w w w . l i s c . o r g / r u r a l

Fundamentals of Asset Management

Rural LISC Seminar Follow up Session

August 28, 2017

INTRODUCTIONS

Goals of this session

• Review online course

• Answer follow up questions

• Discuss asset management best practices

• Next steps for Rural LISC

Review

•What is “effective asset management”

• Active, Strategic and Long Term Approach

• How is asset management different than property management?

Module 1: Asset Management ofAffordable Housing

Key takeaways

• Defining asset management

• Double bottom line theory (or triple bottom line!)

• Distinguish between property and asset management responsibilities

Property vs. Asset Management

PROPERTY MANAGEMENT

• Marketing

• Screening/Occupancy

• Rent Collection

• Day to Day Operations

• Record Keeping

• Financial Reporting

• Maintenance

• Management Staff Supervision

ASSET MANAGEMENT

• Hiring/Firing Evaluating the Property Manager

• Strategic Planning and Goal Setting

• Refinancing Decisionmaking

• Management of Reserves

• Investor Communications

• Hiring Accountants, Lawyers

Life Stages of a Project Predevelopment Construction Lease Up Operations/Management Disposition/Exit

Market Analysis and

Marketing Plan

Establish Scope

of Work

Outreach and

Marketing

Budgeting Negotiate partner

exit (LIHTC

properties)

Financing Plan Manage

Construction

Screening Financial Management Restructure and

refinance debt

Community Outreach Quality Control Compliance and

Reporting

Occupancy Management Reposition

Funding Applications Rent Collection Rehab property

Capital Reserve

Planning

Maintenance and capital

repairs

Turnover

Compliance and reporting

Resident services and

community relations

Module 2: Performance Indicators

Operating indicators:

• Gross Potential Rent

• Vacancy Rate

• Rent Collection Rate

• Turnover Rate

• Vacant Unit Turnaround/Make Ready Time

Expense Measures

•Operating costs

• Benchmarking and PU/PY Operating Expenses

• Trending – comparing year over year; can use to project out expenses over time

Module 3: Finance – Debt and Cash Flow

Key takeaways

• Most projects are financed with hard debt and equity or soft debt

• Hard debt = ‘must pay debt’

• Soft debt = public resources that are equity like (Deferred payment, cash flow payments, etc. ie HOME funds. Structure varies based on local and state policies Comes with restrictions

• Equity = LIHTC or grant funding (some states provide HOME as grant funding)

Cash flow calculation

Calculating cash flow is one of the most critical technical aspects of asset management

Cash Flow Calculation

• Effective Gross Income

• Net Operating Income

• Debt Coverage Ratio

• Net Cash Flow

Cash Flow Distributions

How do Owners Get Cash Flow from their properties?

There are various ways owners/sponsors can receive revenues from properties, depending on financing structure, and state and local regulations and policy.

• LIHTC projects - defined in the Partnership Agreements• State and local requirements – set out in loan and grant agreements

• Percentage of net cash flow • Deferred developer fees• Asset management fees• Resident services fees

Questions?

Next Steps: Implementing Best Practices

• Asset Management Responsibilities and Staffing

• Dashboards

• Deal books

• Capital planning

Essential Tasks

• Annual budgeting with property manager

• Annual goal setting

• Operating budget variance review (monthly)

• Performance standards review

• Monitoring cash flow and DCR; comparison with lender requirements; owner/sponsor distributions

• Overseeing property management

• Review annual audit and tax returns; corporate filings

• Capital planning

• Refinance/recapitalization planning

Developing Dashboards

Dashboards for tracking performance standards

Performance standards to track include

•Gross potential rent

• Vacancy loss

• Rent collection

• Turnover rate

• Vacant unit turnover/make ready time

•Maintenance measurements

• Expense performance standards: operating costs, trending, benchmarking

Dashboard Examples

Deal Books

Important transaction details from the closing• Major terms and conditions of all financing and funding • Loan agreements, regulatory agreements, grant agreements• Affordability restrictions• Operating pro forma/projections• Sponsor’s financial rights – ie cash flow distribution definitions and calculations

• Rehabilitation scope of work • Warranties• Resale or disposition restrictions or rights

Periodic updates• Update pro forma and compare to projections• Capital needs assessment

Capital Planning/Capital Needs Assessments

• Capital Needs Assessments review the condition of major building systems and elements (ie exteriors, major building systems, cabinets and floors, plumbing fixtures, etc.) and estimates at what point in the future these elements are likely to require replacement, as well as estimating the cost of replacement

• Provides a year by year projection of expenditures against the resources available over the property's life

Energy Benchmarking and Tracking

Why benchmark and track?

Available tools

• Energy Star Portfolio Manager energy tracking tool (free)

•Wegowise

• EnergyScoreCard

•Greenprint center for Building Performance

Benefits of an Aggressive Asset Management Strategy

• Improve cash slow

• Ensure subsidized rents are maximized

• Stronger marketing/screening efforts can increase rent collection

• Improve property reputation; waiting list growth

• Increase occupancy rate

• Decrease turnover rates; Turnover/Decrease make ready expenses

Questions/Discussion

Next Steps

How can Rural LISC help you increase your asset management capacity?

Additional Resources