Instructor Guide
Financial Management
LIMITS OF LIABILITY AND DISCLAIMER OF WARRANTY
© 2011 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, encourages 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 SUPPLIER” 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 Supplier” materials is
permitted. Authorized recording of programs or duplication of materials may be
done only by the instructor on site.
© 2011 National Apartment Association
ACKNOWLEDGMENTS
SUBJECT MATTER EXPERTS
The NAA Education Institute wishes to thank the following
apartment industry professionals for contributing their time and
expertise to the rewrite of the Certified Apartment Supplier
program:
Lead Subject Matter Expert
Howard L. Campbell, Ph.D.
Assistant Professor
College of Applied Sciences & Technology
Ball State University
Residential Property Management Program
150 Applied Technology Building
Muncie, IN 47306
765/285-2255
hlcampbell@bsu.edu
KEY CONTRIBUTORS
• David Jolley, CAMT
• Fisher & Phillips, LLP
• Kimball, Tirey, and St. John, LLP
© 2011 National Apartment Association
Certified Apartment Supplier (CAS) SM Instructor’s Guide
Financial Management
Course Information
Course length
This course will take approximately 6 hours, excluding breaks and lunch.
Estimated
time
The estimated time for the chapters in this course including the completion of
all Activities and Skill Checks, is as follows.
Chapter
Welcome/Introductions
Investments
Adding Value to the Investment
Economic Analysis of a Property
Budgets
Property Valuation
Activities
Estimated Time
15 minutes
1 hour
2 hours
1 hour and 15 minutes
1 hour
30 minutes
Activities are exercises covering part of a chapter that require participants to
use specific chapter content, which aids in comprehension and memory.
They are in the Activities Tab in the Participant Guide. The instructions for
the setup and the debrief points are provided in this guide for you. Many of
the Activities are to be completed in pairs or groups. For some activities,
there is an Answer Key handout to be distributed to participants.
This course requires the use of a calculator to complete some activities.
Continued on next page
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Course Information, Continued
Chapter Skill
Checks
Skill Checks are completed at the end of each Chapter. They are similar to
the Activities, but are broader and address more of the content from the
entire chapter. They are completed open-book. Chapter Skill Checks help
the participants review the material and check their own progress by
determining how much they knew from memory versus how much they had
to look up in the Participant Guide.
Participants will complete a Chapter Skill Check at the end of each Chapter.
Skill Checks are located in the Skills Check tab in the Participant Guide.
There is a Skill Check Answer Key handout for each skill check which is to
be distributed to the participants after they have completed the Skill Check.
The Answer Keys are to be used to self-correct these Skill Checks, and for
participants to use as study guides for the exam. Instructions for the Skill
Check setup and debrief are provided in this guide for you.
Course exam
There is a comprehensive 200-question, multiple-choice exam at the
completion of the CAS coursework. The exam is timed for 2 hours and 30
minutes.
The exam can be taken at any time through the following Web site:
www.castleworldwide.com/naaei. Please keep in mind that participants will
not be able to access the online exam until they are eligible.
Participants will need an eligibility code to access the exam. The eligibility
codes will be distributed by the local apartment association after completion
of the required coursework.
Upon completion of the NAAEI exams, participants will receive their results
immediately. All participants will receive diagnostic information on their
performance in the major content areas of CAS. If a participant passes their
exam, they will receive a passing notice. If participants do not pass the exam,
they will receive their score report, in addition to a profile of their strengths
and weaknesses based on the sections included in the exam. Participants
who do not pass the exam, may take the exam again after 7 days.
Required
grade for
exam
The passing requirement is 70%. If participants fail the exam, they may
retake the exam after 7 days for a $30 fee.
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Financial Management
Instructor Preparation
Materials
needed
The printed materials needed for this class include the following:
• Financial Management Participant Guide for each participant and one for
yourself
• Financial Management Instructor Guide for yourself
• PowerPoint slides for Course 8: Financial Management
• Sign-in form (to be turned in to the affiliate office at the end of class)
• Skill Checks for Course 8: Financial Management (5)
• Answer Keys to Skill Checks for Course 8: Financial Management (5)
Your prep
time
Be sure that you review the materials for class and prepare in advance. The
Instructor Guide and slides are intended to be used along with the Participant
Guide as a way for you to take the participants through the material and to
manage the classroom discussions, activities and skill checks. You should
plan on spending several hours preparing to teach the class, particularly if
you have not taught this Course using these materials in the past.
