CAPS Training:
Financial Management Course
INSTRUCTOR GUIDE
Limits Of Liability And Disclaimer Of Warranty
© 2010 by the National Apartment Association, 4300 Wilson Boulevard Suite 400
Arlington, VA 22203. All rights reserved. The course materials or any part thereof may not be
reproduced, stored in a retrieval system, or transmitted, in any form or by any means—graphic,
electronic, or mechanical, including photocopying, recording, or otherwise, without the prior written
permission of the National Apartment Association Education Institute (NAAEI).
NAA retains copyright to the original materials and to any translation to other languages and any
audio or video reproduction, or other electronic means, including reproductions authorized to
accommodate individual requests based on religious or medical deferments from classroom
participation.
Disclaimers
Although NAAEI programs provide general information on apartment management practices, NAAEI
does not guarantee the information offered in its programs is applicable in all jurisdictions or that
programs contain a complete statement of all information essential to proper apartment management
in a given area. NAAEI, therefore, encourage attendees to seek competent professional advice with
respect to specific problems that may arise. NAAEI, their instructors, agents, and employees assume
no responsibility or liability for the consequences of an attendee’s reliance on and application of
program contents or materials in specific situations. Though some of the information used in
scenarios and examples may resemble true circumstances, the details are fictitious. Any similarity to
real properties is purely coincidental. Forms, documents, and other exhibits in the course books are
samples only; NAAEI does not necessarily endorse their use. Because of varying state and local laws
and company policies, competent advice should be sought in the use of any form, document, or
exhibit.
Policy Statement Regarding the Use of Recording Devices, Audio
Visual Equipment, and Other Means of Reproduction or Recording of
the “Certified Apartment Portfolio Supervisor” materials
All program contents and materials are the property of the National Apartment Association Education
Institute, which strictly prohibits reproduction of program contents or materials in any form without
the prior written consent. Except as expressly authorized in writing in advance, no video or audio
recording of NAAEI programs or photocopying of “Certified Apartment Portfolio Supervisor” materials
is permitted. Authorized recording of programs or duplication of materials may be done only by the
instructor on site.
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Financial Management Instructor Guide
Page i
Acknowledgments
Subject Matter Experts
The NAA Education Institute wishes to thank the following apartment industry professionals and
suppliers for contributing their time and expertise to the rewrite of the Certified Apartment Portfolio
Supervisor program:
Howard L. Campbell, PhD, CPM
Assistant Professor
Ball State University
Muncie, IN 47306
hlcampbell@bsu.edu
Ron Gjerde
Senior Director, Knowledge Exchange
Institute of Real Estate Management
430 North Michigan Avenue
Chicago, IL 60611
RGjerde@irem.org
Susan E. Weston, CAM, CAPS, NAAEI Faculty
President, The Susan Weston Company
2655 Mount View Drive
Dallas, TX 75234-6239
Office: 972.308.6092
Cell: 972.415.6299
Email: susan@susanweston.com
Key Contributors
Rich George
NOI Coach
3787 Lincolnshire Road #100
Waterford, MI 48328
rich@noicoach.com
CEL & Associates
12121 Wilshire Boulevard #204
Los Angeles, CA 90025
www.celassociates.com
Emily Hilton
Vice President, Professional Development
Houston Apartment Association
10815 Fallstone Road
Houston, TX 77099
ehilton@haaonline.org
Mary Pacini, CPM
President
Chancellor Properties Inc.
1608 Spruce Street
Philadelphia, PA 19103
mpacini@chancellorproperties.com
Mary Ellen Perrin
Director of Education
Indiana Apartment Association
9100 Keystone Crossing #725
Indianapolis, IN 462240
maryellen@iaaonline.net
Kimball, Tirey, and St. John, LLP
1202 Kettner Boulevard, 5th Floor
San Diego, CA 92101
www.kts-law.com
Realpage
4000 International Parkway
Carrollton, TX 75007
www.realpage.com
SatisFacts Research, LLC
2360 W. Joppa Road #322
Lutherville, MD 21093
www.satisfacts.com
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Financial Management Instructor Guide
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Curriculum Developer
Kaleidoscope Learning
304 Park Avenue South
11th Floor
New York, NY 10010
Tel: 212.679.2740
Fax: 212.679.2738
http://www.kaleidolearning.com
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Financial Management Instructor Guide
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CAPS Training:
Financial Management Course
Just For Instructors .................................................................................................... JFI-1
1. Welcome and Introduction, Homework Exercise Answer Key ...................................... 1-1
2. Apartment Investment Basics ................................................................................... 2-1
3. Mortgages, Financing and Taxes ............................................................................... 3-1
4. Managing the Budget Process ................................................................................... 4-1
5. Getting to the Bottom Line ....................................................................................... 5-1
6. Analyzing Monthly Financial Statements .................................................................... 6-1
7. Valuing Apartment Investments ................................................................................ 7-1
8. Maximizing Revenue ................................................................................................ 8-1
9. Final Exercise .......................................................................................................... 9-1
10. Key Takeaways and Closing .................................................................................. 10-1
Appendix ................................................................................................................. App-1
The CAPS Training Series
Financial Management Instructor Guide
Page TOC-1
Just for Instructors
The National Apartment Association thanks you for your time, talent, and
expertise in training and developing the next generation of Certified
Apartment Portfolio Supervisors.
Whether you're a subject matter expert or lay person…a seasoned instructor
or a new teacher…this guide will help you become an even more engaging
and effective trainer.
In this course on financial management, you'll help property supervisors:
•
Understand the essential terms and concepts relating to financial management.
•
Learn how to use key financial management tools
•
Apply what they've learned to a variety of community management situations
•
Prepare for the CAPS designation examination.
•
Become an even more effective multi-property supervisor.
Although this course is targeted at people with at least one year of supervisory experience, it can also
be used to teach those who would like to learn more about financial management.
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Financial Management Instructor Guide
Page JFI-1
Fast Facts:
The CAPS Financial Management Course
This overview will help familiarize you with the educational approach for this
course and ways you can enrich the training for participants.
Course Type
•
Instructor-led classroom training
•
Uses presentations and individual learning activities to teach the course material
Course Materials
•
This instructor guide
•
The Financial Management Participant Guide
•
The Financial Management PowerPoint Slides (these are optional; use them if you wish)
Course Length
Approximately seven and one-half hours
Where this Course Fits in the CAPS Training Curriculum
"Financial Management" is the second course in the CAPS training series. Here's how the entire series
lays out:
•
Legal Responsibilities and Risk Management
•
Financial Management
•
Property Performance Management
•
Property Evaluation and Due Diligence
•
Effective Leadership
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Financial Management Instructor Guide
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Course Schedule-at-a-Glance
Here's a quick look at the topics included in the Financial Management course,
the approximate time it will take to teach them, and a suggested schedule.
Training Topic
Length
Suggested Time
1. Welcome, Introduction & Homework
30 min
8:30am–9:00am
2. Apartment Investment Basics
15 min
9:00am–9:15am
3. Mortgages, Financing, and Taxes
45 min
9:15am–10:00am
4. Managing the Budget Process
45 min
10:00am-10:45am
Break
15 min
10:45am–11:00am
5. Getting to the Bottom Line
75 min
11:00am–12:15pm
Lunch
60 min
12:15pm–1:15pm
6. Analyzing Financial Statements
30 min
1:15pm–1:45pm
7. Valuing Apartment Investments
45 min
1:45pm–2:30pm
Break
15 min
2:30pm–2:45pm
8. Maximizing Revenue
60 min
2:45pm–3:45pm
9. Final Exercise
60 min
3:45pm–4:45pm
10. Key Takeaways and Closing
15 min
4:45pm–5:00pm
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Financial Management Instructor Guide
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Preparing to Teach the Course
To give course participants a first-rate learning experience, plan to spend
several hours preparing to teach this class.
When to Prepare
Depending on your experience with this course, begin preparing one to two weeks before the
scheduled course date. That’s enough time to absorb the material without feeling rushed.
How to Prepare
•
Read the leader's guide carefully. Get familiar with the organization and flow of the course,
as well as the content itself.
•
Look for ways to personalize the instruction. Add your own stories, examples, and insights.
•
Mark up this guide. Write notes throughout. Highlight passages you want to emphasize. Add
prompts for your examples and explanations.
•
Practice. Do a dry run of the material (or at least some of it) in front of willing colleagues or
family members. Get their feedback. Find out: What are you doing well? What's one thing you
could improve?
•
Samples. For this program particularly it is advised that you bring financials for a sample
portfolio that the entire class can use to facilitate learning. Also consider adding a copy of the
NAA Income & Expense survey for the particular region or area where you will present.
When It’s Time to Teach the Course
•
Use this guide. Refer to it often to keep the class on track. Using notes will make you look
natural, relaxed, and yes, even confident.
•
Approach the course as a conversation, not as a presentation. Keep things open and
easygoing. Pick yourself up if you make a “mistake.” Answer the questions you can. Most
important, avoid the temptation to be the expert—simply share what you’ve learned.
•
Keep participants actively involved. Allow participants to ask questions, share ideas with one
another, and get as much hands-on experience as possible. Remember: telling isn't training.
•
Be yourself. Participants appreciate (and learn more from) instructors who are not only
knowledgeable, but also approachable, personable, and dedicated.
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Financial Management Instructor Guide
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Preparing the Classroom
To complete your final preparations, arrive at the training site at least one
hour before class begins.
Find the Location of these Public Facilities or Services
•
Rest rooms
•
Kitchen facilities or vending machines
•
Emergency exits
Prepare Materials
•
Financial Management Participant Guide (one for each participant)
•
Financial Management Instructor Guide (with all your preparation notes in it)
•
Financial Management PowerPoint Slides (their use is optional)
•
Sign-in form (to be turned in to the affiliate office after class)
Prepare and Test Equipment
•
Flipchart with stand or whiteboard
•
Markers
•
Microphone or sound system (if needed)
•
Laptop computer with LCD projector (if using PowerPoint slides)
Prepare a Learning-Friendly Classroom
•
Arrange the tables and chairs in the room so that participants will be able to talk with one
another, work in small groups, and take notes.
•
Make sure the room isn't too hot or cold.
•
Ensure that there's adequate lighting.
•
Write the course agenda on the flipchart or whiteboard.
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Financial Management Instructor Guide
Page JFI-5
1. Welcome, Introduction and
Homework Review (30 minutes)
In this part of the training, you'll kick things off by welcoming participants to
the CAPS Financial Management course and previewing the day that lies
ahead.
Suggested Opening
Good morning, and welcome to our second course in the CAPS Training Series, Financial
Management. I'm (state your name), and I'll be your instructor for today's event. (Feel free to share
more information about yourself, such as your experience in the apartment industry or with financial
management matters.)
Understanding the financial part of managing apartment communities is critical to the success of any
multi-property supervisor. That’s because the job is to help the owner make money. It's that
simple…and yes, that complicated, too.
Therefore, you need to become fluent in the financials of the business, as well as learn how to
maximize income and manage expenses for his or her communities. Once you've mastered this
essential knowledge—and more important, can apply it back on the job—then you'll be well on your
way to CAPS excellence.
Let's see what this course holds in store.
Learning Goals and Objectives
This course will help you achieve five key learning objectives. These goals are to:
1. Understand the essential terms and concepts relating to financial management
2. Learn how to use key financial management tools
3. Apply what you’ve learned to a variety of property management situations
4. Prepare you for the CAPS designation examination
5. Help you become an even more effective multi-property supervisor
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Financial Management Instructor Guide
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How this Course Fits into the Overall Course Design
Financial Management is the second major topic in the CAPS training series. Much like the Legal
Responsibilities and Risk Management course you just completed, the things you'll learn here are
things you'll use every day. What's more, by learning the financials, you'll be well prepared for the
remaining courses in this series:
•
Property Performance Management
•
Property Evaluation and Due Diligence
•
Effective Leadership
Course Overview
This Financial Management course is divided into nine parts:
•
Apartment Investing Basics
•
Mortgages, Financing and Taxes
•
Managing the Budget Process
•
Getting to the Bottom Line
•
Analyzing Financial Statements
•
Valuing Apartment Investments
•
Maximizing Revenues
•
Final Exercise
•
Key Takeaways
In this course, we’ll cover these topic areas; use practical, hands-on tools and techniques to evaluate
and manage the owner's investment; identify potential issues; and give the information you need to
improve the profitability of the apartment communities you manage.
Participant Introductions
(Only If You Didn't Teach the Legal Responsibilities and Risk Management Course)
But before we dive in—and since I'm a new instructor today—you can help me by introducing
yourself.
Leader's Instructions:
Ask participants to share their name, the name and location of their employer, and their experience
as a multi-property supervisor. This will gives you a sense of the depth and breadth of knowledge in
the room.
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Financial Management Instructor Guide
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Ground Rules
(If You'd Like to Reiterate Them)
To make sure we all have the best of experiences today, let's establish a few ground rules:
•
Participate fully. What you get out of this class is fully dependent on what you put into it.
•
Help us stay on track. We're going to cover a lot of ground today—at quite a fast pace—and to
make sure you get the full leadership training experience, we'll need everyone to stay focused.
•
Have fun. The amount of learning that will take place is directly proportional to the amount of
fun you have.
Any other ground rules you'd like to add?
Homework
Review the answers to the twenty-five questions provided as homework from the previous (first)
CAPS session.
Questions?
Ask does anyone have any questions about the agenda, the ground rules, or anything else about
today's session?
Transition to the "Apartment Investing Basics" Section
Let’s get started down the path to financial management. First, let’s take a few minutes to talk about
the risks and rewards of investing in apartment properties.
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Financial Management Instructor Guide
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2. Apartment Investing Basics
(15 minutes)
In this part of the training, the CAPS student will learn that all financial
management activities begin with the owner and the investment goals for the
property.
Suggested Opening
Historically, apartments have provided competitive investment returns compared to office, retail, and
industrial properties.
The National Council of Real Estate Investment Fiduciaries reports that apartments have produced a
higher total return, with less variance, than the average of all property types in the portfolios of
pension funds and other large investors. During the 20-year period from 1984-2004, apartments
earned an average 9.3% total annual return compared to 7.6% for all property types combined.
It's not a bad deal for investors, is it?
In this part of the training, we'll briefly review the some of the big picture information related to
apartment investments.
Learning Objectives
•
Describe the potential risks and rewards of investing in apartments.
•
Articulate the most common investment goals of owners.
•
Use owner goals to develop a financial roadmap for the apartment communities you supervise.
Topics
•
Why Invest in Apartments?
•
The Investment Goals of Owners
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Financial Management Instructor Guide
Page 2-1
Why Invest in Apartments?
People own or invest in property to make money, and historically, apartments have proven to be to a
sound choice.
The National Multi-Housing Council reports that demand for apartments will continue to grow
moderately, based on current demographic trends. In 2006, the value of all apartments in buildings
with five or more units was almost $1.9 trillion, and from 1990 to 2006, total value increased at a
compound annual growth rate of 7.5%. The U.S. median gross rent increased to $775 per month in
2007, an all time high.
Despite the economic downturn beginning in 2008, apartment values have held moderately well. In
early 2010, NMHC at its Apartment Strategies Conference was projecting an optimistic 2011-2014
with:
•
Slow but steady job growth
•
Resumption of sales and purchase activity
•
Firming of market occupancies and rental rates
•
Continued paced development and access to capital
Multifamily housing provides, in the views of many investors, better yields compared to competing
fixed-income and equity investments.
Still, investors weigh the pros and cons of putting money into apartment properties, just as they
would for any investment.
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Advantages of Apartment Investments
•
Property owners receive regular cash payments from the cash flow generated by the
property.
•
The property may increase in value.
•
There are tax benefits to owning real estate.
•
Unlike other investments that require 100% of the value in cash, a real estate investment
may be purchased using borrowed or leveraged money. In many cases, a cash investment
of only 10% – 25% of the full value is needed. So an owner may have purchased an apartment
property worth $1,000,000 for as little as $100,000.
•
Apartment properties can be a good long-term investment.
•
More aggressive and speculative property owners can engage in repositioning the
property (that is, make it more attractive to a different type of renter) or quickly turn and sell it.
•
Properties give investors the opportunity to diversify, that is, to own real estate as part of a
balanced portfolio of investments. A balanced portfolio spreads risk and exposure with a variety
of investments such as stocks, bonds, mutual funds, and real estate.
Disadvantages of Apartment Investments
•
Real estate is one of the least liquid investments or assets. If investors need cash quickly,
they may have trouble getting it if their money is invested in a property. Real estate isn't quickly
or easily sold because of the size of the transaction—in fact, it can take six months, a year, or
more to sell an apartment community.
•
The need to actively manage the community can be a disadvantage for some investors.
Apartment investments are more work than buying stocks and bonds. That's why property
investors often choose to retain professional residential property management firms. These firms
assume the responsibility of overseeing all aspects of the community, and the owner is not
burdened with the day-to-day involvement needed to maintain a well-managed apartment
community.
•
The potential risks of natural disasters, fire, market fluctuations, crime, community image and
others present ongoing challenges for owners of multifamily properties.
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Financial Management Instructor Guide
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Apartment Investments and Risk
All investments, including apartments, require that the investor assume some level of risk, or the
probability that foreseen or unforeseen events might occur. Common risks that affect multifamily
housing investments include:
•
Business risk: Changes in economic conditions affect apartment properties in different ways,
depending on factors such as location, existing lease terms, and local growth rates. Shorter-term
apartment leases provide more flexibility, for example, than longer term leases in commercial
properties.
•
Financial risk: The greater the debt, the greater the financial risk. In addition, both the cost
and structure of the debt influence the amount of financial risk investors assume.
