Vermont
Housing &
Conservation
Board
Risks and Opportunities in Asset
Management Today
September 24, 2010
www.vivaconsult.com
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 Outdated/Insufficient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
1
#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
2
#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
Other ideas?
3
#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
-LIHTC projects need
marketing savvy
-Can’t be run as a jobs
program without additional
resources
4
#2: Modest Staff Capacity
• Solutions
– Do it right the first time
Time
• Get the time-quality-cost
balance right re: using staff
vs. contracting out
– Leadership is key
•
•
•
•
Quality
Cost
Skilled
Passionate
Dedicated to outcomes
Must have standing within
organization and with
stakeholders
– Train, train, train
5
#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
6
#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
7
#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 projectbased subsidies
– Market alternatives
may include single
family homes
• Units and features may
be obsolete
• May be more difficult to
overcome in transitional
markets
8
#4: Weak Market Conditions
• 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
9
#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.
10
#5: Stalled Pipeline
• 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 overcapacity)
11
#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.
Don’t expect third party
managers to automatically
agree to below market fees.
12
#6: Low Management Fees
• Opportunities
– Know the market – if selfmanage, 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.
13
#7: Negative Prop Mgmt Bottom Line
• Virtually impossible for
nonprofit to have breakeven 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.
• 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.
– Avg fee = $450 pupy
– 350 units in 10
properties = $157,500
– 900 units in 10
properties = $405,000
14
#7: Negative Prop Mgmt Bottom Line
Typical non-profit property
management division
Non-Profit
IREM
Revenues
100%
100%
- Payroll
75% 80%
63%
- Other
25%
25%
= Bottom
Line
0 – (5%)
12%
• Solutions
– Consider using thirdparty 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.
15
#8: Negative Trends in Operating
Advances to Properties
• Advances to the
properties can take
different forms
– Deferred developer
fees
– Outright loans
– If self-manage:
• Growing “due to related
party” advances
weaken the
organization’s balance
sheet
• Unpaid management,
bookkeeping and other
fees
• Site payroll
– What else?
16
#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
17
#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
What else?
18
#9: Poor Stakeholder Reviews
• 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
19
#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
Found in organizational
cultures where constant
upgrading/refining is not
regular and ongoing
20
#10: Outdated/Insufficient Systems &
Procedures
• 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.
21
#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
Partial list of Asset
Management Functions
AM Function
Performance
Monitoring/Analysis
Investor Relations
Assigned to
Prop Ops
Finance
Compliance
Prop Ops
Capital Planning
Develop
Managing ongoing
deal elements/fees
Finance
Board reporting
Exec Dir
Risk management
Finance
22
#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
23
#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
Failure to act as performance
and value deteriorate over
time.
24
#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
25
What other challenges
have you faced?
What were your
solutions and/or
your opportunities?
26