Equipment
needed
The equipment needed in the training room includes::
• Flipchart or whiteboard with stand and markers
• Computer with LCD to project PowerPoint slides
Note: If the slides have been made into transparencies, you will need an
overhead projector instead.
• Microphone or sound system (if necessary)
• Calculator
Continued on next page
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Instructor Preparation, Continued
Room requirements
Prior to the training, be sure that the room has:
• Seating that allows for the number of participants to be seated
comfortably and still be able to see the flipchart and slides from all seats
• Tabletops or desks for writing
• Controllable thermostats and lighting
Logistics
Prior to the training, be sure to confirm or to find out the following:
•
•
•
•
•
Date and time of the class
Venue for the class
Room number/location
Location of rest rooms, telephones, kitchen facilities, etc.
Location of emergency exits
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Financial Management
Using This Guide
Introduction
This instructor’s guide has been prepared to help you manage the
information for this class as well as to help make the class more consistent at
all locations nationwide.
Topics
You will notice that the topic being discussed is labeled at the top of each
page. The content in this guide is different than what participants are looking
at in their participant guides, but references to page numbers that they
should be looking at are provided here to help you keep track of where they
are. You will need to have the Participant Guide in front of you, to be able to
see what they are looking at as well.
Timing
The timing in this guide is provided as a guideline. Each class is different,
and it is up to you to be able to manage the time so that you do not run over
the allotted limits. This will ensure that you are able to cover all the materials
that participants need to know in order to pass the exam.
Hints
If there is a mix of students who are quick and slow, or if someone is telling a
lengthy story or asking a lot of questions that require time-consuming
answers, you will have to decide at what point to move things along.
Other hints include:
• offering to discuss things further after class
• explaining that something being brought up now will actually be covered
later in the material
• explaining that although everyone may not be finished, you need to
move on but will be available to help with any questions after class
• using a “parking lot” for issues that come up that you don’t want to forget
about but that can’t be discussed right then
Instructor’s
talking points
Anything you may want to say word-for-word is bolded and bulleted. These
are only offered as suggestions. Things that are instructions to you are in
regular font and not bulleted.
Continued on next page
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Financial Management
Using This Guide, Continued
Adding your
experiences
Feel free to elaborate on the content in this guide by adding your own
experiences as long as your stories are directly relevant to the topic under
discussion and time permits. Your experiences can help clarify the content,
make the content more relevant and interesting to the students, and
encourage them to share their own experiences as well.
Icons
There are several icons that are used throughout this guide. They are:
Flipchart: This icon shows when you should display a prepared flipchart or
write something on the flipchart.
Handout: This icon shows when you should distribute a handout. This could
be a skill check, activity, or other handout.
Reference: This icon is used to tell participants what page to look at in the
Participant Guide.
Activity: This icon is used to point out where there is an activity/practice.
Optional: This icon is used to point out places where you may add a
personal story or do something extra, if time permits. It is more important to
complete the class on time and be able to get through all the material than to
provide extra examples. Use your judgment.
Continued on next page
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Financial Management
Using This Guide, Continued
Icons,
(continued)
Video: This icon is used to show where you will show a video to the
participants.
Question/Answer: This icon is used to show where you will ask a question or
questions of the participants.
Skill Check: This icon is used to point out where there is a skill check for a
chapter or chapters.
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Getting Started
Estimated time: 15 minutes
Welcome
Welcome them to the class and thank them for attending.
Introduc-tions
If you are using name tents, ask participants to put their first names on them.
Show Slide #2 - Introductions
Introductions
Your name
Where you work
„ Your job responsibilities
„ How long you have been in the
industry
„ What you hope to get from this class
„
„
Module 8: Financial Mgmt
2
Introduce yourself first, telling participants where you work, how long you
have been in the industry and what your involvement is with the local NAA
affiliate.
Ask participants to introduce themselves, selecting someone at one side of
the room to start.