•
Liability risk: Apartment properties house individuals, families, and pets. The exposure to
liability from injury or death is a risk to the owner.
•
Inflation risk: If the income an apartment community produces cannot keep up with the rate of
inflation, investors can lose money. When vacancy rates are high, demand is weak, and new
construction is slow, income isn't likely to keep pace with unexpected inflation.
•
Interest rate risk: Interest rate changes affect apartment properties, which are usually highly
leveraged, because these changes affect the rate of return earned on the equity invested.
Interest rate increases may lower the price a buyer wants to pay. Yield rates that investors want
tend to move with the overall interest rate in the economy.
•
Property damage risk: Apartment properties can be damaged by natural disasters such as
floods, tornadoes, or hurricanes.
•
Obsolescence risk: Apartment properties can provide services and products that are no longer
wanted or attractive to the public even though they may still be in good working order. Typically
this occurs when a replacement has become available that is superior in one or more aspects.
Trends, styles and market demand drive these values.
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Financial Management Instructor Guide
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The Investment Goals of Owners
Owners will have specific short- and long-term financial objectives. Management companies and
multi-property supervisors help owners achieve these objectives—and are the key connection to the
owner's property goals.
As a starting point, find out what investment goals the owner has for a property or a portfolio of
properties. The most common goals are:
•
Getting a specific rate of return
•
Generating regular cash flow
•
Refinancing
•
Renovating or retrofitting property
•
Acquiring new properties
•
Selling existing ones
Don't overlook the importance of portfolio performance goals. These goals are built on the
performance goals of individual properties, combined to meet the portfolio strategy. Indeed, stronger
assets within a portfolio can carry lower performing assets so that the portfolio goals are still
achieved. The opposite, of course, is also possible.
The Financial Strategy or Roadmap
Once you know the owner's goals, you can then use them to put together a financial strategy or
roadmap to help manage the property or portfolio. Involve the community managers in achieving
those objectives:
•
Keep the owner well informed through detailed financial data, reports, and
narratives. (Narratives explain the reasons for your decisions—why are you proposing a $20
rent increase for next June? Why are landscaping costs going up?)
•
Factor the owner's goals into all key financial activities, such as budgeting.
•
Provide incisive and timely analysis pertaining to financial matters, such as net
operating income performance and actual versus budget results.
•
Take decisive and effective steps to correct financial shortfalls.
•
Recommend strategies and tactics to maximize property performance.
•
Assess portfolio growth regularly.
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Financial Management Instructor Guide
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Communication Tips
Avoid the traps of too little and too much communication. The amount of communication will depend
on the size of the property or the portfolio. Find a balance that works for you and the owner—one
that allows you to meet owner needs, while not overwhelming management administration.
Questions?
Does anyone have any other questions or comments about the basics of investing in apartments?
Transition to the "Mortgages, Financing and Taxes" Section
Now that we've looked at basic financial management responsibilities, let's extend your knowledge on
mortgages, financing and taxes.
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Financial Management Instructor Guide
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3. Mortgages, Financing, and Taxes
(45 minutes)
In this part of the training, the CAPS student will increase his or her financial
literacy by learning both the general and finer points of mortgages, financing,
and taxes—and how they all play critical roles in apartment investments.
Suggested Opening
Let’s take a look at the importance and impact of mortgages, financing terms and taxes that impact
financial management of our portfolios. Let's look at the ground we'll be covering.
Learning Objectives
•
Increase your knowledge relating to mortgages and mortgage financing.
•
Calculate loan-to-value and debt coverage ratios.
•
Describe tax laws and practices affecting apartment investments,
Topics Covered
•
Mortgages and Investors
•
Mortgage Notes
•
Types of Mortgage Loans
•
Mortgage Financing
•
Sources of Mortgage Financing
•
Loans and Property Value
•
Property and Income Taxes
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Financial Management Instructor Guide
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Mortgages and Investors
A mortgage is one of the most common sources of financing real estate investments. It is a lien (or
legal claim) on a property that secures a loan. It also includes a promise (the promissory note) that
the borrower will repay the money according to the terms of the loan.
The Survey of Residential Finance reports that that 86% of all properties of 50 or more units had
mortgages, and almost two-thirds of those had level payment, fixed-rate loans.
Why Investors Choose Mortgages
There are many reasons why investors choose to make use of debt when buying or developing an
apartment property. For example, investors may:
•
Need additional funds to purchase or develop an apartment community
•
Have enough money to buy a property, but take out a loan in order to use the money to
diversify their investments
•
Want to take advantage of the tax benefits that allow them to deduct mortgage interest and
depreciate their assets
Investors also borrow to benefit from financial "leverage"—that is, using borrowed funds to increase
their overall purchasing power. Practically speaking, this means an owner borrows money at a lower
interest rate than what the property itself is expected to yield.
More on Financial Leverage
Leverage can be positive or negative. When the property produces a higher return than the loan's
interest rate, you have positive leverage, and the owner's profit, as well as purchasing power,
increases. Conversely, when the property produces a lower rate of return than the loan's interest
rate, negative leverage occurs, and both the owner's profit and cash flow decreases.
This principle of financial leverage makes real estate different than other types of investments.
Indeed, the investor can borrow a large part of the purchase price or development cost, which is a
benefit not found in investments such as stocks and bonds.
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Financial Management Instructor Guide
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Mortgage Notes
The mortgage note is a document that establishes the existence of the debt between the lender and
the borrower. It outlines the terms under which the loan will be repaid, as well as the rights and
responsibilities of both properties.
Key Provisions of the Mortgage Note
•
Amount borrowed
•
Rate of interest
•
Payment due dates
•
Loan maturity date (that is, the date when all remaining amounts are due)
•
Reference to the real estate providing security for the loan
•
Specific terms relating to defaults, grace periods, and early payments (also known as prepayments)
•
Details on how payments will be applied, usually in this order: (1) to late payments, fees, and
penalties; (2) to interest; and (3) to principal
Clauses to Protect the Lender
Mortgages also include several important clauses to protect the lender. These provisions require the
borrower to:
•
Pay monthly amounts for property insurance, real estate taxes, and if required,
mortgage insurance premiums. This clause exists because unpaid taxes, for example, have a
priority lien over the mortgage, which means the property could be sold at a tax sale to satisfy
the tax lien.
•
Pay all other taxes, assessments, charges, and claims that have priority over the
mortgage. The reason, of course, is to prevent the lender's security interest from being
compromised.
•
Have hazard insurance coverage against fire, flood, hail, smoke, and liability insurance.
•
Keep the property in good condition so as not to diminish the property’s value.
•
Get the lender's approval for any new owner. In most cases, such transfers are not
permitted unless the entire loan balance, plus accrued interest, is paid immediately.
•
Mortgage loans also often include an assignment clause, which allows the lender the right to
sell the note.
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Financial Management Instructor Guide
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Clauses to Protect the Lender (continued)
•
Mortgage loans may require replacement reserve funding on a regular basis to meet
capital improvement needs in the future. Amounts may vary and be a fixed dollar amount, a
percentage of loan value, or other agreed upon criteria
Clauses to Protect the Borrower
•
Some mortgages may include a non-recourse clause, in which the lender agrees not to hold
the borrower personally liable in the event of default. Unsurprisingly, all investors would like to
have a non-recourse clause as part of their loan agreements, but if market credit conditions are
tight, it may be difficult to obtain.
•
Prepayment rights and loan assumption conditions can also be potentially favorable to the
borrower if there are no prepayment or assumption penalties.
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Financial Management Instructor Guide
Page 3-4
Types of Mortgage Loans
There are several types of mortgage loans available to apartment investors. The four most common
types are fixed rate loans, variable rate loans, balloon loans, and bullet loans.
Fixed Rate Loans
Fixed rate mortgage loans have an interest rate that stays the same over the life of the loan, which is
usually 10 to 20 years. Borrowers make level payments—that is, the same amount each month—for
the entire term of the loan. The payments are amortized, or applied to interest and principal (in
that order), until the loan is paid in full. An amortization schedule that shows how the debt will be
reduced is part of the loan document.
Variable Rate Loans
Variable rate mortgage loans—also called an Adjustable Rate Mortgage, or an ARM—have a market
interest rate that adjusts over time.
The interest rate is based on a financial index, such as interest rates on one, three, and five-year
treasury securities, six-month Treasury bills, or the prime-lending rate.
The intervals for rate adjustments can be monthly, quarterly, or annually…to every one, three, or five
years. The rate can be short term for the reset parameters, but payments can be amortized over a
longer period. The loan will have a cap, or limit, that defines the maximum increases in payments or
interest rates allowed. It will also have a floor that specifies the minimum interest rate. Loan
assumption and prepayment rights are also established, and the borrower may have the right to
prepay without penalty.
In short, variable rate mortgages have an initial interest rate, an adjustment index, adjustment
intervals, and limitations or caps.
Balloon Loans
Balloon mortgage loans typically behave like a fixed-rate mortgage for a set number of years, and
then must be paid off in a single “balloon” payment. Initially, there is a constant monthly payment
with a large (balloon) payment at the end of the mortgage term. This balloon payment repays the
outstanding principal balance that was not amortized over the loan term.
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Bullet Loans
Bullet mortgage loans are structured so that the loan principal is paid off in one lump sum at a
specified time. Many of these loans, however, may require monthly payments to pay interest costs.
Typically, borrowers use these loans for interim financing, such as a construction loan to build a new
apartment community or to rehabilitate an existing one. They are typically short-term loans of three
to seven years without a provision for extension. In both of these situations, the property may not
produce income for a significant period of time, so borrowers must take that into account.
Other Types of Loans
•
Rollover loans—a fixed rate loan for a certain number of years when it then must "rollover" to
prevailing interest or paid-off.
•
Takeout loans—permanent financing that "takes out" the construction loan at completion.
•
Gap loans—short term, higher interest loans to cover financing gaps.
•
Wrap loans—junior mortgage(s) that provide additional financing. These loans are sometimes
also called “mezzanine” loans.
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Mortgage Financing
In the world of mortgage financing, both lenders and borrowers need to understand how economic
conditions, inflation, and risk have an impact on the availability and cost of mortgage funds.
Economic Conditions
The market-rate interest on mortgage loans is determined by what lenders will accept for the use of
their money for a period of time and what borrowers will pay to use those funds.
Investors need to earn enough of an interest rate so they have the incentive to divert resources
(their money) from present to future consumption.
The demand for mortgage loans is a function of the demand for apartments, which is driven by
economic conditions such as household formation, job growth, household income, alternative housing
opportunities, and the cost of mortgage credit.
Inflation
It's also necessary to determine how inflation will affect investment returns. The rate of inflation is of
particular importance for those making or purchasing loans made at fixed interest rates over long
time spans. Interest rates need to be high enough to offset the expected loss of purchasing power
due to inflation.
Other Mortgage Loan Risks
•
Default risk refers to the possibility that borrowers will default on their obligation to pay back
the loan. This risk will vary with the nature of the loan, the creditworthiness of the borrower, and
the potential for the property’s value to decline.
•
Interest rate risk is influenced by the rate of household savings, the demand for housing, and
the level of future inflation. It is unanticipated inflation that concerns lenders, because the
interest rate on loans they have made could end up being too low.
•
Legislative or regulatory risk refers to the changed status of the lending environment caused
by new or amended laws at the federal, state, or local level. These laws include: tax law changes
relating to investment property, laws affecting interest rates and disclosures, rent controls, and
building or zoning regulations that could adversely affect the development or renovation of
apartment properties.
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Sources of Mortgage Financing
Mortgage financing may be obtained from numerous sources, from banks to pension funds to
government sources.
Commercial Banks
Commercial banks are the largest financial institutions in the country. They provide both short- and
long-term financing for developing, constructing, and acquiring apartment communities, as well as
other income-producing properties.
Life Insurance Companies
Life insurance companies have a long history of commercial lending, including providing loans for
investing in apartments. Their portfolios include all types of income-producing properties, and they
specialize in providing large amounts of long-term debt for offices, shopping centers, industrial
properties, and apartment communities.
Pension Funds
Pension funds lend money to real estate owners, using the tax-exempt contributions collected from
corporations, labor unions, and government employee benefit accounts.
Not only do they want to make money from these loans, but they also want to protect the
contributions they've accumulated—and have enough liquidity to pay member retirement benefits.
Investment Banks
Although the key role of investment banks is to underwrite and sell initial public stock offerings—and
act as dealmakers for private debt placement and corporate mergers and acquisitions—they’ve
recently become more active in real estate investment and brokerage.
Investment banks provide direct mortgage loans for all types of income-producing property, including
apartments. The financing is often for hard-to-finance deals such as properties with past problems,
properties that are being repositioned, and properties with complicated financing needs.
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Mortgage Brokers
These individuals and companies can find financing for apartment development and acquisition, often
from the same sources listed above. Fees are charged for this service above other loan costs.
Mortgage brokers often serve smaller developers and owners rather than larger developers and
owners.
Private Sources
Individual investors—alone, or in limited partnerships or syndications—can provide financing for
acquiring or developing real estate. Their involvement is often in land acquisition or infrastructure
development, where the loan amounts are smaller and shorter term.
Note: Syndications are a special type of limited partnership that package these types of real estate
investments, making it possible for numerous small investors to own property and obtain tax and
investment benefits. Syndications were a principal source of financing until tax laws changed in 1986;
today, they are much less of a resource.
Other Sources
Besides mortgage brokers, who can help by bringing borrowers and lenders together, there are
individual investors, who can supply equity, interim financing, or seller financing in property
acquisitions.
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Government Financing Resources
The federal government also supplies mortgage loan financing, sometimes directly, but more often as
secondary mortgage sources through government-sponsored enterprises (GSE).
Freddie Mac and Fannie Mae
Government-sponsored enterprises (GSEs)—such as the Federal Home Loan Mortgage Corporation
(FHLMC) (Freddie Mac) or the Federal National Mortgage Association (FNMA) (Fannie Mae)—buy
individual mortgage loans from the original lending source, which gives the original lender more
funds to lend. This form of secondary mortgage funding is mostly associated with loans for singlefamily housing and larger apartment properties.
These GSEs hold mortgages on approximately 30% of the properties with 50 or more units.
The Federal Housing Administration
The Federal Housing Administration (FHA) insures mortgage loans made by lenders, including those
for multifamily apartments. In order to receive FHA insurance, both the property and the borrower
must meet certain requirements relating to items such as cost and profit distribution limits.
If the property is eligible to receive government subsidies, then restrictions relating to resident
income and rents will also apply.
The Low Income Housing Tax Credit
The Low Income Housing Tax Credit (LIHTC) is the main financing source for developing affordable
housing.
The LIHTC program, also known as Section 42 housing, is regulated by the Internal Revenue Service.
It provides tax credits to eligible developers in return for creating affordable housing for individuals
and families with low to moderate incomes. Both income limits and rent restrictions apply to Section
42 housing. Approximately, 90,000 units per year of affordable housing have been provided by this
program since its inception.
In addition, the Department of Agriculture provides financing for the development of affordable
housing in rural areas.
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Loan Analysis
When deciding whether to make a loan, lenders not only assess the creditworthiness of the borrower,
but also use certain financial calculations to evaluate the overall safety of the loan.
Lenders primarily use two calculations—the loan to value ratio (LTV) and the debt coverage ratio
(DCR)—to determine the risk associated with a loan.
The Loan to Value Ratio (LTV)
The loan to value ratio measures risk to the lender by comparing the amount of the loan to the
market value of the property. In short, the lender is trying to determine if the property is worth more
than the loan balance.
The loan to value ratio is expressed as a percentage, and the lower the LTV, the lower the risk to the
lender. The formula is: Loan amount / property value = LTV.
Most lenders typically like to see LTV percentages in the range of 65 to 80%.
Because loan principal payments reduce the outstanding loan balance, the LTV may decline over the
term of the loan. That means the lender’s risk goes down, assuming the property value holds or
increases because of NOI performance. The value of the property, however, is the key factor over
time. If the property’s value is in accelerated decline, the LTV may not matter.
LTV Examples:
If a property has a value of $2,470,300 with a mortgage loan of $2,000,000, its LTV is:
$2,000,000 / $2,470,300 = 0.81 = 81%.
But if that same property had a loan of $1,800,000, the LTV would be:
$1,800,000 / $2,470, 300 = 0.73 = 73%
From the lender's perspective, the lower LTV is a better risk, because the borrower has more
equity in the property. From the borrower's perspective, however, the higher LTV may be
preferable, because more of the property's value has been borrowed, which frees up funding to
use elsewhere.
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The Debt Coverage Ratio (DCR)
Even though it is not directly based on property value, the Debt Coverage Ratio (DCR) is another way
lenders evaluate a loan. The DCR measures the property’s capacity to repay the loan from its NOI.
The formula is: NOI / Annual Debt Service (ADS) = DCR.
The DCR is expressed as a ratio greater or lesser than 1, such as 1.14:1, which means there is $1.14
of income for every $1 of debt. The higher the DCR, the less risk to the lender; the closer the DCR is
to 1, the riskier the loan.
DCR Examples:
If a property has an annual NOI of $708,900 with an annual debt service of $675,000, the DCR
is:
$ 708,900 / $ 675,000 = $1.05 = A ratio of $1.05:1, or $1.05 of income for every dollar of debt.
The same NOI with $600,000 in annual debt service produces a DCR of:
$708,900 / $600,000 = $1.18 = A ratio of $1.18:1.
The lender would prefer the second loan.
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Taxes
Federal, state, and local taxes significantly affect the return on investment available to the owner.
By having a baseline understanding of the tax laws and practices affecting apartments you'll increase
your financial literacy—and gain greater insight in how you can help the owner achieve property or
portfolio goals.
