of qualified staff.

– Maximize fees– Keep payroll expenses

at 75% or less of revenues.

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Non-Profit IREM

Revenues 100% 100%

- Payroll 75% - 80%

63%

- Other 25% 25%

= Bottom Line

0 – (5%) 12%

Typical non-profit propertymanagement division

#8: Negative Trends in Operating Advances to Properties

• Advances to the properties can take different forms– Deferred developer

fees– Outright loans– If self-manage:

• Unpaid management, bookkeeping and other fees

• Site payroll

– What else?

• Growing “due to related party” advances weaken the organization’s balance sheet

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#8: Negative Trends in Operating Advances to Properties

• Solutions– Make paying back advances a

priority – plan for them– Determine whether or not any

reserves are available– If self-manage renegotiate

management agreements so payment of management fees is closer to top rather than bottom of “order of monthly payments”

– Make repayment part of refinancing

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#9: Poor Stakeholder Reviews

• Stakeholders scrutiny is increasing – they do have “watch lists”– Substandard

performance can yield financial and other penalties

– Substandard performance can yield increased inspections and reporting

– Poor reviews can halt approvals on pipeline projects

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What else?

#9: Poor Stakeholder Reviews

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• Solutions

– Pass their tests!• Inspect ahead of time• Take corrective action ahead of

time• Use third-party inspectors for

physical and file reviews

– Establish measurable standards – SMART

– Establish stakeholder point of contact

– Communicate before something goes wrong

#10: Outdated/Insufficient Systems & Procedures

• Not often a priority until broken– Reactive, “fire-fighting”

styles have little time for procedural upgrades

• When a change is needed, often bring “inside” main office rather than solve at site level – accuracy may improve but timeliness may suffer

• Redundancy is prevalent

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Found in organizationalcultures where constantupgrading/refining is not regular and ongoing

#10: Outdated/Insufficient Systems & Procedures

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• Opportunities– Upgrade/update during periods

of slow growth– Determine what works best

centrally and what works best at the site

• Use technology instead of FedEx to move documents

– Invoices

– Income Certs/Recerts

– Establish company intranet for standard forms/updates

– Scanners, pdas– Get help! It’s a big job.

#11: Unstructured Asset Management

• Functions are assigned but not prioritized or coordinated– No overarching strategy

that directs and links the functions.

– Handoffs are not formalized. Example – deal components not well tracked or understood over time creating “unintended consequences” – like a default

AM Function Assigned to

Performance Monitoring/Analysis Prop Ops

Investor Relations Finance

Compliance Prop Ops

Capital Planning Develop

Managing ongoing deal elements/fees

Finance

Board reporting Exec Dir

Risk management Finance

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Partial list of Asset Management Functions

#11: Unstructured Asset Management

• Solutions– Board sets broad goals for

portfolio re:• Financial performance• Physical condition• Mission objectives• Stakeholder requirements

– Board defines role of asset management and how it’s carried out:

• Board committee• Staff committee• Staff position

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#12: Non-Real Estate Culture

• Organization’s practices are not aligned to deliver on portfolio underwriting assumptions or stated goals– Being the landlord

may conflict with social objectives

– Absence of capacity thwarts best intentions

– Stakeholders back away

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Failure to act as performance and value deteriorate over

time.

#12: Non-Real Estate Culture

• Solutions– Know your deal! Get

immersed in the details– Establish and monitor

performance benchmarks– Trend balance sheets and

operating statements – Know how to make

adjustments – Create multi-year projections– Establish contingencies– Have a reserve strategy

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What other challenges have you faced?

What were yoursolutions and/or your opportunities?