Overview of
CAS program
Explain to participants that this Financial Management Course is one of nine
(9) courses that they will need to complete in order to receive the Certified
Apartment SupplierSM designation.
Continued on next page
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Financial Management
Getting Started, Continued
Overview of
CAS program,
(continued)
Explain that the last course is a final project where you are required to
perform an analysis of an apartment community. Additional detail about this
project will be provided in that course. Once you have successfully
completed the courses and the final project within the 2-year candidacy
period, you will receive the CAS designation. CAS designates receive a
certificate that is suitable for framing and a pin.
Additional
information
Tell them that the CAS designation is one of several that the NAAEI offers.
They can get more information about the other programs on the Web site at
www.naahq.org/education.
Agenda
Show Slide #3 - Agenda
Agenda
Investments
Adding Value to the Investment
„ Economic Analysis of a Property
„ Budgets
„ Property Valuation
„
„
Module 8: Financial Mgmt
3
Review the agenda.
Note: If you like, you can add breaks and lunches into this slide to show
when those will happen. Otherwise you can leave it as is, and take breaks
when it seems right during class.
Materials
review
Participant Guide
Ensure that each participant has a copy of the Financial Management
Participant Guide. Tell participants that this will be used:
• during class
• as a aid in studying for the exam, and
• as an on-the-job reference following training
Continued on next page
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Financial Management
Getting Started, Continued
Materials
review,
(continued)
Tabs
Explain that the Participant Guide is divided into these tabs:
1. Chapters: they contain the core content
2. Activities: these are exercises covering part of a chapter
3. Skill Checks: these are exercises and knowledge checks covering an
entire chapter
4. Toolbox: these are forms, checklists, and samples that you may want to
use on the job following training
5. Slides: these are the slides you will show throughout the Course
Explain that
• you will tell them where you are in the Participant Guide often, and
• although the slides contain information from the Participant Guide, they
are not identical or always labeled the same way because they have
different purposes.
Resource Materials
Explain that they should also bring their Resource Materials book to class
each time. (This should have been handed out in the first course they
attended.) This book contains the glossary of terms and has any sample
forms or other documents that they may wish to see during class discussion.
Logistics
Tell participants the locations of the restroom, kitchen, telephones, and
emergency exit.
Classroom
rules
Explain rules about use of cell phones and/or pagers, breaks, smoking, and
any other information you need to provide them.
Sign in form
Pass around the sign in form and ask participants to complete it.
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Financial Management
Chapter 1: Investments
Estimated time: 1 hour
What we’ll
cover
Participant Guide page 1-1
• In this chapter we will cover some basic information about
investments, such as what they are and how you decide whether or
not to make them.
• We will also look at some of the advantages and disadvantages of
investing in multifamily housing.
• And, we will talk about the different types of ownership and
different methods for financing the purchase or development of an
apartment community.
Show Slide # 4-Chapter 1: Investments
Background
• As a manager, you are responsible for the day to day financial
activities at the property like collecting rents, processing bills and
making bank deposits.
• However, on a larger scale, you are also responsible for the
property as an investment.
• Let’s look at what an investment is.
Participant Guide page 1-2
Show Slide #5 – Definition: Investment
Definition: Investment
„
An investment is the use of funds to
earn a profit.
Module 8: Financial Mgmt
Chapter 1
4
Review the definition of investment.
Continued on next page
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Financial Management
Chapter 1: Investments, Continued
Background,
(continued)
• The decisions that you make will directly contribute to the financial
success of the property you manage. And the value of a property
is directly related to its financial performance.
Participant Guide page 1-2
• There are many types of investments that we all make in our lives.
Q. Who can name an investment that you have made?
Flipchart any answers. Answer include: savings account,
Certificate of Deposit (CD), stocks, bonds, money market funds, real estate,
small business, 401(k), 529 plans, IRAs
• Great! These are all examples of things that we invest in, with the
hopes of turning a profit.
• Now let’s think about these investments a little more by doing an
activity.
Continued on next page
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Financial Management
Chapter 1: Investments, Continued
Factors in
investment
• When an investor wants to know whether an investment is right, he
or she can consider four (4) factors.