Note: Tax laws are complex, and professional tax advice always needs to come from a tax attorney
or tax accountant. Refrain from giving tax advice if you're not licensed to do so.
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Property Taxes
Property taxes are one of the largest expenses for an apartment community. They also provide the
major source of funds to provide local government services used by apartment communities.
Property taxes—and sometimes water and sewer fees imposed by local government—usually have a
lien priority, even over mortgages. That is, in the event of default, these obligations are paid first.
How Property Taxes Are Determined
Local governments first determine a property's value through the assessment process. Next, the local
taxing authorities establish the property tax rate, and the owner pays property taxes based on that
assessed value.
Owners can appeal their property tax assessments, but not their property tax rates.
Different Types of Values
When evaluating property taxes, consider the different values:
•
Market value is the price potentially paid by a buyer under normal conditions.
•
Assessed value is the basis for taxation, determined by the local taxing authority.
•
In some jurisdictions, there is also a taxable value, which is determined after exemptions or
caps are applied to the assessed value.
Property Tax Appeals
Substantial savings can result from a successful appeal contesting the property's assessed value.
Successful appeals require documentation to support market rents, occupancy levels, and operating
expenses.
Remember: NOI helps determine property value and should be used as part of the appeal process.
Comparable market sales data is also helpful.
The appeal process is different in each state and local jurisdiction. Be aware of any local filing
deadlines.
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Income Taxes
Income taxes are typically paid at both the state and Federal level and are the result of revenue
earned from the property and other sources.
Taxable income is gross income, less the deductions allowed by the IRS. The tax liability is calculated
on this taxable income and is paid with Before Tax Cash Flow (BTCF), the funds available after all
expenses including operating expenses, capital expenditures and debt service are subtracted from
gross operating income (GOI).
Before the Tax Reform Act of 1986, investors paid few, if any, taxes on the returns from their real
estate investments. Passive losses from apartment investments were used to offset active income
from any source. While many of these benefits have been eliminated, there are still tax advantages
to owning real estate.
Tax Benefit #1: Depreciation or Cost Recovery
Under the premise that a property loses its value with age and use, tax laws allow owners a
deduction for cost recovery, also known as depreciation. Owners deduct depreciation—that is, the
"cost" of wear and tear, age, or obsolescence that reduces the value of an asset—in determining
their net taxable income.
Depreciation is the principal source of tax shelter. It is a "paper" expense for owners that can
significantly reduce taxable income, even though the property itself continues to produce positive
cash flow.
Depreciation, however, only temporarily defers tax obligations. Amounts deducted in prior years must
ultimately be recognized when the property sold.
In addition, depreciation for apartments placed in use after 1986 (or purchased after 1986, even if
built earlier) is now calculated on the straight-line basis. In this method, the amount of the deduction
remains the same during each year of the cost recovery period. In the past, an accelerated cost
recovery system was also available—in this system, deductions are greater in the front end of the
investment period and less at the end.
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Tax Benefit #2: The Capital Gains Tax Rate
Apartment properties are treated as "capital" assets for income tax purposes, and owners also pay
capital gains tax on the appreciated value of the property when they sell it. Capital assets can qualify
for special reduced tax rates when they're sold.
The capital gains tax rate influences investor interest in buying and selling apartments. Buyer and
seller motivations are affected in different ways, depending on the legislative process and
Congressional views on whether the rate is too high or too low.
The Concept of Basis
Basis is an important concept to understand as it relates to capital gain tax obligations. It's an
accounting term that defines book value as defined in the IRS tax code. Basis increases with capital
improvements, and decreases with deductions taken for depreciation.
•
Original basis is the cost of new construction or property acquisition, including the purchase
price and the capitalized acquisition costs. It determines the book value for tax purposes.
•
Recoverable basis is the cost of capital improvements only, not the cost of the land. The
original basis must allocate between land and improvements.
•
Adjusted basis adjusts the original basis up or down over the time period the property is owned
to reflect the capital improvements added or the depreciation claimed. The adjusted basis is the
source for the capital gains rate. A taxable gain or loss is determined by the difference between
the net sale price and the adjusted basis.
Tax Law Changes
If tax laws change the tax benefits for property owners, their decisions relating to purchase prices,
financing (how much and what type), and when to sell a property will most likely be affected.
Questions?
Does anyone have any other questions about mortgages, financing, or taxes?
Transition to the "Managing the Budget Process" Section
Now, it's time to talk about budgeting and budgets.
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4. Managing the Budget Process
(45 minutes)
In this part of the training, the CAPS student will learn the what, why, and
how of budgets—and how to lead and coach his or her team of community
managers through this critical financial process.
Suggested Opening
A budget is the most important part of a business or operating plan. It provides the
roadmap for achieving the property’s performance and investment goals. Over time, it
charts property and portfolio direction.
Here's what we'll be covering in this part of the training.
Learning Objectives
•
Identify the purpose and parts of a budget.
•
Describe the financial foundation upon which a budget is based.
•
Find and use the appropriate current and historical sources for budget data.
•
Perform the steps of preparing a budget.
•
Lead and supervise the team of community managers through the budget process.
•
Establish best practices for your budget process, ones that will lead to the creation of timely,
accurate, and complete budgets that are fully aligned with the owner's investment goals.
Topics Covered
•
Budget Fundamentals
•
Budget Goals
•
Sources for Budget Data
•
Preparing the Operating Budget
•
Extrapolation and Annualization
•
Tips for Supervising the Budget Process
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Budget Fundamentals
As a multi-property supervisor, you'll need to fully understand the budget basics, as well as your role
in the process.
Budget Definition
A budget is an itemized summary of estimated income and expenses for a defined period of time,
most often one year. It provides the "window" on property operations and is the principal source of
information relating to a property's financial performance.
There are several types of budgets, each serving a different objective, and each measuring different
things:
•
Lease-up budgets are used when a property is first built—and until it reaches stabilized
occupancy. These budgets reflect non-recurring expenses, such as the extensive marketing
efforts required in a start-up phase, and will change as buildings are delivered for lease.
•
Renovation or modernization budgets are used when a property is undergoing renovation
designed to enhance or restore the physical asset.
•
Operating budgets are used for stable properties, that is, those that are fully leased and
operating under normal conditions.
In this section, we'll focus on the operating budget
The Importance of a Budget
Budgets monitor a property’s performance. By regularly comparing actual income and expenses to
the budget, you’ll be able to identify income shortfalls and expenses overruns, and then take
corrective measures.
You may also use a budget to evaluate the performance of personnel. Budgets set a level of
expectation based on an established set of assumptions. As the owner evaluates the assumptions,
the management team's performance is being measured. In addition, community managers are
responsible for collecting income, controlling expenses, and meeting the financial goals set for the
property. The team's ability to fulfill those responsibilities will have a direct impact on how
performance is evaluated.
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Budget Timing
Budgets are produced generally once a year. The fiscal year for many apartment properties usually
begins on January 1 and matches the calendar year. The budgeting process, however, should begin
as early as August or September in the prior year.
Sometimes the owner may want budget estimates for more than one year, perhaps for three to five
years in the future. These projections can help an owner decide whether to sell or refinance, and
when to do so.
Portfolio Budgets
When creating budgets for a portfolio, you may factor in different individual property budget goals
because of the portfolio effect. For example, you may be more aggressive on market rent goals on
one property and less so on another, based on the fact that these goals are part of a total portfolio
package.
This is particularly true for portfolios owned by the same entity.
Your Role in Budget Production
Multi-property supervisors and owners use budgets to plan and monitor financial activities and track
the performance of a property. As you work with the team to create the budget, you’ll need to be a
good leader. That means you should communicate clear expectations about budget goals, make sure
the team has the data and resources they need to prepare realistic and detailed budgets, challenge
the numbers when necessary, and recognize progress and hard work.
It’s best to have community managers initially prepare the budgets, because they:
•
Know their properties
•
Have last year’s budget figures and notes
•
Can contact vendors and suppliers to get the best information on pricing
•
Know the market trends
•
Are more closely involved with the property
Even though community managers can supply much of the detail, you need to work closely with
them. The budget is simply too important to manage from a distance.
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Sample Budget
Sample Property
OPERATING BUDGET
Revenues
Gross Potential Rent
$2,865,235
Rent Revenue Collected
$2,487,605
Losses to Vacancy
$220,981
Collection Losses
$19,386
Losses to Concessions
$137,262
Other Revenue
$203,156
Total Revenue
$2,690,762
Operating Expenses
Payroll
$312,664
Marketing
$54,414
General & Administrative
$62,087
Total Net Utilities
$150,219
Contract Services
$60,708
Property Insurance
$109,451
Taxes
$376,247
Management Fees
$74,214
Maintenance
$78,414
Total Operating Expenses
$1,278,417
Net Operating Income
$1,412,344
Capital Expenditures
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$184,560
Budget Goals
A budget begins with the owner's operational and financial goals. For example, does the owner want
to:
•
Receive a specific rate of return?
•
Generate cash flow?
•
Renovate or upgrade a property?
•
Sell a property?
Before beginning to prepare the annual operating budget, you’ll need to identify and understand the
owner’s investment goals for the property. Often, owners will give you a head start by articulating
specific budget goals for revenue and expenses. For example, you may be given budget goals of
93% occupancy, a 36% lease renewal rate, and an expense increase of 2%.
But in some cases, you may need to talk with the owner to determine his or her budget targets. The
most realistic budget goals are based on economic conditions in the marketplace, and you may need
to help the owner understand these conditions and how they relate to the proposed goals.
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Sources for Budget Data
When you and the property management team use historical and current budget data from reliable
sources, it results in a more accurate and realistic budget, one with the greatest potential to meet the
property’s financial objectives.
Revenue and Expense Data
The sources for obtaining historical information for revenue and expense data include:
•
The actual income and expenses from the property itself, from several prior years
•
The previous year's budget and actual results, including any notes used in budget
preparation
•
Other portfolio properties in the same market of similar size, age, and condition
•
Local multifamily sales data that may contain revenue and expense information on recently
sold properties
•
Occupancy trends in the marketplace
•
The current National Apartment Association Income and Expense Survey (www.naahq.org)
•
The Institute of Real Estate Management (www.irem.org)
•
Current service contracts (for potential cost increases)
•
Vendors and contractors (for expected labor and material costs)
•
Utility companies (for possible rate increases)
•
Taxing authorities (for changes in assessment or tax rates)
•
Inflation data (which clearly affects costs and expenses)
"Zero-Based" Budgeting Method
Sometimes, budgets are prepared using the less-preferred "zero-based" method, which makes little
use of past actual results, but uses assumptions based on current market conditions instead.
Use this method only when the historical information for the property is unavailable or less than
accurate—or the property is brand new.
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Preparing the Operating Budget
Once you know the owner's budget goals—and you've gathered the necessary income and expense
data—you and the community managers will prepare the annual operating budget for each property.
This budget forecasts income and expenses for an entire year, which usually matches the calendar
year. All projections must be based on sound and reasonable assumptions that you can clearly
explain—in fact, most owners will require you to provide these explanations in writing when you
submit the budget for approval.
Work closely with the community managers throughout the entire budget process. You should be
able to rely on them for much of the current information about market conditions, the competition,
and how the property is performing. But you need to know these things as well.
Many management companies use the budget template provided by their property management
software. Others use a spreadsheet and may pre-load estimates for areas over which on-site
operations have little control, i.e. taxes, insurance, employee benefit loads.
Step 1: Forecast Income
Begin by using last year’s income as a starting point. Evaluate rental income performance relative to
budget and year over year growth. Can you project the same, more, or less and why? Factor in
seasonal changes, renewal schedules, and occupancy shifts, such as summer move-outs for student
properties.
In addition, consider the impact of any special or one-time events, as well as the:
•
Economy
•
Local market conditions
•
Competitive environment
•
Expectations for growth
The major source of income, of course, is rental income. The key concept to remember here is that
rental income is a function of rental rates, occupancy levels, and collection percentages. Therefore, to
determine anticipated income, consider occupancy trends and pricing strategies. Don’t just add a
percentage increase “across the board”—you need to justify every income number.
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Step 2: Project anticipated expenses.
These include the normal operating expenses: payroll, marketing and advertising, maintenance and
repair, utilities, insurance, property taxes, and so on.
To come up with a solid projection for the year's expenses:
•
Review the operating history of the property, the prior year's budget, and the actual
results year-to-date, but consider current economic trends and the age of the property.
•
Make good use of historical operating data going back several years.
•
Look for expenses that may not be needed in the current budget year because they
were completed in a prior year or were one-time costs. This would also include expenses for
uninsured losses associated with an insurance settlement.
•
Anticipate future expenses that haven’t been part of a previous budget.
•
Factor in occupancy projections when budgeting utility costs. When units are occupied,
residents, and not the property, may be paying the charges.
Allow budgeting software or a spreadsheet program to help simplify the process by using “locked in”
numbers provided by management and recurring expenses. (Be sure to include a narrative about
your assumptions, including why and when, so you can support the projections.)
Check to see what budget numbers the management company may provide. Often, these include as
tax estimates, insurance costs, and management and accounting fees.
Step 3: Consider Using “What if…?” scenarios.
To find the best budget solution, take advantage of your property management software. Many of
these packages give you an opportunity to try out different budget assumptions and answer “What
if…?” questions before you put the budget to rest.
For example, you could try out a "what if" scenario with rent increases budgeted at $20 per unit,
rather than $10.
Doing these "what if" scenarios is also called a sensitivity analysis.
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Two "How-to" Techniques:
Extrapolation and Annualization
Extrapolation and annualization are two methods to help you come up with realistic budget numbers.
Extrapolation
You’ll often need to use extrapolation to forecast figures for your budget. This is where you estimate
a number based on information you already know. For example, you might use data you’ve gathered
for several months to extrapolate expenses for an entire year. However, before you use known data
for extrapolation, check that the numbers aren’t skewed too high or too low for some reason, and
that you take seasonal changes into consideration.
Annualization
Annualizing a number is much the same as extrapolating.
Example: The electricity bill has been $500 in the months of January, February, and March. To
annualize the electricity expense for the year, just multiply $500 by 12 months. That gives you a
total annual expense of $6,000.
Be careful, though. If the electricity includes the heat—the cost of which can vary tremendously—use
the historical data for the same months in the prior year instead.
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Tips for Supervising the Budget Process
As a multi-property supervisor, you'll need to lead your team through the budget process. Here are
some pragmatic tips to get you started.
•
Start early. Create a timetable with due dates so that community managers have enough leadtime to complete and submit their budgets. Start preparing budget projections several months
before they’re due. This will give you time to think about the business, conduct research, and
consult with contractors and vendors. And, if you’re planning a major repair or installment in the
coming year, you’ll have time to request multiple bids and weigh the expense against expected
revenue. (Remember, however, that the earlier the start, the fewer months of actual results from
the current year will be available,)
•
Ask property personnel to help develop realistic projections. You and the community
managers will work together to develop the budget. The team is an excellent source of
information, can provide details, and can document financial assumptions. The Service Manager
or Maintenance Supervisor should also be part of the budget development process.
•
Describe the specific supporting documentation that must accompany budgets.
Develop every budget category independently, and avoid flat percentage changes. Require
details on the assumptions and data used in the projections. Software programs can take your
assumptions and use them to project results. This will help you understand the expenses and
revenue expected for the next year.
•
Supply your team with the right tools. Distribute copies of previous operating statements
and prior years' budget performance compared to actual results. Review and analyze existing
service contracts for potential cost increases. Provide a summary of personnel costs, particularly
the pay and benefit increases to be budgeted.
•
Think about holding a budget workshop. Many property supervisors kick off the budget
season with a workshop. At these events, managers from all the properties meet together and
review the budget format or template. Using current year-to-date actuals and budget
performance, the group focuses on projections for major income and expense categories, known
adjustments needed for the coming year, and other budget assumptions, provided by human
resources, risk management, and asset management personnel in the management company for
items such as payroll and benefits, insurance costs, and capital improvement plans.
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Tips (continued)
•
Distribute copies of the budget. After the property management software has produced the
proposed final budget, give each manager a copy. Then, after the owner has approved the
budget, give each manager the revised final budget, noting the changes that have occurred and
the performance expectations that have resulted.
Questions?
Does anyone have any other questions or comments about the managing the budget process?
Transition to the "Getting to the Bottom Line" Section
Let's now continue to by exploring ways that you can add value to the bottom line.
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5. Getting to the Bottom Line
(75 minutes)
In this part of the training, participants will learn more about the concepts
that form the basis of financial literacy in the multifamily housing industry.
Suggested Opening
In order to be a good steward of the owner's properties, you'll need to fully understand certain
financial fundamentals and be able to apply them to improve the financial position of the properties
you supervise.
Let's see what's on deck for the next hour or so.
Learning Objectives
•
Describe and differentiate the two accounting methods used in the apartment industry.
•
Identify the key sources for operating income.
•
Identify the key operating expenses.
•
Use the income statement and balance sheet to evaluate financial health.
•
Calculate net operating income (NOI) and cash flow for a property.
•
Describe the difference between NOI and cash flow.
•
Identify, calculate, and use other financial measures, such as the Operating Expense Ratio, to
measure financial soundness.
Topics Covered
•
Accounting versus Bookkeeping
•
The Income Statement and Balance Sheet
•
Calculating NOI
•
Cash Flow
•
Other Financial Calculations
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Page 5-1
Accounting vs. Bookkeeping
Accounting and bookkeeping both reflect—and relate to—a property's financial position, but each
discipline provides distinct and different perspectives.
•
Accounting deals with the entire system for providing financial information—from the
design of the systems through its operation to interpretation of the data.
•
Bookkeeping is the routine, day-to-day recordkeeping that’s a necessary part of
accounting.