Participant Guide page 1-3
Show Slide #6 – Four (4) Factors in Investment
Four (4) Factors in
Investment
Risk
Income
„ Growth
„ Liquidity
„
„
Module 8: Financial Mgmt
Chapter 1
6
Review the slide.
• Any investment involves risk. Typically the less risky than
investment is, the lower the return. Because you are trying to use
your money to make money, you must be willing to take more risks
to make more money.
Continued on next page
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Chapter 1: Investments, Continued
Factors in
investment,
(continued)
• If you put your money into a savings account or CD at the bank you
will get a much lower profit than if you had invested it in a mutual
fund and let it grow over time. Typically the longer the time period
of the investment the greater the return, but also the greater the
risk.
• This is why we put our money into IRAs, 401(k) and 529 plans so
that over time our investments will yield a high return when we
need it- for retirement or to pay for college in the future.
• However, there is no guarantee on those types of investments, so
you have to be willing to take that risk and to be able to accept the
loss if it happens.
Participant Guide page 1-3
Review the list of common risks that affect multifamily housing investments.
• The ability to make some income from the investment is another
factor to consider. Income often depends on the amount of risk
involved. Conservative investments provide a predictable amount
of interest, while riskier investments have the potential for higher
returns.
Discuss the fact that income may not be in the form of cash- as in the case of
a tax shelter.
Participant Guide page 1-4
• Growth potential is another factor to think about when choosing an
investment.
• Investors looking for growth look at expanding rather than stable
markets, businesses and companies.
• The thing about investing for growth means giving up income now
to make more in the long run and that you may get low returns
initially until money is reinvested.
Continued on next page
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Financial Management
Chapter 1: Investments, Continued
Factors in
investment,
(continued)
Q. Thinking back to the different types of investments I
wrote on the flipchart earlier, what are some that you get into when
specifically looking for growth?
Answers include: mutual funds, 401(k), 529 plans, real estate, business
• Liquidity is the fourth factor in investments. Liquidity means
that you can easily convert the asset into cash.
• An investor must decide how long he or she can have their
money tied up in the investment in order to decide on whether to
make a certain investment.
Q. Thinking again of our different types of investments,
what are some that you think are liquid?
Answers include: stocks, bonds, Certificate of deposit (although there is a
penalty for early withdrawal once the commitment is made)
• Real estate is not a liquid investment. It is not easy to “just sell
off” an expensive property like a multifamily community. So the
investor who cannot allow his or her money to be tied up for a
while in order to realize a profit would not want to get into real
estate.
Investment
performance
measurements
Participant Guide page 1-5
• Successful investors need to know how to measure the
performance of an investment.
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Chapter 1: Investments, Continued
Show Slide # 7-Owners Objectives
• Discuss why it is important to know the owner’s investment
objectives.
Continued on next page
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Chapter 1: Investments, Continued
Investment
performance
measurements,
(continued)
• Investment performance is used to guide investment decisions
about buying, selling, and increasing or decreasing an equity
position. It is also a way to look at whether or not financial goals
are met.
Show Slide #8 and #9 – Performance Measures and ROI
Performance Measures
Rate of return on investment (ROI)
Cash-on-cash return
„ Capitalization rate
„ Internal rate of return (IRR)
„
„
Module 8: Financial Mgmt
Chapter 1
8
• The most frequently used measurement of performance is rate of
return on investment or ROI.
• This means simply the percentage of return on each dollar
invested.
• Here is the formula for calculating ROI.
Write the following on the flipchart:
Cash Flow/Investment = ROI
• Cash flow means the money left after all income has been collected
and all operating and capital expenses and debt service have been
paid. We will talk in much more detail about cash flow in Chapter 3,
as far as how to calculate it. As for investment, we are talking
about the initial investment or down payment.
• Let’s look at a sample calculation just to get a quick idea of how
this works.
Continued on next page
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Chapter 1: Investments, Continued
Investment
performance
measurements,
(continued)
Participant Guide page 1-5
Review the example of ROI calculation in the subtopic “Rate of return on
investment (ROI)” subtopic on page 1-5.
• Cash on cash return is another method of measurement.
Review the subtopic “Cash on cash return.”