An accountant focuses on strategy, seeing the relationships in the financial numbers and how those
numbers affect the owner and the property. A bookkeeper, on the other hand, has a more functional
role, entering and keeping track of the numbers, such as the rent collected and the expenses
incurred.
Accrual vs. Cash Basis Accounting
There are two methods for recording financial transactions:
•
Accrual basis accounting—This method records all income and expenses in the period
they are earned or incurred, regardless of when they are actually received or paid. Accrualbased accounting gives a more realistic and controlled picture of net operating income in the
period, and is the most common type of accounting used in multifamily residential
management.
•
Cash basis accounting—This method records all income and expenses when they are
actually received or paid, which causes widely fluctuating numbers. Therefore, cash basis
accounting may give a distorted picture of profitability at a given point in time. Consider this:
is it more important to know when rent is incurred, or just noting the cash received when it
was paid?
The management agreement will usually specify the type of accounting method the owner requires.
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Operating Income
Operating income (also known as operating revenue) is the money generated by a property. There
are two distinctions to be made regarding gross operating income and net operating income:
•
Gross operating income is all the money a property takes in, including rent and other
income
•
Net operating income is gross income less operating expenses.
Each property needs to generate and collect as much income as possible. Rent is the largest source
of property income, although additional income (also known as "other income," "miscellaneous
income," or "ancillary income") may be collected through parking fees, application and administrative
fees, lease term fees, pet fees, deposit forfeitures, and laundry, vending, cable, and amenity charges.
Service fees, upgrade charges, and concierge-type services add valuable income, but can fluctuate
based on demand. These include revenue share opportunities with outside providers such as food
delivery firms and pet health and grooming services.
Other income does not typically include utility reimbursements, which are usually deducted from the
gross utility expense.
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Financial Management Instructor Guide
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Operating Expenses
There are two types of operating expenses to identify on the income (or operating) statement: fixed
expenses and variable expenses.
Fixed Expenses
Fixed expenses don’t vary with the occupancy level of the property. These include:
•
Property taxes: Property taxes are usually based on the assessed value of a property and
the local tax rate (millage rate).
•
Insurance payments: Properties will have expenses for various types of insurance, such as
liability, casualty, and automobile insurance. (Worker's compensation insurance, however, is
a payroll cost.) Other than annual cost increases and coverage changes, insurance is mostly
a fixed cost.
Variable Expenses
Variable expenses, also called controllable expenses, are costs that vary as conditions change.
Many variable expenses are associated with occupancy, and with effective management, most can be
controlled. Examples include:
•
Utilities: When residents pay for utilities, the property saves money. Even if individual
metering isn't available, you can use sub-metering, or a Resident Utility Billing System (or
RUBS) to set up a program where residents pay for utilities. Typically, owners pay the utility
costs only for common areas and vacant units.
•
Contract Services: These include landscape maintenance, exterminating services, trash
removal, snow removal, and other service costs typically provided on a contract basis.
•
Marketing: Marketing costs include advertising, referral fees, collateral materials, locator
fees, model costs, and promotions designed to bring traffic to the property, increase leases,
and promote name recognition for the property.
•
Management fees: These fees are paid to the company or agent who manages the
property. The fees earned are usually a percent of the total revenue collected or a negotiated
fixed rate, such as a monthly amount.
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Variable Expenses (continued)
•
Repair and maintenance costs: This broad category includes costs for maintaining the
interior and exterior of buildings, as well as preventive maintenance and repair for the
plumbing, electrical, and HVAC systems. And while the "make-ready" costs associated with
move-outs are included here, non-recurring capital expenses, such as replacing a roof, are
not.
•
Administrative costs: These include expenses associated with operating the management
and leasing offices, such as telephone, computer, and software costs.
•
Salary and personnel costs: These include salaries and wages for onsite employees, as
well as employee apartment allowances, payroll taxes, group health and life insurance,
workers' compensation insurance, bonuses and lease commissions, and employer 401(k) or
retirement contributions.
Thanks to property management software, income and operating expenses can also be easily
presented on a per square foot basis, per unit basis, or as a percent of Gross Potential Rent (GPR).
Industry income and expense comparisons also use these measurements of performance.
The Largest Expense Categories
The two largest expense categories as a percent of Gross Potential Rent usually are property taxes
and salaries and personnel costs. It varies from property to property.
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The Income Statement
A financial analysis of a property answers two important questions:
•
How well has the property performed over a given period of time?
•
Where does the property stand at a given point in time?
The income statement answers the first question; the balance sheet answers the latter.
How an Income Statement Measures Performance
The income statement, sometimes called the operating statement or profit and loss statement,
measures performance over a certain time period—a month, a quarter, or annually. Most often, the
income statement reflects both month and year-to-date (YTD) results.
This statement compares the income and expenses over that time period to the budget for the same
period. It shows the difference or variance between the budget and the actual numbers, which is the
property's Net Operating Income (NOI), or cash flow, depending on the detail provided in the
statement. It may also reflect performance compared to a prior time period (also known as "same
store"), such as "same month last year" or "YTD last year."
The income statement will also include a year-to-date listing of actual versus budget activity and the
variances between actual and budget, expressed in dollars or as a favorable or unfavorable
percentage.
The Key Indicator of Financial Health
The income statement is the key indicator of a property’s financial position and should be used to
define: progress, trends, the relationship to the competitive marketplace, and the continuing
ownership strategy. An income statement is used to make comparisons, set goals, and exercise
better control over a property.
Sample Income Statement
You can find an example of a sample income statement in the Appendix.
Leader’s Instructions:
Introduce the sample portfolio financial statement you will use as you examine
financial statements
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The Balance Sheet
The balance sheet shows the financial status of a property at a moment in time. It is more a tool for
monthly, quarterly, or annual use, rather than a day-to-day management tool. Usually a year-end
statement, it consists of two sections that “balance” each other: assets and liabilities:
•
Assets are the cash on hand, the things the property owns (such as the property itself and
equipment), and the accounts receivable.
•
Liabilities are the debts and obligations owed, such as loans. They also include the
accounts payable at the property.
Assets and liabilities are typically separated into short-term (or current) and long-term "categories."
The property's mortgage debt is usually the largest long-term obligation.
Working capital is the difference between short-term assets and short-term liabilities.
In addition, a balance sheet also shows owner equity, which is the value of the property when
long-term liabilities are subtracted from long-term assets. When an owner first acquires or develops a
property, equity refers to the funds the owner invests; it can be thought of as the "down payment."
Over time, however, the owner's equity position can change as mortgage obligations are reduced or
as property value increases or decreases.
Sample Balance Sheet
You can find an example of a sample balance sheet in the Appendix.
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Financial Management Instructor Guide
Page 5-7
Calculating Net Operating Income (NOI)
As a multi-property supervisor, you need to understand how net operating income (NOI) is calculated
and what it tells you about a property or portfolio performance.
Net operating income (NOI) is gross operating income (GOI)—the total income from the property—
less operating expenses (OE).
The income statement uses this formula to express, in detail, the net operating income for the
property: GPR - VAC = EGI + OI = GOI – OE = NOI.
Gross Potential Rent (GPR)
Gross potential rent, or GPR, is the total rent that would be generated from the property if all the
units were occupied. GPR combines the sum of occupied units at current lease rates, plus vacant
units at market rates.
All income and expenses are measured and evaluated as a percent of GPR.
Example: A 250-unit apartment building has 230 units occupied at an average occupied monthly
lease rent of $759. Let’s also say that the average market rate for the 20 vacant units is $810.
What is the gross potential rent?
230 x $759 =
$174,570
20 x $810 =
$ 16,200
GPR =
$190,770
GPR and Market Rent
Gross potential rent is different from market rent, sometimes called scheduled rent, which is the total
annual income you’d receive if 100% of all units were occupied and paying market rents. Increases
or decreases in market rent are a response to market conditions.
If market rent appears on the income statement, which it often does, the market rent at month end
is reported.
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Financial Management Instructor Guide
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Loss/Gain to Lease
Since all units are not paying market rent because of the lease rent each resident pays at the time of
move-in, there is always a variance from market rent that is called loss/gain to lease. As market rents
go up, loss to lease increases; as market rents are lowered, the loss to lease is reduced.
There will always be a gap between market rent and gross potential rent. In a strong market, it
reflects the upward movement of market rents.
Vacancy, Concessions, and Collection Loss (VAC)
Vacancy, concessions, and collection loss, or VAC, includes the total value of rent loss from vacant
units, cost of concessions given, collection loss as a result of writing off bad debt, and the total
amount of rent loss from any non-revenue units.
Non-revenue units include the unit(s) used for office space, models, or employee rent-free units.
(Employee discounted rent units, however, are usually part of the loss to lease calculation.) To
determine the rent loss from these non-revenue units, use the market rate for the type of unit. For
example, if the market rent on a two-bedroom model unit is $875, the annual rent loss is $10,500
($875 x 12).
A generally accepted standard for uncollectible or bad debt loss is an amount equal to no more than
1 to 2% of gross potential rent. However, you should consult your management company’s senior
management, or the owner's representative, to learn what percent is acceptable for your properties.
Total vacancy, concession, and collection loss (VAC) was almost 14% of the gross potential rent
collected in the 2010 NAA Income and Expense Survey.
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Financial Management Instructor Guide
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Effective Gross Income (EGI)
Effective gross income (EGI) is the amount of gross potential rent (GPR) less vacancy, concession,
and collection loss (VAC). The formula is: GPR - VAC = EGI.
Effective gross income is also called net rental income or total rental income. It represents only rental
income.
Other Income (OI)
Other income (OI) is any money collected for items other than rent. That includes collections from
laundry facilities on site, vending, cable, deposit forfeitures, parking, amenity charges, late fees, pet
fees, application fees, administrative fees, and lease premium fees.
Other income may add up to an additional 5 to 10% of the total property income, so it is clearly
worth the focus of the property supervisor and the on-site staff. It's a valuable contribution to total
revenue. In the 2010 NAA Income and Expense Survey, this amount was 7.1% of GPR.
Gross Operating Income (GOI)
Gross operating income (GOI) is the total amount of money the property has to use to pay expenses.
It’s also known as total revenue or total income.
GOI is the sum of the Effective Gross Income (EGI) and other income (OI). Thus, expressed as a
formula, it is: EGI + OI = GOI.
Example: Let's say the Effective Gross Income is $1,136,886 and Other Income is $55,000. The
GOI is: $1,136,886 + $55,000 = $1,191,886.
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Financial Management Instructor Guide
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Operating Expenses (OE)
Operating Expenses (OE) includes all expenses, fixed and variable, that are paid to manage the
property. Typical expense categories are:
•
Salary and personnel costs
•
Insurance
•
Taxes
•
Utilities
•
Management fees
•
Administrative costs
•
Marketing
•
Contract services
•
Repairs and maintenance
Note: Capital expenses and replacement reserve payments (if required) are not typically considered
operating costs.
Net Operating Income (NOI)
Net operating income (NOI) is gross operating income (GOI) less operating expenses (OE). The
formula is: GOI - OE = NOI.
Example: Let's say Gross Operating Income is $1,191,886 and the Operating Expenses are
$482,300. The NOI is: $1,191,886 - $482,300 = $709,586.
To calculate per unit income and expense…
Divide the annual total income or total expense by the total number of units. If there were 230 units
in the property above, per unit income would be $5,182 and per unit expenses would be $2,097. It’s
an additional way of looking at the numbers.
Per square foot calculations…
Divide the total income or total expense by the total square footage of all the apartment units on the
property. Be sure you know exactly what areas are to be included. Some companies may include the
outdoor patio and balcony space when marketing units, while others may not. Generally, square
footage is measured as net rentable climate-controlled space.
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Financial Management Instructor Guide
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Cash Flow
A cash flow statement is another measure used to show financial performance. Statements can
include before tax cash flow or after tax cash flow.
Cash flow is similar to net operating income except that you also subtract capital expenses, (including
replacement reserve payments), and debt service.
•
Positive cash flow means there’s a positive amount of money remaining.
•
Negative cash flow means total expenses are greater than income and the owner will need
to put money into the property.
As a multi-property supervisor, it’s more likely that you’ll use NOI as the property performance
measurement rather than cash flow. NOI is a more accurate measure, since you may not have much
control over capital expense decisions and debt service terms, both of which are included in
calculating cash flow.
Still, as the steward of the owner's financial resources, you do need to know the cash flow position of
the property. While it may not reflect the performance of the property or the management team, it
will indicate how the owner's investment is performing.
The Cash Flow Calculation
Cash flow is the money remaining after all sources of income have been collected and operating
expenses, capital expenses (CE) including replacement reserve payments, and debt service (DS) have
been paid.
To calculate the cash flow, use the formula: NOI - CE – DS = Cash Flow.
Example: Use the following data to figure the cash flow:
NOI
$ 709,586
CE
$ 112,000
DS
$ 424,373
Therefore, the cash flow is:
$709,586 (NOI) - $112,000 (CE) - $424,373 (DS) = $173,213 Cash Flow
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Cash Flow Statement
The cash flow statement shows how capital expenses and debt service reduce net operating income.
Sample Property
CASH FLOW STATEMENT (Completed)
(Annual Dollars)
Revenues:
Gross Potential Rent
4,892,000
Less: Vacancy, Concession & Collection Loss
(678,000)
Effective Gross Income
4,214,000
Other income
145,000
Gross Operating Income
4,359,000
Operating Expenses:
Administrative & Management
183,900 (includes management fees)
Marketing
101,000
Repairs & Maintenance
164,000 (includes make ready costs)
Personnel
365,000
Utilities
133,000
Taxes & Insurance
779,000
Contract Services
77,900 (includes professional fees)
Total Operating Expenses
1,803,800
Net Operating Income
2,555,200
Capital Expenditures
475,000
Debt Service
1,278,000
CASH FLOW
802,200
Note: This particular example shows the cash flow for a property before income taxes have been
paid. This cash flow number is also called before tax cash flow, or BTCF.
As a multi-property supervisor, you're not likely to receive the after-tax cash flow statements
prepared by tax accountants, however, since they may contain sensitive information about an
owner's personal finances and income tax obligations.
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Capital Expenses and Debt Service
Capital expenses (including replacement reserve accounts) and debt service are the two elements
that are subtracted from NOI to determine cash flow.
Capital Expenses
Capital expenses or capital expenditures (CE) are large property expenditures. They include nonrecurring capital expenses such as replacing a roof, adding a swimming pool, and otherwise
improving the property in ways intended to add to its life.
Capital expenses have a “useful economic life.” They are depreciated over this "expected" life rather
than in a single year.
Example: Let’s say you purchased $10,000 of new appliances. If appliances have a life
expectancy of 10 years, they’d depreciate $1,000 each year for 10 years. (A tax advisor will have
information about how long common capital expenses can be depreciated and what is
depreciable.)
Owners, tax accountants—and ultimately, the Internal Revenue Service—determine whether a capital
expense is eligible for depreciation.
More on Capital Expenses
•
Capital expenses are usually depreciated over several years, which make them different
from the fixed and variable expenses that appear on income statements.
•
Different companies may use different depreciation schedules. These are based on the
age of the property, when it was acquired, and what the company classifies as a capital
expenditure.
•
Capital expenses are not used to calculate NOI. Sometimes companies may include a lineitem in budgets and income statements that notes NOI after capital expenditures have been
subtracted, but before debt service has.
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Financial Management Instructor Guide
Page 5-14
Replacement Reserve Accounts (RRA)
Some lenders may require that property owners set up a replacement reserve account (RRA) and
make certain minimum payments. An RRA is money set aside in a special account for the
replacement costs of items that wear out and must be replaced periodically, such as carpeting,
roofing, boilers, repaving parking lots, and exterior painting.
In some cases, a “useful life” for each item is determined and the cost of replacement is divided by
the number of years an item should last, thereby establishing an amount to use for reserves. In other
cases, a percentage of the mortgage or net operating income is used to determine how much money
should be allocated to the replacement reserve account.
RRAs are most prevalent with HUD-assisted or HUD-insured properties, but are becoming extremely
common with conventionally financed assets. Often a special RRA is established and funded at the
inception of the loan for specific uses and includes items that must be completed within a specified
time frame.
Debt Service
Debt service (DS) is the mortgage or loan payment (principal plus interest) if a loan or mortgage was
used to buy, build, or refinance the property. Most fixed-rate loans have the same amount due
monthly.
Debt service is not included when calculating NOI. It is a separate category below the NOI line on the
income statement.
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Financial Management Instructor Guide
Page 5-15
Other Financial Calculations
Along with NOI and cash flow, other financial calculations can help you understand more about a
property's financial performance. These calculations are the:
•
Break-even Occupancy Percentage
•
Break-even Rent per Square Foot
•
Economic Occupancy Percentage
•
Rate of Return on Investment
•
Cash-on-Cash Return
•
Operating Expense Ratio
•
Loss/Gain to Lease
Break-even Occupancy Percentage
Break-even occupancy represents the occupancy level needed to produce enough income to pay the
operating expenses and debt service of a property—the minimal requirements to keep a property
operating.
The formula to determine the break-even occupancy percentage is: (OE + DS)/GOI.
Example: If the Operating Expenses are $482,300, Debt Service is $424,373 and Gross Operating
Income is $1,191,886, the break-even occupancy ratio is: (OE + DS)/GOI, which equals: 0.76 or 76%.
Therefore, the property will need a 76% occupancy rate in order to break even.
Break-even Rent per Square Foot
The break-even rent per square foot calculates the rent per square foot needed to pay the operating
expenses and debt service of your property.
The formula for break-even rent per square foot is: (OE + DS)/total square feet.
Example: If the Operating Expenses are $482,300, Debt Service is $424,373 and square footage is
125,280 square feet, the break-even rent per square foot is: (OE + DS)/total square feet), which
equals 7.24.