Participant Guide page 1-6
Show Slide #10 – Capitalization Rate
• Another method of measurement is Capitalization rate. In this
method, you take the Net Operating Income, or NOI, of the property
and measure it against the total cost of the investment.
• The Capitalization rate is determined by dividing NOI by the
purchase price.
• The Capitalization rate is expressed as percentage or a decimal. It
is dependent on the market and the quality of the property, but
generally rages from 6-10%.
• Let’s look at how this works.
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Show Slide #11 and #12
Write the following on the flipchart:
NOI/Cap rate = Value or I/R= V
• To get the cap rate, let’s say we have a property that we paid
$7,000,000(value) for, and the NOI is $500,000 (I). (Write
$500,000/$7,000,000 on the flipchart.)
• This means our cap rate(R) is 7.1 % (write = 7.1% at the end of the
equation)
• Now let’s divide our NOI (I) - $500,000 by 6% to get our value- which
would be $8,333,333. (write out the equation on the flipchart.)
• Note the difference in value depending on the cap rate.
Continued on next page
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Chapter 1: Investments, Continued
Investment
performance
measurements,
(continued)
Participant Guide Toolbox tab page 5: Capitalization/Valuation
formula
• Let’s look at another example of this in the Toolbox on page 5.
Allow participants to review the content in the Toolbox example. Mention
that we will talk more about Capitalization in Chapter 5 when we talk about
Property Valuation.
Participant Guide page 1-6
Refer back to page 1-6.
• The final method for measuring performance that we will talk about
is the Internal Rate of Return, or IRR.
Review the subtopic “Internal Rate of Return (IRR).”
Questions
Q. What questions do you have about performance
measurements before we move on?
Answer any questions they have at this point, or use the “parking lot” flipchart
to note things that will be covered in more detail later.
Advantages
and disadvantages of
apartment
investments
• Now that we have talked about what an investment is, and how we
can decide whether or not to start or stop making one, let’s talk
about some of the advantages and disadvantages of investing in an
apartment community.
Continued on next page
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Chapter 1: Investments, Continued
Advantages
and disadvantages of
apartment
investments,
(continued)
Participant Guide page 1-7
Show Slide #13 – Advantages of Investments
Review the slide. Additional content to discuss can be added from page 1-7
in the Participant Guide.
Show Slide #14 – Disadvantages of Investments
Review the slide. Additional content to discuss can be added from page 1-7
in the Participant Guide.
Forms of
ownership
• Assuming that real estate is the investment of choice, and that a
property is to be purchased or developed, there are still many
things to figure out.
• One of those things is which form of ownership is the right one.
Continued on next page
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Chapter 1: Investments, Continued
Forms of
ownership,
(continued)
Participant Guide pages 1-8 and 1-9
Show Slide #15 – Forms of Ownership
Review the slide, and using the table in the Participant Guide on pages 1-8
and 1-9, briefly review the Descriptions column of each type.
Q. Who can tell me the type of ownership that you have at the
property where you work?
Allow a few different people to answer. Ask what effect they think the
ownership has on them.
Answers include: different objectives, different reporting requirements.
Mortgage
loans
Participant Guide page 1-10
• The last topic we are going to discuss in this chapter on
investments is mortgages.
• A mortgage is the most common sources of financing real estate
investments.
Continued on next page
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Chapter 1: Investments, Continued
Mortgage
loans,
(continued)
• As any of you who have ever purchased real estate yourselves
know, there are many different types of mortgages, each with its
own terms and conditions.
• Let’s look at them now.
Participant Guide page 1-10
Show Slide #16 – Types of Mortgages
Review the slide, and using the table on page 1-10, describe each type of
mortgage.
Continued on next page
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Chapter 1: Investments, Continued
Mortgage
loans,
(continued)
Participant Guide page 1-11
Show Slide #17 – Where to obtain a mortgage
• So, you have decided to buy a property and you have formed some
sort of company or partnership in order to do it. Where are you
going to get the money?
• Again, there are many sources for obtaining a mortgage that you
can look into.
Review the list on the slide. Add any information that you feel is beneficial to
this discussion here.
Questions
Q. What questions do you have about anything we have talked
about so far?
Answer any questions that come up.