Therefore, the property will need to annually collect $7.24 per square foot in rent in order to break
even.
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Financial Management Instructor Guide
Page 5-16
Economic Occupancy Percentage
When it comes to overall property performance, the economic occupancy percentage is a better
indicator than physical occupancy. Economic occupancy reflects only the actual revenue being
realized.
Economic occupancy takes into account the discounted rent negotiated with the lease, model units,
units being made ready for lease, and free employee units. Physical occupancy, however, measures
occupied units, some of which may not be paying rent—or are paying varying rent amounts based on
lease terms. Therefore, it is accounting for this foregone revenue that makes economic occupancy or
economic vacancy the more useful vacancy measure for apartment owners.
Vacant units are included in both physical and economic occupancy calculations. Even when all
available units are 100% occupied, it doesn't mean the community is achieving all its potential
revenue.
Indeed, the difference between physical and economic occupancy/vacancy can be a measure of
management efficiency, as well as one of overall market conditions. As physical vacancy rates
decline, the pricing power of the community will increase and effective rent will move upward.
The formula for the economic occupancy percentage is EGI/GPR.
Example: If the current month's EGI is 198,000, and the GPR is $250,000, then the economic
occupancy percentage is .79, or 79%.
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Financial Management Instructor Guide
Page 5-17
Rate of Return on Investment (ROI)
Simply stated, rate of return is the percentage of return—or yield—on the total amount invested for a
given time period. It is the ratio of NOI to the total investment. And while it measures the financial
performance of the investment, it does not take into account the time value of money—that a dollar
today is worth more than a dollar tomorrow.
It is calculated as follows: NOI/Equity Investment = ROI.
Example: If a property generates $14,300 in NOI to an investor with equity or /investment of
$125,000, the ROI is $14,300/$125,000 or 11.4%.
The return on investment is an important number for the owner—especially if the property is held as
a source of regular income. The equity or investment in a property can change over time as
improvements are made and amortization occurs.
Note: Equity investment is not the total value of the property—it is the amount of money that an
investor has put into the investment. Be aware of the wishes of the owner as they often seek to see
the equity invested number change, representing the amount of the debt service that is allocated to
principal and any time that the owner has to contribute cash to the deal.
Cash-on-Cash Return
Cash-on-cash return measures the cash flow received against the original cash invested. It’s a useful
method of measuring return on investment for financial institutions and investors interested in
purchasing or evaluating a property.
The formula for cash-on-cash return is: Cash Flow / Total Initial Investment.
Example: If a property generated annual cash flow of $52,500, and the down payment (initial
investment) on a $1,750,000 investment was $350,000, the cash-on-cash return would be .15 or
15%. ($52,500 / $350,000).
In figuring a cash-on-cash return, the original investment amount—the down payment—is always the
same. The equity invested can change over time based on additional capital investment or
withdrawal by partners. More or less cash flow over time obviously changes based on investment
performance.
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Financial Management Instructor Guide
Page 5-18
Operating Expense Ratio
The operating expense ratio (also known as expense-to-income ratio) is another tool to measure how
well a property is managed. An owner may compare the operating expense ratio for your properties
to those of other properties in the area—or national averages—to evaluate your success.
The operating expense ratio calculates the percentage of the gross potential rent that’s used to pay
operating expenses. The ratio can be affected by property:
•
Age (older properties usually have higher operating expenses)
•
Location
•
Owner investment strategy
•
Type (high rise, garden apartments)
•
Operating expenses included in the calculation
Concessions may be classified as an expense rather than a deduction to rental income. Resident
utility reimbursements are sometimes counted as other income, or may be offsets to utility expenses
like gas, electric, and water.
The formula for calculating the operating expense ratio is: OE/GPR = operating expense ratio.
Example: Here’s an example of calculating the operating expense ratio:
Operating Expenses (OE) =
$1,325,743
Gross Potential Rent (GPR) =
$3,410,700
OE/GPR = 0.389 = 38.9% Operating Expense Ratio
In 2010, the National Apartment Association Income and Expense survey showed a national average
operating expense ratio (operating expenses as a percentage of GPR) of 39.8% for 2009 data.
Operating expenses in 2010 rose to $4,308 per unit from $4,196 per unit in 2007 for individually
metered garden properties. (You can find the most recent data from the NAA's "2010 Survey of
Operating Income and Expenses in Rental Apartment Properties" at the NAA website:
www.naahq.org.)
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Loss/Gain to Lease
For a detailed explanation of loss/gain to lease, refer to the "Calculating NOI" section, page 3-8.
The formula is: (Annual market rent less gross potential rent) / annual market rent.
You can also use monthly numbers in the same formula.
Example: A property with an annual market rent of $1,375,025 and a GPR of $1,249,325 has a
loss to lease of $125,700. Expressed as a percent, it is $125,700 / $1,375,025 = .091 or 9.1%
loss to lease.
Questions?
Does anyone have any other thoughts or questions about the getting to the bottom line? Or any of
the calculations or formulas we've discussed?
Transition to the "Analyzing Monthly Financial Statements" Section
Let's take it a step further now by talking about analyzing those statements relative to budget and
trends.
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6. Analyzing Financial Statements
(30 minutes)
In this part of the training, participants will learn how to read, interpret, and
use the monthly financial statements that measure the financial and
operational health of the business—and see how they can be used to improve
property operations.
Suggested Opening
Financial reports and statements are a good starting point to help you understand how your
properties are performing.
Learning Objectives
•
Identify the uses of the chart of accounts and general ledger.
•
Analyze and explain monthly budget variances.
•
Perform monthly budget re-forecasting based on budget variances and trends.
•
Use financial statements as a data point for discerning and improving team performance.
Topics Covered
•
The Chart of Accounts and General Ledger
•
Budget Variances, Budget Re-forecasting, and Trends
•
Financial Reports and Team Performance
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Page 6-1
The Chart of Accounts and General Ledger
Financial statements are based on the chart of accounts and general ledger.
Chart of Accounts
The chart of accounts provides the basis for budgeting, variance reporting, journal entries, and
financial statements. Every company uses at least one chart. Invoices are coded using the
appropriate chart of accounts. Often, the property manager does the coding and submits the coded
invoices in a batch. Approval limits may apply and you will have to approve certain invoices.
The chart of accounts lists account codes for each income and expense item, and defines what
should be posted for each account. By providing a framework for these categories, a management
company can identify the sources of its revenue and expenses on the property.
For example, accounts for Marketing and Promotion expenses may include smaller sub-accounts such
as advertising, corporate outreach, flags and banners, apartment guides, locator and referral fees,
and internet advertising.
Rental income and other income accounts are generally assigned chart of account numbers, too,
usually by the rent roll software system.
A portfolio of properties may use one chart of accounts, or different ones, depending on owner entity
and lender requirements. You'll need to be fluent in all the charts of accounts your properties my use.
Technology is providing significant support in this very manual process. Electronic coding and invoice
submission and even posting to the property management general ledger are now a reality.
Sample Chart of Accounts
You can find an example of a chart of accounts in the Appendix.
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General Ledger
The general ledger is a group of accounts that support the major financial statements. It is the
formal record for all financial transactions for the property and transfers journal data from the book
or page where accounting entries are posted.
Debits and credits are the double-entry values used, and for every debit or credit, there is an
offsetting debit or credit. Debits increase assets and decrease liabilities and equity; credits do the
opposite.
The sub-accounts (or ledgers) are assigned names or numbers and provide details of financial
activities that occurred. These sub-accounts are often called the chart of accounts. In order to
properly record and track financial transactions for your properties, you’ll need to know—and
correctly use—the account categories and numbers used by the management company.
The balance sheet and income statement are based on data entered into the general ledger.
Although the general ledger doesn’t provide easy-to-use information about a property’s financial
performance, it does provide necessary detail for each income and expense item.
Uses of the General Ledger
In addition to the balance sheet and income statement, you'll also use the general ledger to identify:
•
Variances between planned (or budgeted) performance and actual performance
•
Trends in business operations
•
Cash flow needs (and, perhaps, the need for financing)
•
Operational areas that may need improvement
Once identified, you and the team can do the research to explain the circumstances behind the
numbers, and then take appropriate steps to improve operations. These steps will help the owner
meet or exceed the financial goals for the property.
Sample General Ledger
You can find an example of a general ledger in the Appendix.
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Budget Variances
Each month, you'll need to look at the monthly income statement to compare the budget estimates
with the actual numbers in order to identify, understand, and explain variances.
Budgets Will Never Be Perfect
Once you create an annual operating budget, it will likely remain in place for the operating period,
and you and the community managers will strive to achieve the budget numbers. If the budget
process was done well, the budget will be based on the owner’s goals, past history, current trends,
and income-generating and cost-controlling strategies.
But no matter how well prepared the budget, it will never be perfect, because it's a forecast. Even
the most well-documented and researched assumptions can prove wrong due to unexpected
changes.
Budget Variances
A variance is the difference between a budgeted income or expense number and the actual income
or expense in a particular month or year-to-date. You (or the community manager) will need to:
•
Keep track of budget variances.
•
Use them to prepare a new forecast of future results.
•
Analyze and explain variances to the owner.
•
Take action when necessary.
In most cases, the management company or the owner reporting requirements will determine when
you'll need to analyze and explain variances. Some emphasize monthly explanations; others, year-todate analysis. In addition, an absolute dollar amount, or a percentage of variance from the original
budget, will usually prompt the need for an explanation.
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Analyze Variances
It’s not enough to report that rental income is down because vacancy is up. You need to be able to
explain why actual vacancy is greater than projected in your budget. For example, projected moveins may not have occurred in a certain month. A certain month may have more move-outs than
budgeted. Increased evictions will affect vacancy and revenue collection. In any event, both positive
and negative variances will need analysis and explanation.
When looking for reasons for budget variances, ask questions like:
•
How many move-ins and move-outs were budgeted for a particular month? What
factors could account for the difference? Less traffic? A lower closing ratio? More evictions?
These reasons, too, must be explained.
•
Is a new or established competitor attracting residents? If so, why?
•
Do competitors have lower rental rates or offer more amenities? How might the
property respond?
•
Are competitors running successful advertising campaigns? Are they offering
concessions?
•
Have you been able to raise rents compared to budget? Why or why not?
•
Are your budget variances a timing issue or likely to be permanent? For example:
Are you receiving your utility bills late? Did you receive the cable revenue payment in the
month budgeted? Will your current occupancy, and the time or cost needed to increase it,
prevent occupancy goals from being met for subsequent months?
Some variances will be easier to figure out. For example, a major expense was incurred to make an
emergency repair. The expense was a one-time event but will nevertheless affect the budget.
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Explain Variances
When explaining variances, use terms like “favorable” and “unfavorable” rather than “up,” “down,”
“good,” or “bad.”
•
Increased expenses versus budget are an unfavorable variance.
•
Increased income versus budget is a favorable variance.
Stated another way, favorable variances increase NOI, while unfavorable ones lower it.
Be sure to indicate what you’re doing to deal with unfavorable variances. Discuss the strategies you
used to achieve favorable variances, as well as the likelihood that they will continue.
It may also be worth noting how the current variance is similar to, or different from, historical data.
This may help provide the necessary context to better understand the current variance.
Note: Be prepared to discuss the variance as a percent, as well as absolute dollars. A software
program will calculate these percentages for you.
Recommend Action
Once you explain the variances, determine what (if any) action should be taken and when it should
be taken. Sample actions include:
•
Increasing advertising or outreach marketing to generate additional traffic
•
Increasing or decreasing rents as dictated by market conditions
•
Adjusting fees to increase revenue or attract rentals
Furthermore, be specific in your recommendations. Explain:
•
Where and how you’ll increase advertising or marketing, how much it will cost, what the
expected results are, and how it will affect your budget.
•
How much you’ll adjust rents, and how it will affect your property revenue.
•
How fee changes (for parking, application, premiums) will increase revenue and be
competitive enough in the market to attract new residents
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Trends
While it’s important to understand and manage variances, it’s equally important to understand the
normal income and expenses for the property. Note any consistent increases or decreases in an
expense, and determine the reasons for the trend.
A trend takes place over a period of months. A trend can be a clue to an unresolved problem. On the
other hand, it may result from sound management decisions you made, especially if it is a positive
result. Common industry trends related to occupancy (better/worse), turnover (more/less) and moveouts (high/low) are part and parcel of a analyzing a property's performance.
To help identify trends, use the income statement. Look at the actual results year-to-date and the
budgeted amounts for the remaining months in the year.
In particular, examine occupancy trends for the next 30 to 60 days at the property. How many moveins and move-outs are scheduled in each time period? Without more or less move-ins and move-outs,
what will the property’s occupancy be at the end of each future month? Accounting for such trends is
essential for projecting future income results and taking action to improve projected occupancy.
Keep in mind that trends are clues. Look for additional supporting evidence before making quick
decisions, especially if they involve significant changes or expenses.
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Budget Re-Forecasting
Each month, you’ll work with the team to re-forecast revenue and expenses. Re-forecasting means
you'll use the actual year-to-date numbers and the most current information on market and property
conditions to forecast future results. Even performance results from a prior year can help when reforecasting.
Re-forecasting allows you to:
•
Assess how the property is expected to perform for the balance of the year, in relation
to the original budget.
•
Determine whether you need to make further changes in income and expenses in
future forecasts.
•
Understand your property and the impact of occupancy conditions on property
performance.
Remember: you're not changing the budget. You're simply taking the actual year-to date results and
projecting the income and expenses for the remaining months in the budget year.
Re-forecasting is both art and science. But the whole point is to stay on top of things and anticipate
the changes needed so the property meets or exceeds the budget at year-end, and you can prepare
the owner for changes that require his or her involvement.
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Financial Reports and Property Performance
Financial reports can also help you evaluate team performance. If a property is not meeting financial
goals, poor employee performance may part of the reason. On the other hand, when a manager and
staff perform well, the property’s financial performance will reflect this in meeting or exceeding
budget.
Interpretations of staff performance might include:
•
A variance showing increased revenue because of increased occupancy could be a
sign that the leasing staff has been successful in achieving or surpassing the goals set
for them. Alternatively, it could mean that these goals were set too low.
•
An overrun in salary expenses may be due to high employee turnover or the use of
temporary staffing agencies. Every time a new employee is hired, there are expenses
associated with hiring and training the person. You'll want to find out why employees are
leaving.
•
If administrative expenses are exceeding budget, you may want to find out if
purchases are being properly authorized and if the manager is using the established
purchasing procedures.
•
Is the cash in the bank consistent with the normal flow of rent payments and the
timing of expenses? You may want to check if deposits are being made on time, especially
at the beginning of the month, or if rent collection procedures are being followed and
enforced.
Investigate the circumstances behind the numbers. Talk with the team, visit the property frequently,
review market conditions, talk with competitors, and examine paperwork. Once you know the "why,"
you can get into the "how" of improving the numbers.
Questions?
Does anyone have any other thoughts or questions about analyzing budget variances, trends, or
other financial statements?
Transition to the "Valuing Apartment Investments" Section
Now, let's move on to a key financial management concept, valuing apartment properties.
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7. Valuing Apartment Investments
(45 minutes)
In this part of the training, participants will learn about property values, how
they are determined, and how they can influence them.
Suggested Opening
One of your chief financial objectives is to the raise the value of the properties you oversee.
Knowing the value of properties will not only help you make sound management decisions, but it will
also help you analyze and interpret financial data.
Learning Objectives
•
Describe the purpose of property values.
•
Identify three valuation methods used in the apartment industry.
•
Examine the key components of the income capitalization approach.
•
Calculate the income capitalization formula.
•
Use the income capitalization formula to run "what-if" scenarios to see how various amounts of
NOI affect the property value.
Topics Covered
•
Property Value Fundamentals
•
The Cost Approach
•
The Sales Approach
•
The Income Capitalization Approach
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Property Value Fundamentals
Property value, as the name suggests, is what the property is worth at a point in time, based on
certain standard valuation techniques used in apartment management. There are different types of
value: market value, appraised value, insured value, replacement value, investment value, and even
sentimental or emotional value.
Knowing the value of a property will help you make management decisions and analyze and interpret
financial data. Both you and the owner will need to know a property’s potential value in order to
make major financial decisions. Knowing the value will help you:
•
Decide what price to offer when buying a property
•
Come up with an acceptable price when selling a property
•
Establish a basis for real property exchanges
•
Determine the terms of a sale price for a proposed transaction
•
Estimate the value to get a mortgage loan
•
Establish the market value for condemnation proceedings or tax purposes
•
Set rent schedules and lease provisions
•
Decide the feasibility of construction, modernization, or renovation projects
•
Estimate liquidation value for forced sale or auction proceedings
The Three Approaches to Valuing Property
•
Cost Approach
•
Sales Approach
•
Income Capitalization Approach
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The Cost Approach
The cost approach for determining the value of a property estimates the current cost of reproducing
or replacing the improvements (buildings), minus the loss in value from depreciation due to age,
condition, or obsolescence. It also includes the value of land, but does so separately.
In short, the cost approach looks at the current cost of the “bricks and sticks” to rebuild the property.
It is the replacement cost at today's prices, using current materials and construction standards. There
are two types of costs:
•
Direct: Costs for labor and material.
•
Indirect: Costs such as administrative expenses, finance fees, taxes and interest, and
insurance.
The cost approach requires that land and improvements be valued separately, so it’s a useful
approach for insurance and accounting purposes when depreciation must be estimated for income
taxes.
The cost approach is important when there’s no market activity, and a sales approach can’t be used
to value a property. The cost approach is generally not used to value income-producing property.
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The Sales Comparison Approach
The sales comparison approach works best when there are several similar properties in the local
market that have been recently sold or are currently for sale. The fundamental principle of this
approach is that the market value of a property is directly related to the prices of comparable,
competitive properties. It's an approach identical to the market comparable studies that are done to
find out about rental pricing of similar properties in your neighborhood – except that it compares
sales prices, not rental rates.
In general, the more limited the area or neighborhood in using sales comparison data, the better the
value determination is likely to be.
"Comparable" and "Competitive"
Much like a rental competition analysis, the key is to correctly identify "comparable" and
"competitive." If a high-rise apartment community is next door to a garden-style one, the properties
aren't comparable or competitive, despite their proximity to one another.
"Comparables" should reflect normal transactions, rather than those with unusual circumstances such
as foreclosure. Adjustments for differences in size, location, age, and construction quality also need
to be made. The rationale for this approach assumes that the informed investor would not pay more
for an apartment community than what other investors paid for comparable properties.
Appraisers will compare properties and focus on similarities and differences among properties and
transactions that affect value. These may include:
•
Buyer and seller motivation
•
Financing terms and interest rates
•
Market conditions at the time of sale
•
Size and location
•
Physical features
•
Economic characteristics, such as resident incomes, rent levels, fees, who pays utilities,
concessions, lease terms, and lease expiration dates
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The Income Capitalization Approach
Income-producing property is often purchased as an investment. Typically, investors believe that
higher earnings translate into higher value. In other words, the more NOI, the higher the property
value.
The income capitalization approach is the most common method for determining value for any
income-producing property. It estimates property value by applying a current capitalization (or cap)
rate to the annual stabilized NOI.
The cap rate reflects the investor's desired rate of return for that apartment investment and is
expressed as a decimal or percent. Viewed in another way, the cap rate is a concept understandable
to the stock market investor who evaluates dividend yield. The stock's dividend rate (NOI) divided by
its price (market value) is the dividend yield (cap rate).
The Formula
The basic formula is I/R = V, where I is NOI, R is the capitalization rate, and V is the property value
or cost. As long as you know two of these numbers, you can change the formula to find the
remaining unknown element. For example:
•
If you need to know income, then the formula is I=V multiplied by R.
•
If you need to find the cap rate, the formula is I/V = R.
If the NOI is not based on current stabilized operations, then it's important to use an accurately
projected NOI.
Appraisers must establish the most probable NOI, because buyers and sellers see the issue
differently. Sellers focus on future NOI; buyers, on past NOI or actual results.
Determining Cap Rates
Cap rates are a benchmark determined by dividing income by property value. Increasing cap rates
typically imply that property values are falling. They are impacted by:
•
Decreases in risk/uncertainty regarding the future performance of the property.
•
Expectations of higher appreciation rates.
•
Decreases in interest rates and stock/bond returns.
Capitalization rates vary significantly between properties and markets. Supply and demand for
apartments or a particular apartment type (e.g., garden or high rise), apartment quality, current
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prices of comparable apartment properties, location, general operating efficiency, current available
interest rates, and future benefits help determine the cap rate.
The appropriate cap rate is critical, because small differences in the rate will have a major impact on
the resulting value. The higher the cap rate, the lower the value—and vice-versa.
Sources for Cap Rates
The sources for cap rates include multifamily appraisers, multifamily sales brokers, and major buyers
of apartments, such as pension funds, REITs, life insurance companies, banks, and other lenders.
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Calculating Value Using NOI and the Cap Rate
In order to value a property, you’ll need to know the cap rates being used for buying and selling
properties in your marketplace. Once you know these cap rates, you can then run "what-if" scenarios
to see how various amounts of NOI affect the property value.
The formula is: Value = NOI/Cap Rate.
Example: If an apartment property is selling for $1,000,000 (its value or cost), and it has an
annual NOI of $80,000, the cap rate is 8%. ($80,000 / $1,000,000) In other words, the investor
would receive 8% of his or her investment each year.
If a similar property is selling at the same 8% cap rate and has net income of $87,500 (NOI), the
property would be valued at $1,093,750. ($87,500 / .08 = $1,093,750).
Here’s an example showing how an increase in income and a reduction in property operating
expenses might increase the value of the same property.
Example: If an apartment manager could build income by $10 per month on a 250-unit
property, $30,000 in additional revenue would be generated each year ($10 x 12 months x 250
units = $30,000 annually).
If that same manager could reduce property operating expenses by an additional $6,000
annually, the NOI would grow by an additional $6,000, or a total of $36,000 ($30,000 in
additional revenue + $6,000 in expense savings).
Using the same 8% cap rate and the Value formula (Value = (1) NOI/Cap Rate (R)), the
manager would add $450,000 to the value of the property: $36,000 / .08 = $450,000 greater
property value!
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Individual Activity: Calculating Values
Using the formulas, complete the following exercises.
Leader's Instructions:
Give participants seven minutes to complete this activity, and then go over the correct answers.
1. With an NOI of $421,000 and a value of $7,235,00, what is the cap rate?
The answer is 5.8%. ($421,000 /$7,235,00)
2. With a value of $4,350,000 and a cap rate of 7.1%, what is the property's NOI? (Remember: this
formula involves multiplication. Rate multiplied by value equals income.)
The answer is $308,850. ($4,350,000 multiplied by 7.1%)
3. If the NOI is $755,900, and the cap rate is 7.7%, what is the property value?
The answer is $10,646,478. ($755,900 / 7.7%)
Questions?
Does anyone have any other questions or comments about valuing apartment investments?
Transition to the "Maximizing Revenue" Section
Now, let's talk about another of your key financial management responsibilities, maximizing revenue.
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8. Maximizing Revenue
(60 minutes)
In this part of the training, the CAPS student will learn how to maximize
revenue at the properties, using specific strategies relating to rental pricing,
occupancy, leasing, and other income.
Suggested Opening
Revenue changes have a greater impact on NOI—and therefore, cash, profits, and property value—
than changes in operating expenses.
One of your chief financial management objectives is to maximize revenue, or put more money in the
bank at the end of each month and each year.
Learning Objectives
•
Examine strategies for maximizing revenue at your properties.
•
Put these strategies into practice.
•
Manage the balance between rent and occupancy.
•
Describe how automated revenue management systems (where used) change "old" pricing
models and maximize revenue.
Topics Covered
•
Pricing Strategy
•
Occupancy Strategy
•
Leasing Strategy
•
Other Income Strategy
•
Automated Revenue Management Systems
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Pricing (or Rent) Strategy
Rent typically accounts for 90-95% of total property revenue. There are two ways to maximize this
most important revenue stream: (1) charging the optimal amount of rent, and (2) increasing the
property's effective rent.
Charging the Optimal Amount of Rent
The rent that can be charged will be dependent on economic conditions, competitor pricing, and the
Four P's—pricing, product, promotion, and people.
Pricing
Answer these “pricing” questions:
•
Are your rents competitive in the marketplace?
•
How many total units do you currently have available? How many different floor plans?
•
Is your pricing correct based on total availability, as well as the availability for different floor
plans?
•
Do you have sound lease renewal pricing?
•
Are your prices based on incomplete or inadequate market knowledge?
•
Are you quick to lower rents and slow to take advantage of improvements in the
marketplace?
•
Do rents simply stimulate traffic instead of attracting the right potential residents?
Product
Answer these “product” questions:
•
Does the property have outstanding curb appeal?
•
Does it look and feel well-maintained, or is deferred maintenance apparent?
•
How do the amenities, models, and leasing office look to prospective renters? In other
words, how do they “show”?
•
Is the tour route clean and inviting?
•
When was the model last updated or refreshed and preventive maintenance work done?
•
Is the model route walked every day before business opens?
•
Is there an adequate supply of market-ready apartments for prospective residents to view
and rent?
•
What does the parking area look like? Are there abandoned or disabled vehicles?
•
Is the signage fresh?
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Promotion
Answer these “promotion” questions:
•
Are you using the best, most cost-effective marketing sources?
•
Is your advertising creative and eye-catching?
•
Are you reaching the right prospective renters?
•
What are the main traffic and leasing sources? Are they providing a number of excellent
prospects?
•
What are the cost per traffic and the cost per lease of these sources?
•
If you were to reduce your advertising sources, which ones would you drop, and how might
they affect your traffic and sales?
•
Do you respond to Internet inquiries in a timely manner?
•
Is “outreach” done on a regular basis?
•
Are you regularly reviewing all the traffic trend reports the property's automated software
system provides?
People
Answer these “people” questions:
•
Do you have the right people in every position?
•
Do you have a well-trained, high-performing leasing staff dedicated to closing sales?
•
Do you have the best people working the high traffic times (the weekend) and are they
asking for the sale?
•
Are the best leasers working with the most prospective residents?
•
Is the rest of the staff well-trained and do they have the right skills?
•
Does the staff have a professional appearance? Are they enthusiastic and energetic?
•
Do you demand excellence from your employees or do you allow them to just get by?
•
Do you cut rents to compensate for poor performers?
•
Do you manage the property effectively and efficiently?
•
Do your residents receive prompt service?
•
Do vendors provide what is required in their service contracts?
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Increasing Effective Rent
Effective rent is the rent actually collected under the terms of the lease, after accounting for any
concessions given at move-in or lease renewal.
Concessions reduce the rent collected when compared to the market rent for the unit type. One-time
concessions must be allocated over the term of the lease to determine what is actually being paid
monthly, or in total as would be done when providing a concession over the entire term of the lease.
Effectively, the rent has been reduced during the lease term and the property is collecting less than
the current market rent.
Ways to Increase Effective Rent
•
Give no concessions or reduce the amount of the concession given. Lower, one-time
concessions of less than one month’s rent are better than one or two months rent-free. Try to
avoid concessions that are pro-rated over the term of the lease, but rather are limited to the
move-in month only. This gets the resident used to paying market rent on the apartment home
after the initial move-in concession has expired.
•
Do not waive move-in day rent to meet an occupancy goal, because you're not meeting
the real goal: increased revenue.
•
Consider adding a premium to all short-term and month-to-month leases.
•
Guarantee rent prices for people on a deposit-paid priority wait list, as long as they
agree to move in within a certain timeframe. How long you choose to hold this guarantee will
depend on the strength of rental demand, but it is most often for periods of 30 to 90 days before
move-in.
•
Remember to update your rents on the Internet websites that you use for
advertising, if your property software doesn't automatically do it for you.
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Occupancy Strategy
The most effective way to increase operating revenue—and therefore, cash, profits, and property
value—is by renting apartments.
You can cut expenses and collect other income, but nothing has a greater impact on the bottom line
than occupancy and rents.
Nevertheless, finding the proper balance between occupancy and rental rates is a
challenge. Some owners and property management companies aim for higher occupancy in the
range of 97-98%, while others will take lower occupancies with higher rents.
Setting Market Rents
Sometimes, the community manager—with input and direction from the multi-property supervisor—is
responsible for determining market rents. In other cases, automated revenue management or pricing
systems will make those “decisions" daily or weekly.
Markets, Submarkets and Occupancy Strategy
Occupancy strategies require an understanding of current market and submarket conditions. "Market"
refers to citywide conditions; "submarket" to the immediate competitive market around the property,
or the properties with which you compete for residents.
Ask yourself these questions:
•
What is the current average occupancy in the market and submarket?
•
What are the trends in both the market and the submarket? Is occupancy trending up or
down?
•
How does the current occupancy at your community compare to both the market and
submarket?
•
What occupancy rate is needed to make your budgeted revenue? How will you accomplish it?
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Individual Activity:
Balancing Occupancy and Income
This exercise illustrates how to balance occupancy and rental rates in order to maximize revenue.
Consider the data for this property:
Unit Types
# of Units
Current Rent
Monthly GPR
A1
30
$625
$18,750
A2
44
$680
$29,920
B1
40
$725
$29,000
B2
36
$775
$27,900
C1
30
$875
$26,250
Total
180
$732
$131,820
In the table above, occupancy at 92% is revenue of $121,274…occupancy at 94% is revenue of
$123,911…and occupancy at 95% is revenue of $125,229.
If rents were to increase $25 per unit, then the gross potential rent (GPR) would increase to
$136,260 (180 units x $757 average rent). At 92% occupancy, the monthly GPR would now be
$125,359.
Leader's Instructions:
Give participants eight minutes to complete the questions on the next page, and then go over the
correct answers.
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Questions:
1. Which occupancy/rent situation generates more revenue? 94% occupancy at an average unit
rent of $732, or 92% at an average unit rent of $757?
The answer is 92%. (92% at $757 is $125,359. 94% at $732 is $123,911.
2. If you were budgeted to collect $128,000 in monthly GPR, what occupancy would you need if
your average unit rent were $732?
The answer is 97.5% ($128,000 / $131,820)
3. If you were budgeted to collect $135,000 at a current occupancy of 92%, what would your
average rental rate need to be?
The answer is $813 ($135,000 / 166)
4. With 240 units, will you collect more revenue at $740 per unit with 95% occupancy, or at $775
per unit with 92% occupancy?
The answer is 92% at $775 per unit, calculated as follows:
$740 x 240 units = $177,600 x 95% = $168,720.
$775 x 240 units = $186,000 x 92% = $171,120.
Remember that the goal is not 100% occupancy,
but to maximize income.
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Financial Management Instructor Guide
Page 8-7
Occupancy Performance Levels
Some companies use “performance levels" to encourage optimum occupancy. When this strategy is
used, properties are expected to reach predetermined occupancy rates, take appropriate action to
reach certain levels, and continue to move up to higher performance levels.
Performance levels are usually established citywide—for example, for each property in San Antonio or
Chicago. But they can also be for neighborhoods or submarkets—areas like downtown, the north
suburbs, the west suburbs, and so on.
How Performance Levels Are Set
Performance levels are determined by careful market analysis relative to economic conditions, rental
supply and demand, the occupancy and rents of competitive properties, and the desired occupancy
goals to drive revenue.
For example, Level 1 performance might be 96-98% occupancy, Level 2 might be 92-95%
occupancy, Level 3 might be 87-91% occupancy, and Level 4 might be anything below 87%.
Action Ideas for Each Level
Level 1: Focus on increasing effective rent, with pricing trends to reflect this. Eliminate or reduce
special marketing costs and locator fees. Reduce holding periods for vacant units to minimal
turnaround times. Focus on pre-lease notices to vacate.
Level 2: This level is often the targeted or budgeted level; it seeks to maintain occupancy, while
moving effective rents up. The effective rent trend should be upward or neutral. Reduce the holding
period on vacant units from the standard company requirement.
Level 3: Concentrate on increasing occupancy. If a property is going down from Level 2, gradually
decrease effective rent pricing; if it is moving up from Level 4, gradually increase effective rent
pricing. In addition, consider developing a short-term marketing plan to increase traffic. Re-evaluate
your maximum holding period policy. Assess training needs for the staff.
Level 4: Increasing occupancy is essential. Gradually reduce effective rent pricing to promote
occupancy. Increase the maximum holding period for vacant units, perhaps for up to 30 days.
Implement aggressive daily marketing activities to increase traffic, frequently check market-ready
units, and think about using mini-models in long-standing vacant units or particular unit types. Do
shops on the leasing staff to determine their effectiveness.
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Financial Management Instructor Guide
Page 8-8
Analyze Vacancies
At all performance levels, but especially at level 3 and level 4, analyze the average days a unit is
vacant. Determine the value of that vacancy loss by multiplying a daily rental rate to the average
days held vacant. Most software programs have reports that provide this information, even if they
use different terminology.
Remember: Every day an apartment home is unoccupied, revenue is lost forever.
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Financial Management Instructor Guide
Page 8-9
Individual Activity: Analyzing Vacancies
Assume the community’s average unit is $865, the property’s average days
held vacant is 15.2 days, and there are 24 vacant units. Now, answer the
following questions.
Leader's Instructions:
Give participants six minutes to complete the questions below, and then go over the correct
answers.
1. What is the vacancy loss for a property (using a 30-day month calculation) with 24 vacant units
at month end?
$865 / 30 days = $28.83 x 15.2 days = $438.22 per vacant unit x 24 units = $10,517.
2. If the apartments were vacant for 2 days longer, what would be the additional vacancy loss?
$28.83 x 2 =$57.66 x 24 units = $1,384 more vacancy loss.
3. If there were 6 fewer days held vacant, what would be the property’s total monthly vacancy loss?
$28.83 x 11.2 days = $322.90 per vacant x 24 vacant units = $7,750.00 (rounded).
The CAPS Training Series
Financial Management Instructor Guide
Page 8-10
Leasing Strategy
The leasing strategy for maximizing revenue centers on evaluating your current criteria for screening
residents, as well as the approval of applications. The creditworthiness of the applicant should be
determined by the property’s resident screening software, as well as the selection parameters you provide.
Typically, anywhere from 60-65% of monthly applications are recommended for approval, 20-25% are
“approved with conditions,” and 10-20% are denied.
Leasing Strategy and Occupancy
When occupancy changes, you may wish to revisit the criteria for screening residents. Consider adjusting
property criteria to maximize revenue:
•
When occupancy increases, consider using tighter screening to find applicants with higher scores
and better credit standings. Make it more likely that marginal applicants with poorer credit will not be
approved.
•
When occupancy drops, you may consider accepting less creditworthy applicants to fill vacant units.
This can still be done wisely, although great care is required to avoid those who might become nonpaying residents. For example, consider requiring additional deposits from applicants “approved with
conditions.” (Written notice is required for applications that are “approved with conditions” or denied.
Most property management software programs provide these letters to send to applicants.)
If you choose this approach, simply use the lower resident screening scores. Do not change or
manually adjust scores—or eliminate variables that have been part of the long-standing screening
criteria.