Transition
• That brings us to the end of the Investments chapter. That means it
is time to take our first Skill Check.
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Skill Check #1
What this Skill
Check covers
Show Slide #18 – Skill Check #1
• This Skill Check covers the material from Chapter 1: Investments.
Setup
Explain to participants that they will now complete the first skill check for this
course. They will work individually to complete the skill check, and once
complete (or time runs out) you will provide the answers which they can use
to score themselves and use as a study guide for the exam.
This skill check can be completed using their Financial Management
Participant Guide to look up the answers.
Refer to Skill Check #1 in the Skill Checks tab of the Participant
Guide.
Explain that they have 15 minutes to complete the skill check, and then you
will:
• call time, and
• provide an answer key
Working Time
Allow participants 15 minutes to work. As they work, walk around the room
offering help where needed and to see how they are doing. Once the time
has lapsed, ask participant to stop. Some may not complete the skill check
in the time provided and that is OK. The answer key contains all the
information they need to study for the exam, and this is just a way to
reinforce what they have learned.
Continued on next page
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Certified Apartment Supplier (CAS) SM Instructor’s Guide
Financial Management
Skill Check #1, Continued
Debrief
Distribute the Answer Key to Skill Check #1 to each participant.
Explain that the Answer Key is a good tool for them to use when studying for
the exam.
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Financial Management
Chapter 2: Adding Value to the Investment
Estimated time: 1 hour and 30 minutes
What we’ll
cover
• In this chapter we’ll cover the different methods that a CAS can use
to add value to the investment. Value has different meanings,
depending on the goals of the owner. We will discuss the things
you can do to try to increase income and control expenses.
Show Slide #19 – Chapter 2
Background
• In order to add value to a property, you need to increase Net
Operating Income (NOI). Remember, NOI is income less expenses
before capital expenses and debt service.
• Let’s talk about things that you can do as a CAS to increase the
value of a property.
Participant Guide page 2-2
Show Slide #20 – Adding Value: CAS Responsibilities
Review the slide.
• Your biggest opportunity to increase cash flow is to increase
income. Income can grow by charging aggressive rents and being
creative with other income sources.
• We will talk more about some practical ways to increase income
sources in this chapter.
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Certified Apartment Supplier (CAS) SM Instructor’s Guide
Financial Management
• Many expenses are fixed and occur no matter how high or low
occupancy is. But you may be able to control when they are paid
or even to get discounts on some things. We will talk more about
that later as well.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Background,
(continued)
• The financial goals are going to depend on your owner’s objectives
for the property. The value to the owner will be based on those
objectives. For example, if a property is being sold, the criteria for
value will be different than if it is being rehabbed and kept.
• Let’s look at some ways that value can be added.
Participant Guide page 2-2
Show Slide #21 – Additional ways to add value:
Review the slide.
Mention that decreasing the turnover rates of both staff and residents will
help save you money and that is actually a way to add value as well.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Income and
expenses,
(continued)
• Let’s see if there are any others that we haven’t thought of.
Show Slide #22 – Sources of Income
Review the slide. Point out any that the groups didn’t capture on their lists.
Reiterate that being creative with what you offer residents allows you to add
to your income.
Show Slide #23 – Types of Expenses
Review the slide. Point out any that the groups didn’t capture on their lists.
Explain that although many expenses are fixed, there may be ways to reduce
expenses by negotiating prices with vendors and staggering purchases.
Rental income
• Since rent is the major source of income at a property, let’s look at
the factors that affect rental income.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Rental
income,
(continued)
Participant Guide page 2-3
Show Slide #24 – 3 Factors That Affect Rental Income
• Market rents need to be determined so that you know what you can
charge for your different units based on unit type. You want to be
sure you know what the “going rate” is so that you can charge as
much as possible yet still be competitive.
• Physical occupancy is important because you need a certain
percentage of your units to be occupied in order to run the
business. The percentage of occupancy will vary based on the
company or owner’s objectives. The way to calculate this is shown
in the Toolbox on page 7.
Participant Guide page Toolbox -7
Review the formula for calculating the percentage occupancy. You can write
the formula and example calculation (from page Toolbox-7) on the flipchart
and the participants can follow along with the content in the Toolbox.