The CAPS Training Series
Financial Management Instructor Guide
Page 8-11
Building Other Income
Other income is key contributor to a property's revenue stream. It can represent 5-10% of the gross
potential rent (GPR).
In the 2010 NAA Survey of Operating Income and Expenses, which recaps 2009 data, other income
represented 7.1% of gross potential rent. Although that may seem insignificant, it's not—if an annual
rent roll is $2 to 3 million. Another 5-10% of income, generated by "other" sources, is a significant
revenue source for the property.
As you seek ways to increase other income, find out what your competitors are doing.
During Leasing…
Look to increase your application and administrative fees. For example, do you charge an application
fee for each unrelated adult who will occupy the apartment? Should these fees be charged when
married couples usually pay only one application fee? Or should married couples pay two fees?
At Move-In and During Occupancy…
If utility companies allow the community to sign up residents for their utility services, should you
charge a fee for doing this?
Should you charge residents sewer and trash pickup fees, utility billing fees, amenity user fees,
parking income, and appliance rental markups?
At Move-Out…
What fees should be assessed beyond “normal wear and tear?”
Is there a published fee schedule for damages and charges provided at the time of move-in? Legal
fees and court costs are often allowed in eviction actions and should be pursued diligently.
The CAPS Training Series
Financial Management Instructor Guide
Page 8-12
Automated Revenue Management Systems
First used by hospitality and airline industries, automated revenue management systems, often called
yield management systems, maximize profitability. In these systems, centralized databases of
information help forecast supply and demand, and then price rooms or seats daily to maximize their
yield. The market, on that day and moment in time, determines consumer pricing.
The use of revenue management systems is on the rise in the residential property management
business. Our industry’s revenue management providers indicate that more than one million
multifamily units across 150 markets use revenue management as a tool to generate additional
revenue via proactive flexible pricing. The industry consistently reports a high level of satisfaction
and en effective revenue premium of more than 2 percent.
And now, more mid-sized operators are seeking these systems as user costs are dropping and results
are becoming more widely disseminated. These results include:
•
Steady increases in rental income and rental prices with fewer vacant days
•
Higher rents for shorter-term leases
•
More objective, consistent pricing decisions
•
More effective timing and unit turn processing
•
Improved property efficiencies
•
More time available to focus on customer service
Without question, revenue management systems have proven to be a key to maximizing income and
generating increases in property values.
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Financial Management Instructor Guide
Page 8-13
The Benefits of an Automated System
Revenue management systems not only understand what is being sold, but also what the customer is
buying. Understanding what customers are buying, rather than what you are selling, is the initial
point for identifying more revenue possibilities.
That last point—understanding what the customer is buying—is key. Every resident rents for personal
reasons, including location, availability of amenities, or social opportunities at the community.
Revenue management systems automatically find these incremental opportunities and segment the
market based on the customer's willingness to pay.
A System to Handle the Variables
When setting rent levels, there are many internal and external variables to consider:
•
Current vacant units
•
Current and anticipated demand
•
Competitive property rents and occupancy
•
General economic factors such as job growth, household formation, population changes,
apartments under construction and permitted, and interest rates and the single-family
market.
It's difficult for people to take all these variables into account when they decide on rent pricing.
Automated revenue management systems, on the other hand, do this so that revenue strategy is
adjusted as variables change.
These Systems Work By…
•
Establishing price based on property performance/characteristics
•
Examining the balance to optimize income and occupancy
•
Evaluating market considerations
•
Calculating various scenarios that deliver recommendations/options
•
Taking into consideration or eliminating concessions
•
Looking at other income factors that relate to leasing decisions
The CAPS Training Series
Financial Management Instructor Guide
Page 8-14
Revenue Management System Pricing
Revenue management is intended to be a dynamic, evolving approach to pricing. Because it's a
centralized system, it can improve business processes, ensure compliance with company pricing
strategy, and enhance the leasing process by better matching apartments with residents.
Simply put, the system replaces "gut instinct" pricing with a centralized, automated, data-based
approach to maximizing income.
The Leasing Process and Pricing Strategy
Revenue management systems analyze each element of the leasing process and make it part of the
overall pricing strategy. The objective is to find the highest rent to maintain or improve budgeted
occupancy and revenue.
The system takes unit turn into account, identifies upcoming unit availability, and prices units
accordingly. The pricing can encourage longer or shorter-term leases.
The system also analyzes these incremental opportunities and recommends:
•
Amenity Pricing: Amenities are anything that makes one unit different from another. They can
be positive (such as hardwood floors, views of water, or in-unit washer/dryers) or negative (such
as dumpster or highway views)
•
Renter-specific fees: Such as pet fees and satellite or cable charges.
•
Service or penalty fees: Such as card key replacements, concierge services and lock outs.
Concession and Lease Expiration Management
In revenue management systems, concessions become promotional tools to match or achieve an
advantage over competitor's promotions. The system permits concessions to be set selectively on a
local property-by-property or unit type-by-unit type basis, thus better controlling the adverse effects
of concessions.
In addition, forecasting and managing lease expirations becomes more precise with the historical
data on lease renewals, traffic history, and closing ratios.
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Financial Management Instructor Guide
Page 8-15
Introducing a Revenue Management System
Introducing a revenue management system at a property or portfolio is primarily a business decision,
not a technology decision, and one that fully supports business objectives, strategies, and plans.
High-level executive buy-in is essential, as is implementation leadership. Some companies have hired
yield management experts or have developed in-house programs with central pricing personnel to
train on-site leasing personnel and manage the system.
Costs include upfront set-up, per-unit per-month access charges, on-going consulting support, and
major training and project management efforts.
Revenue management systems are compatible with major property management systems. All data
comes from the host property management system. Therefore, it's recommended that 2 to 4 years
worth of historical data be available for use before the system is implemented.
The Human Side of Implementation
It's critical to be sensitive to employees and residents affected by the change. After all, central pricing
authority is replacing current pricing mechanisms long used at the community. You'll earn
understanding and advocacy through frequent communication.
The Costs Are Worth It
Companies using revenue management systems report that the benefits of the system far outweigh
the cost of implementation. Most have seen increases in annual gross revenue, rental rates above
market and stabilized revenue growth. They've also reported greater employee focus on customer
service and leasing, since pricing decisions are now out of their hands.
Questions?
Does anyone have any other questions, comments, or suggestions about maximizing revenue?
Transition to the "Final Exercise" Section
Now, it’s time to show what you know in the final exercise.
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Financial Management Instructor Guide
Page 8-16
9. Final Exercise
(60 minutes)
Now it's time for participants to apply the tools and techniques they've
learned in the CAPS Financial Management training. To do this, they'll
complete a three-part individual exercise.
Leader's Instructions:
Give participants 45 minutes to complete the three-part final exercise, and then go over the
correct answers.
Gramercy Point Apartments
You're the new property supervisor for Gramercy Point Apartments. Use the following information to
answer the questions on the following pages and evaluate the property.
Unit Type*
Quantity
Size
(sq. ft.)
Market
Rent
1.1
70
724
$700
2.1
50
940
2.2
80
3.2TH
40
Average
Occupied
Rent
Occupied
Vacant
$690
67
3
$820
$805
40
10
1,000
$970
$950
76
4
1,340
$1,280
$1,265
38
2
*1.1 = 1 bedroom, 1bath; 2.1 = 2 bedrooms, 1 bath; 2.2 = 2 bedrooms, 2 baths; 3.2TH = 3 bedroom, 2 bath townhouse
unit
Additional Details
One 2.2 unit is occupied with a model and one 3.2TH unit is provided free for the Maintenance
Supervisor.
Turnover
Turnover in 2005 was: 148 units
Turnover in 2006 was: 142 units
Turnover in 2007 was: 156 units.
Concessions
Concessions are $10,000 per month
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Financial Management Instructor Guide
Page 9-1
Gramercy Point Apartments (continued)
Operating Expenses
Per Unit Annual Operating Expenses
Salaries/Personnel
$1,050
Contract Services
350
Repairs/Maintenance
358
Marketing
200
Utilities
309
Taxes
1,015
Insurance
245
Administrative
179
Mgt. Fees
324
Debt Service and Capital Improvements
Annual Debt Service: $910,000
Capital Improvements: $162,000
The CAPS Training Series
Financial Management Instructor Guide
Page 9-2
Individual Activity, Part 1
Answer the following questions about Gramercy Park Apartments, using the
financial data on the previous two pages.
1. How many units are at this property?
240 units (70 units + 50 units + 80 units + 40 units)
2. What percentage of the total units are:
a. One bedroom: 29% (70 units / 240 units)
b. Two bedroom: 54% (130 units / 240 units)
c.
Three bedroom: 17% (40 units / 240 units)
3. What unit type has the most units on the property? 2.2 (two bedroom, two bath). What % of the
total does that represent? 33.3% (80 units / 240 units)
4. What was the turnover percentage at this property in each of last three years?
a. 2005: 61.6% (148 "turned" units / 240 units)
b. 2006: 59.1% (142 "turned" units / 240 units)
c.
2007: 65% (156 "turned" units / 240 units)
5. What is the average unit size (square footage) at this property?
964 (rounded) sq.ft. (231,280 total square feet / 240 units)
6. What is the total monthly market rent at this property?
$218,800
7. What is the current monthly Gross Potential Rent (GPR)?
$215,440
Formula: Occupied units at current lease rates + Vacant units at market rates
8. What is the monthly $ loss to lease at this property?
$3350
Formula: Monthly market rent - Monthly gross potential rent = Monthly loss to lease
9. What unit type has the greatest percentage of vacant units and what is that %?
2.1 (two bedroom one bath); 20% (10 vacant units / 50 total 2.1 units)
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Individual Activity, Part 1 (continued)
10. What is the physical occupancy?
92% (221 occupied units / 240 units)
11. What is the total monthly $ rental vacancy?
$16,740 (Vacant units at market rent)
12. What is the monthly $ value of the non-revenue unit vacancy loss?
$2,250 (Monthly market rent for one 2.2 model and one 3.2TH for the Maintenance Supervisor)
13. What is the monthly total $ value of vacancy loss, including concessions, but not concession
loss?
$28,990
14. What is the economic occupancy % of the property?
86.5%
Formula: Effective gross income / Gross potential rent
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Financial Management Instructor Guide
Page 9-4
Individual Activity, Part 2
Annualize the numbers you've been working with to answer the questions
below.
1. What is the annual market rent?
$2,625,600 ($218,800 x 12)
2. What is the annual GPR?
$2,585,280 (215,440 x 12)
3. What is the annual $ loss to lease?
$40,320 ($3360 x 12)
4. Assume a collection loss of 1%. What is the annual Effective Gross Income (EGI) after deducting
for all parts of the vacancy loss calculation? (Don't forget the concessions!)
$2,211,547 ($2,585,280 - $373,733 [rounded up])
Formula: Gross potential rent - Vacancy, concession and collection loss
5. Other income is $159,000. What is Gross Operating Income (GOI)?
$2,370,547 ($2,211,547 + $159,000)
Formula: Effective gross income + Other income
6. What is the annual total operating expense?
$967,200 ($4,030 per unit x 240 total units)
7. What are the 3 highest expense categories and what % of total operating expenses do each of
these categories represent?
Salaries/Personnel = 26% ($1,050 / $4,030)
Taxes = 25% ($1,015 / $4,030)
Repairs/Maintenance = 8.9% ($358 / $4,030)
8. What is the operating expense (expense-to-income) ratio?
37.4 % ($967,200 / $2,585,280)
Formula: Operating expenses / Gross potential rent
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Page 9-5
Individual Activity, Part 2 (continued)
9. What is the Net Operating Income (NOI)?
$1,403,347 ($2,370,547 - $967,200)
Formula: Gross operating income - Operating expenses
10. What is the property’s necessary “break even occupancy” ratio?
.79 or 79% ($967,200 + $910,000) / $2,370,547
Formula: (Operating expenses + Debt service) / Gross operating income
11. What is the Before Tax Cash Flow?
$331,352 ($1,403,352 - $910,000 - 162,000)
Formula: NOI - Annual Debt Service - Capital Improvements
12. What is the Debt Coverage Ratio?
1.54:1 ($1,403,357 / $910,000)
Formula: NOI / Annual Debt Service
13. With a 6.5% cap rate, what is the property's current value?
$21,589,953
Formula: NOI / Cap Rate = Value (1,403,347/.065=21,589,953)
14. With a loan balance of $12 million, what is the property's current loan to value ratio? (LTV)?
55.6% ($12,000,000 / $21,589,953)
Formula: Loan / Value
15. If the owner's original investment was $2 million, what it the ROI?
16.6% ($331,352 / $2,000,000)
Formula: Before Tax Cash Flow / Investment
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Page 9-6
Individual Activity, Part 3
Calculate a new cash flow for this property by making these four changes to
the existing data.
1. Increase the GPR 3.7%
2. Calculate vacancy at 7.7%
3. Increase operating expenses 2.6%
4. Increase capital expenses to $130,000.
Cash Flow for Gramercy Park Apartments
Item
Current
New
Gross Potential Rent
$1,249,325
$1,295,550
Vacancy
$112,439
$99,757
Effective Gross Income
$1,136,886
$1,195,793
Other Income
$55,000
$55,000
Gross Operating Income
$1,191,886
$1,250,793
Operating Expenses
$482,300
$494,840
Net Operating Income
$709,586
$755,953
Capital Expenses
$112,000
$130,000
Debt Services
$424,373
$424,373
Cash Flow
$173,213
$201,580
Now, answer the questions on the following page.
The CAPS Training Series
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Page 9-7
Individual Activity, Part 3 (continued)
Questions
1. What is the Debt Coverage Ratio (DCR) with the current data and the new data?
The formula is: Income / Annual debt service.
DCR with current data: $709,585 / $424,373 = 1.67:1
DCR with new data: $755,953 / $424,373= 1.78:1
2. Using a cap rate of 6.2% on the new NOI with a $10,000,000 mortgage, what is the current Loan
to Value (LTV) ratio for this property?
First, calculate the value of the property, using this formula: NOI / cap rate. Therefore, the value
of this property is $755,953 / 6.2% = $12,192,790.
Next, calculate the LTV, using this formula: Mortgage amount / Property value. The LTV for this
property is $10,000,000 / $12,192,790 or 82%. That is, the loan represents 82% of the current
value of the property.
Questions?
Does anyone have any other thoughts or questions about the final exercise?
Transition to the "Key Takeaways and Closing" Section
Now, let's bring this financial management course down the home stretch—and to the finish line.
The CAPS Training Series
Financial Management Instructor Guide
Page 9-8
10. Key Takeaways and Closing
(15 minutes)
Participants have just spent an entire day learning about financial
management. It's time for them to make the most of their newfound
knowledge by taking action on what they have learned.
Suggested Opening
Well, you've come a long way today. In just one day, we've covered these all these financial
management topics:
•
Apartment investing basics
•
Mortgages, financing, and taxes
•
Managing the budget process
•
Getting to the bottom line
•
Analyzing financial statements
•
Valuing apartment investments
•
Maximizing revenue
•
And the final exercise
Now, to cross the finish line for this course, there are just two things remaining—taking a look at the
key takeaways for this course, and writing a brief action plan.
Let's start with the key takeaways. Turn to page 10-1 in your Participant Guide.
The CAPS Training Series
Financial Management Instructor Guide
Page 10-1
Key Takeaways
You now have a solid grounding in what it takes to manage the financial part of a multi-property
supervisor’s job—from analyzing balance sheets and income statements…to budgeting and valuing
properties…and to maximizing income and gaining a deeper understanding of mortgages and taxes.
Keep these five "big picture" things in mind:
1. Keep a close eye on Net Operating Income (NOI). It is the key measure. Know how it’s
calculated, how it will help you manage your properties, and how it increases the value of the
properties.
2. Be organized. Know your owner’s goals. Keep good records. Start the annual budgeting process
early. Stay current with all reports and statements. Review your budget and NOI regularly. Back
up analysis with data and variance explanations.
3. Watch the bottom-line. Re-forecast the budget—income and expenses—every month. Look
for trends and variances. Link your budget to the property's overall strategy. Take appropriate
action to meet the bottom-line budget number.
4. No surprises. Live by this mantra: no surprises, especially with the owner. Remember: “the
cover-up is worse than the crime." You’re on the same team, so treat the owner fairly and
honestly. That way everybody wins, even if you have bad news.
5. Be a team player. Teach and coach the team. Encourage them. Challenge them. Make them
better financial managers. Let them know how important they are.
With these takeaways in mind, let's now move on to having you write an action plan. Turn to the
next page in your Participant Guide.
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Financial Management Instructor Guide
Page 10-2
"Start/Stop/Continue" Action Plan
Once again, it's time to put together a "Start/Stop/Continue" action plan. All you need to do is reflect
on the things you've learned in this course, and based on that, write one thing you want to start
doing, stop doing, and continue doing when you return to your apartment communities.
Then, the rest is up to you. If you can work on these three things for the next month, you'll most
likely improve your on-the-job skills and feel more confident.
I'm going to give you five minutes now to work on your "Start/Stop/Continue" plan, and remember,
this plan is for you and you alone. You don't need to share it with anyone, unless you'd like to.
Leader's Instructions:
Give participants five minutes to work on their "Start/Stop/Continue" action plans, and answer any
questions along the way.
Thank you for taking the time to work on your plan. I wish you all the best as you work on it over the
next month.
The CAPS Training Series
Financial Management Instructor Guide
Page 10-3
Closing
Thank you for being a part of today's Financial Management course. Next, you'll be diving into the
world of property performance management.
If You Are Teaching the Property Performance Management Course…
If you have no further questions or comments, let's call today a wrap.