• We will talk about how you can manage your occupancy later in
this chapter.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Rental
income,
(continued)
• Your collection percent has to do with rent collection. If your
tenants are not paying rent on time, you need to get better at
collecting it, or at charging the appropriate fees if they are late.
Setting your screening criteria for applicants at market rent helps
to reduce delinquency rates. You want to make sure you get the
right people in, so that you can avoid dealing with late payments.
Participant Guide page 2-3
Review the subtopic “How these factors work together” to show the
interdependence between rents, occupancy and rent collections.
• If you want to try to set competitive rents, you need to understand
what the competition is charging for rents. You must not only be
aware of market rents, but also determine what your average
effective rent is, so that you can compare your actual rates to those
of the competition.
• There is a formula for determining your average effective rent in the
Toolbox tab on page 4.
Show Slide # 25: Concession Impact
Participant Guide page Toolbox -4
Review the formula to calculate the average effective rent. You can write the
formula on the flipchart and the use the example in the Toolbox to illustrate
the calculation.
• You can see the impact that concessions have on the average rent.
In certain economic conditions, concessions are used to get a
lease signed or to get a renewal. At other times, though, you
should not use them.
• Any time concessions are provided, the property will collect less
rent than it would if the resident were paying current market rent.
So reducing or eliminating your concessions will increase your
income!
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Rental
income,
(continued)
• Your leasing staff may get used to using concessions during
challenging times, but it’s important to be aware of changes in the
market and know when you can stop using them. You can sell
prospective residents on the features of the property and how they
meet their needs rather than offering a concession.
• Similarly at renewal time, you can point out the benefits of living in
the community and the costs of moving that would be more than an
increase in rent.
• However, you need to have some turnover in residents to maintain
a healthy rent roll. If you have too many residents paying low rates,
you need them to leave at some point in order to increase your
income.
Participant Guide page 2-4
• Let’s look at the impact of concessions on effective rent.
Write the following on the flipchart
Market rent = $700
Concession = one month free
Effective rent = $642 (700 x 12 months = $8,400 - $700 = $7,700/ 12 months
= $642)
• The effective rent is what matters, and it’s important to understand
the financial impact of the use of concessions. At any point in time
your effective rent will vary based on what has been given to
residents and market rent will also vary, so there may be times
when the effective rent varies by a larger amount than at other
times due to the size and term of the concession.
Participant Guide page 2-4
Review the subtopic “Factors that affect successful concessions” to show the
things to keep in mind when considering concessions.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Factors that
affect rental
rates
Participant Guide page 2-5
• As a CAS, you must be aware of the events and trends in your area
so that you can assess the economic effects they will have on your
property.
Show Slide #26 – Law of Supply and Demand
• If you are aware of what is happening in your community, you will
be able to assess the effects of the economy on your property, and
be able to make decisions to react appropriately.
• Certain economic conditions impact apartment housing.
Show Slide #27– Economic conditions
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Factors that
affect rental
rates,
(continued)
Review the subtopic “Economic conditions” to explain how the economy can
create an increase or decrease in supply. Factors like a new company in
town means more jobs and more people who need to live nearby.
Conversely a plant closing or a natural disaster can devastate an area.
Participant Guide page 2-6
Review the subtopic “Housing trends” and discuss the impact of:
• construction of new apartments on rental rates
• construction of single family homes and conversion of rental units to
condos on supply and demand for rental homes.
Q. Who can tell me about a situation that has impacted your
community in the recent past, such as the constructions of a new
property nearby, a housing boom or other situation that has affected
how you operate?
Allow a couple of people to share stories if they offer.
• Other things that affect rental rates are things like the amenities
that you offer- or if you don’t offer as many as your competition.
You will not be able to charge comparable rent if you don’t offer
comparable services. Conversely, if you can add amenities at your
property and charge extra for them, you need to consider that.
• Features of your property also may allow rental increases. Things
like a special view or living on a certain floor can add a premium
charge to certain unit rents.
Q. Who can tell me about some differences in rental rates that
you charge at your community for these types of features?