If You Are Not Teaching the Property Performance Management Course…
If you have no further questions or comments, let's call today a wrap. I wish you the best of luck as
you pursue your CAPS designation, and all the best back on the job, too. It's been my pleasure to be
your instructor.
The CAPS Training Series
Financial Management Instructor Guide
Page 10-4
Appendix
Contents
•
The Income Statement
•
The Balance Sheet
•
The Operating Budget
•
The General Ledger
•
The Chart of Accounts
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Page App-1
The Income Statement
The CAPS Training Series
Financial Management Instructor Guide
Page App-2
The Balance Sheet
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Financial Management Instructor Guide
Page App-3
The Operating Budget
Sample Property
OPERATING BUDGET
Revenues
Gross Potential Rent
$2,865,235
Rent Revenue Collected
$2,487,605
Losses to Vacancy
$220,981
Collection Losses
$19,386
Losses to Concessions
$137,262
Other Revenue
$203,156
Total Revenue
$2,690,762
Operating Expenses
Payroll
$312,664
Marketing
$54,414
General & Administrative
$62,087
Total Net Utilities
$150,219
Contract Services
$60,708
Property Insurance
$109,451
Taxes
$376,247
Management Fees
$74,214
Maintenance
$78,414
Total Operating Expenses
$1,278,417
Net Operating Income
$1,412,344
Capital Expenditures
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Page App-4
$184,560
The Cash Flow Statement
Sample Property
CASH FLOW STATEMENT (Completed)
(Annual Dollars)
Revenues:
Gross Potential Rent
4,892,000
Less: Vacancy, Concession & Collection Loss
(678,000)
Effective Gross Income
4,214,000
Other income
145,000
Gross Operating Income
4,359,000
Operating Expenses:
Administrative & Management
183,900 (includes management fees)
Marketing
101,000
Repairs & Maintenance
164,000 (includes make ready costs)
Personnel
365,000
Utilities
133,000
Taxes & Insurance
779,000
Contract Services
77,900 (includes professional fees)
Total Operating Expenses
1,803,800
Net Operating Income
2,555,200
Capital Expenditures
475,000
Debt Service
1,278,000
CASH FLOW
802,200
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Page App-5
The General Ledger
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Financial Management Instructor Guide
Page App-6
The Chart of Accounts
Sample Company:
Chart of Accounts
INCOME
Potential Rent
Account Name
Apartment Rental Income
Description
Market Rent
Loss to Lease
Concessions Total concessions given
Market rents for occupied units, plus market rents for vacated units
Adjustments for vacancies, delinquents, concessions, and other adjustments
Concessions-Chargebacks
Concessions-Renewal
Affordable Housing Discount
Rental Income
Account Name
Description
Non-Revenue Vacancy
Vacancy
Uncollectible Accounts - Net
Forfeited Security Deposits - Rent
Previous Collections - Rent
Lease Expiration Overage
Parking - Carport Revenues
Total value of lost rents for models.
Total value of lost rents for vacant units.
Net change in the balance of delinquent rents during the period.
All rent collected from previous residents.
All parking revenues relating to carports and other parking related income i.e. recreational
vehicle parking etc.
Other Income
Account Name
Description
Parking - Garage Revenues
Storage Revenues
Laundry
Laundry - Contracted
Trash Fee Receipts
Electricity Receipts
Water-RUBS Receipts
Water - Submetering Receipts
Cable System Revenues
Internet Revenues
Maintenance Service Revenues
Application Fees
Administrative Fees
Corporate Premiums
Settlement/Improper Notice Fees
Month-to-month Fees
Resident Billing Fees
Gate Card Fees
Pet Fees
Late Fees
NSF Fees
Cleaning and Damages
Transfer Fees
Lease Premium Fees
All parking revenues related to garages
All revenues from rental of space used for storage.
Monies collected from coin-operated washers/dryers
Portion of monies collected from coin-operated washers/dryers contracted
Cable commission revenues
From high speed sharing agreements
Application fees
Administrative fees and non-refundable fees
Termination fees
One-time activation fees on Rubs/Subs accounts
The CAPS Training Series
Financial Management Instructor Guide
Page App-7
The Chart of Accounts (continued)
EXPENSES
Payroll Taxes_Benefits
Account Name
Description
Salaries & Wages - Office
Salaries & Wages - Maintenance
Salaries & Wages - Leasing
Management Bonuses
Maintenance Bonuses
Leasing Commission
Employee salaries, temporary help, employee s 401K and medical contributions.
PAYROLL USE ONLY:
PAYROLL USE ONLY:
Bonuses paid to managers, maintenance staff, and group bonuses. FOR PAYROLL USE ONLY.
Bonuses paid to maintenance staff.
Commission paid to leasing consultants for new and renewed leases signed. FOR PAYROLL
USE ONLY
Employer's FICA, unemployment taxes, union dues. PAYROLL USE ONLY!
Payroll Taxes
Payroll Taxes - Maintenance
Medical & Other Insurance
Medical & Other Insurance- Maintenance
401K Contributions
Rent Allowance
Rent Allowance- Maintenance
Other Employee Benefits
Other Employee Benefits- Maintenance
Worker's Compensation
Worker's Comp Accrual
Worker's Comp Accrual- Maintenance
Placement Fees
Temporary Help
Other Personnel Expenses
Payroll Accrual
Vacation Accrual
Company portion of medical insurance. PAYROLL USE ONLY!
Company 401K contribution (including 3%) PAYROLL USE ONLY!
Rent allowance for office and maintenance staff.
Union dues only!
Workman's compensation insurance premiums.
Monthly worker’s comp accruals
Fees paid to outside temporary agencies or contract employees.
This account is to be used by Accounting only. This will represent the current month accrual less
the reversal of the prior month accrual.
Payroll Expense -Allocation
Payroll Expense -Reimbursement
Capitalized Salaries & Benefits
Capitalized Salaries - Maintenance
Maintenance Services
Account Name
Description
Rubbish Collection
Trash Fee Receipts
Pest Control
Safety Services
Monthly, door-to-door, recycling and special pick-up
Trash fee collections from residents
Exterminator, termite inspection and treatment, ant and mouse traps, and insect spray.
Contract guard and patrol services, intrusion alarm system, fire extinguishers, fire alarm systems
(including telephone monitor charges), smoke alarms, and rent allowance for property monitors.
Contract cleaning of apartments.
Apartment Cleaning
Elevator Maintenance
Snow Removal
Other Maintenance
Apartment Cleaning - Non Turn
Window Cleaning
Maintenance Services - Chargeback
Monthly elevator maintenance and repairs.
All third party snow removal costs and any salting/ice melt costs
Other Maintenance
The CAPS Training Series
Financial Management Instructor Guide
Page App-8
Repairs and Maintenance
Account Name
Description
R & M Painting Interior
Paint, brushes, pans, labor, masking tape, drop clothes, caulk, ceiling/ sheetrock repairs, and
interior hallways.
Painting costs associated with common areas (hallways, clubhouse, etc.).
Common area costs. Cleaning costs associated with common areas (hallways, clubhouse, etc.).
Mini-blind repairs and replacements.
Wallpaper purchases.
Carpet dye, installation, stretching, shampooing, repairs, and all vinyl repairs.
Prudential properties only!
All new vinyl and tile replacements.
Roof repairs, shingles, plastic cement, edging, decking stacks, chimney repairs, and gutters.
Doors, millwork, wood repairs, cabinet replacements, stair tread replacements, apartment unit
door numbers, cabinet refinishing.
Window glass and screens, sliding mirror closet panels.
Resurfacing of tubs, sinks, counter tops, all sub floor repairs, and grout.
Keys, locks, nails, screws, bolts, nuts, washers, towel bars, soap dishes.
Pipes, plumbing parts and fixtures, faucets, contract labor for plumbers, hot water heaters, and
boilers.
Freon, compressor, condenser, and zoneline repairs / replacements, tubing, filters, ductwork,
burners, belts, parts, thermostats.
Golf cart repairs, flashlights, saws, ladders, other minor items of equipment, and rental items.
Burner pans, heating elements, garbage disposals, ice makers and all appliance repairs including
coin operated washer/dryers.
New appliance replacements < $2,500, including microwaves.
Wire, bulbs, electrical tape, boxes and covers, fuses, circuit breakers, connectors, conduit, TV and
contract labor (electricians), chandeliers, ceiling fans, and light fixtures.
Surface repairs, pumps, filters, filter material, heaters, ladders, diving board, painting of the pool,
all spa repairs, pool supplies, chlorine, acid.
Fountain repairs and replacements, algaecide, fish, and monthly maintenance.
Tennis court repairs, cleaning and nets, volleyball court repairs and nets, weight room equipment
repairs and cleaning, signage for amenity areas (rules and regulations) including tennis courts,
volleyball courts, pet areas, pool furniture, and miscellaneous clubroom repairs.
Surface repairs, striping, car stops, floodlights, speed bumps, sweeping, cement slabs for trash
containers, and signage for lots.
Any repairs or maintenance costs related to garages and/or carports.
Any repair items related to gates, gate cards, and monitors.
R & M Painting Common Area
R&M Common Area Maintenance
R & M Miniblinds
R & M Wallpaper
R & M Carpet
R & M Carpet Replacement
R & M Vinyl Replacements
R & M Roof
R & M Carpentry
R & M Glass
R & M Countertop Resurfacing
R & M Hardware
R & M Plumbing
R & M HVAC
R & M Equipment
R & M Appliance Repair
R & M Appliance Replacement
R & M Electrical
R & M Swimming Pool
R & M Fountains & Pools
R & M Amenity Areas
R & M Parking Lots
R & M Garages & Carports
R & M Access Gates
R & M Painting Interior - Non Turn
R & M Carpet - Non Turn
R & M Submetering System Repairs
R & M Janitorial Supplies
R & M Other Supplies
R & M Vendor Rebates
R & M Warranties
R & M Service Guarantee
R & M Insurance Claims
R&M Mold
R&M Retail
R & M Other
R & M - Chargeback
Cleaning supplies, wash rags, air fresheners, paper towels, garbage bags.
All batteries.
All rebates from R&M vendors.
Expenses and reimbursements related to property damages covered by insurance.
Mildicide, mildew treatment, germicide
Other repairs and maintenance items.
The CAPS Training Series
Financial Management Instructor Guide
Page App-9
The Chart of Accounts (continued)
Major Repairs and Maintenance
Account Name
Description
R & M Painting Exterior
R & M Roof - Non Routine
R & M Carpentry - Non Routine
All exterior painting including breezeway paintings
Major non recurring roof expense, exceeding $1,000 per item
Major non-reoccurring carpentry expense, exceeding $1,000 per item. Examples include major
wood repair/replacements.
Major non-recurring plumbing expense, exceeding $1,000 per item.
Major non-recurring electrical expense, exceeding $1,000 per item.
Major non-recurring swimming pool expense, exceeding $1,000 per item. Examples include pool
resurfacing or re-plastering and major pool deck repairs.
Major non-recurring amenity area expense, exceeding $1,000 per item. Examples include tennis
court resurfacing, amenity signage, painting of fitness centers, volleyball court sand.
Major non-recurring parking lot expense, exceeding $1,000 per item. Examples include parking
lot resurfacing, major concrete repairs, restriping of entire property.
R & M Plumbing - Non Routine
R & M Electrical - Non Routine
R & M Swimming Pool - Non Routine
R & M Amenity Areas - Non Routine
R & M Parking Lots - Non Routine
Landscaping
Account Name
Description
Lawn Maintenance
Monthly services for mowing, weed-eating, edging, trimming, all fertilization/super bloom, preemergent control, insect spray(lawn), grub worm services, pruning, rye grass seeding, jogging trail
and basket ball court landscape maintenance.
Seasonal Color
Sprinkler Repairs
Tree Removal
Plant Replacement
Groundskeeping Supplies
Sprinkler repairs and parts.
Tree removal.
Plant replacement including grass and shrubs.
Ground supplies, gas and oil for blowers and other machines, rakes, hoses, etc
Marketing
Account Name
Description
Advertising
Newspaper ads, outdoor signs for advertising purposes, billboards, telephone directory, bootleg
signs.
Apartment guide ads.
Ads placed with all Internet Providers
Locator fees
Referral fees; resident and non-resident.
Apartment Guides
Internet Advertising
Locator Fees
Commission/Referrals
Resident Retention
Move-in Gifts
Collateral Materials
Brochures
Promotional Amenities
Model & Accessories
Office Refreshments
Office Uniforms
Other Marketing
Move-in gifts.
Brochures, flyers, and floor plans.
Cable TV, washer/dryer rental and tokens (for non-corporate units).
Furnishing and moving model apartments
All refreshments including candy, cookies, sodas, coffee, and coffee supplies (tea, hot cocoa,
sugar, creamers, stirrers, cups, etc.)
Contests, freeze warning signs, flags, flag poles, flag repairs, holiday decorations, water cooler
rental, helium rental, ice machine rental, rent allowance in exchange for promotional services,
newsletters, and all resident activities, parties, services, seminars, and functions, business center
internet.
The CAPS Training Series
Financial Management Instructor Guide
Page App-10
Electric Expense
Account Name
Description
Electricity
Electricity
Electricity
Electricity
Electricity
Common Areas
Clubhouse/Leasing
Master Meter
Billing Costs
Receipts
Water Expense
Account Name
Description
Water- Apartments
This account is to be used by accounting only. This number will represent the current month
accrual less the prior month reversal.
Water - Landscaping
Water - Chilled Water Services
Water - Submetering Receipts
Water - RUBS Receipts
Water - Billing Costs
Water Accrual
This account is to be used by accounting only. This number will represent the current month
accrual less the prior month reversal.
Gas Expense
Account Name
Description
Gas - Receipts
Gas - Accrual
Other Utilities
Account Name
Description
Telephone - Long Distance / Lease
Telephone - Mobile
Utilities- Late Fees
Utilities - Management Fee
Long distance charges.
Cell phone charges.
Charges for utility bill processing
Management Fee
Account Name
Description
Property Management Fee
Bonus Management Fee
Real Estate Taxes
Account Name
Description
Real Estate Taxes
Real Estate Tax Consulting Fees
Real Estate Tax Accrual
Real Estate Tax - Refunds
Real Estate Tax - Prior Yr Adj
Real estate taxes paid in the current year.
Consulting fees related to real estate tax appeals.
Current year real estate tax accrual.
Insurance
Account Name
Description
Property Insurance
Flood Insurance
Auto Insurance
Property, liability, boiler, umbrella, and terrorism insurance.
Flood insurance.
Auto insurance.
The CAPS Training Series
Financial Management Instructor Guide
Page App-11
The Chart of Accounts (continued)
Administration
Account Name
Occupancy Expense-Rent
Occupancy Expense - Utilities
Occupancy Expense - Services
Professional Fees - Legal
Professional Fees - Tax Consultant
Employee Airfare
Employee Lodging
Employee Parking/Tolls/Taxi
Employee Mileage
Employee Car Rental
Employee Other Travel
Employee Meals
Employee Dues
Employee Phone Charges
Employee Housing Allowance
Employee Modem/Internet
Data Processing Fees
Software Expense
Computer Support
Dues
Subscriptions
Conference/Recognition
Seminars
Charitable Contributions
Administrative Supplies
Administrative Fee
Licenses & Taxes
Permits/Inspections
Recruitment Expense
Employee Training/Evaluation
Credit Checks
Resident surveys
Strategic Planning
Other Administrative
Homeowners Association Dues
Training - Scholarship Program
Property Management Software Fees
Mailing- Standard
Mailing- Express
Data Communications / Internet
Answering Service/Pagers
Interior Plant Maintenance
Office Furniture & equipment
Office Equipment Rental
Office Supplies
Office Uniforms
Computer Hardware
Retail Administrative Costs
Bad Debt Expense
Description
Attorney s fees, warrants, evictions.
Property tax consultant's fees.
Computer rent
Office supplies, letterhead, envelopes, work orders, computer paper, film for move-outs, and
business cards.
Business licenses.
Permits (pool), inspections (elevator and boiler).
Employee moving expense, permanent placement fees, advertising for employment, and employee
credit checks.
Seminars, shopping reports, manager s / maintenance workshop expenses, and continuing
education courses.
Credit checks for prospects.
Dues/memberships, subscriptions (including newspaper), business license, ADP charges.
Stamps, postage for meters, and messenger service.
Overnight mail.
Answering services, pagers, and beepers.
Leasing office, clubhouse, and model plant maintenance.
Calculators, desks, file cabinets, chairs, paintings, copier rental, telephone system/equipment
rental, fax machine rental, copier repairs, toner for copier, first aid kit, and telephone maintenance
contracts.
All leasing and maintenance uniforms, name badges, and nametags.
The CAPS Training Series
Financial Management Instructor Guide
Page App-12
CAPITAL EXPENDITURES
Land Improvements
Landscaping
Parking Lot
Concrete
Monument Sign
Fence
Security Gate
Irrigation
Sprinkler System
Amenities- Land Improvements
Real Property
Building
Building Improvements
Roof Improvements
Garages & Carports
Water Meter
Entry Gate
Pool Restoration
Amenities- Real Property
Personal Property
Furniture, Fixtures, & Equipment
Carpet
Appliances
Cabinets
HVAC
Maintenance Equipment
Plumbing Fixtures & Equipment
Submetering Equipment
Other Equipment
Model/Clubhouse
Pool Furniture
Pool Improvements
Exterior Light Fixtures
Exterior Painting
Signage
Computers
The CAPS Training Series
Financial Management Instructor Guide
Page App-13
E DUCATION
I NSTITUTE
Apartm
tmen
enttCareerHQ .org
4300 Wilson Blvd., Suite 400
Arlington, VA 22203
703/518-6141 FAX 703/248-8370
education@naahq.org
www.naahq.org
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