Allow a couple of people to contribute if they offer.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Factors that
affect rental
rates,
(continued)
Participant Guide pages 2-6 and 2-7
Review the subtopic “HUD and government-assisted housing programs”
pointing out that:
• they are income restricted and rent limited
• annual fair market rents are established
• income levels effect eligibility
Rental rate
adjustments
• Something we need to look at is what you need to consider before
raising or lowering rent. Even though you want to maximize
income, it doesn’t mean you need to fill up every unit at any cost.
Participant Guide page 2-8
Show Slide # 28 – Balancing rental rates and vacancies
Balancing rental rates and
vacancies
The goal is to maximize income not
occupancy
„ Pricing too high may cause longer
vacancy
„ Pricing too low means you are losing
money while the unit is occupied
„
Module 8: Financial Mgmt
Chapter 2
23
Review the slide to explain that you need to determine whether it’s better to
raise the rent and maybe have a longer vacancy as opposed to lowering the
rent which remains low for the length of the lease no matter what happens in
the market during that time. And it may be less expensive too.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Rental rate
adjustments,
(continued)
• Let’s look at some calculations that you can use to see what the
effect on net income would be in the different scenarios of raising
rent, lowering rent or keeping rent the same.
Show Slide # 29- Increasing Rental Rate
Write the following on the flipchart
Market value = $800
Raise rent 10% = $880
Vacancy = 15 days
Q. What is the cost of that vacancy?
A. $400 (half the month’s rent)
Q. And at the new rate, how long would it take to make the
money back from the 15 days that the unit sat vacant?
A. 5 months ($400/$80)
• Now consider what could happen if you wanted to lower rents.
• Sometimes you have a certain type of unit that you just can’t rent
and you want to target those units to get some money out of them.
An empty unit not only makes no money but costs money for
utilities in the meantime. So you may decide to focus on lowering
the rent for those units for a week and advertise them so that you
can try to get them leased.
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Rental rate
adjustments,
(continued)
Financial Management
Participant Guide page 2-9
Show Slide # 30- Lowering Rental Rate
• Let’s look at an example of what lowering a rent does to your
effective rent.
Write the following on the flipchart:
Market value = $800
Lower rent 10% = $720
Loss per month = $80
Potential loss for year = $960
• If you lower the rent the unit will probably lease quickly. However
you have the potential to lose $960 during the course of the year.
Q. If you had not lowered the rent and let the apartment go
vacant for a month, what would you lose?
A. One months rent or $800
• So, that is a $160 that you would save compared to the lower rent
scenario on the flipchart.
• So you have to make decisions based on the situation. If you have
already lost a few months rent on a unit, it may be better to get it
filled than to have it sitting empty month after month.
• Let’s review some of the factors to consider before adjusting the
rent.
Continued on next page
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Certified Apartment Supplier (CAS) SM Instructor’s Guide
Rental rate
adjustments,
(continued)
Financial Management
Participant Guide pages 2-9 and 2-10
Show Slide # 31- Before Adjusting Rent:
Review the table of questions to ask about the 4 P’s, making the following
points:
People- Your people are representing you and your community. Be sure they
are knowledgeable and professional and offer excellent service.
Product- Be sure that you keep your property looking good. If you neglect
things that need to be fixed or updated, that creates a bad impression and
makes a statement about how you run your business.
Promotion- You will need to advertise to the right people and in the right
places. You need to be responsive when someone calls or comes in or
makes an inquiry via the Internet.
Participant Guide page Toolbox-6
Refer to the Toolbox page 6 for the formulas to calculate the cost per lease
and the cost per traffic of the advertising dollars that you are spending.
• The numbers that you get from these calculations will help you
decide if that advertising was worthwhile or not. You may decide to
make some changes to your marketing plan based on what you had
to spend to get those leases signed.
Price- Be sure your pricing is based on a sound policy and that you have
done your research.
Continued on next page
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Certified Apartment Supplier (CAS) SM Instructor’s Guide
Rental rate
adjustments,
(continued)
Financial Management
Participant Guide page 2-12
Show Slide #32– Determining pricing
• Before you change the rent schedule, you need to determine what
the rents should be.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Rental rate
adjustments,
(continued)
• We have already talked about the fact that you need to set
competitive rents in order to attract residents and to make money.
There are a couple of ways you can do this.
• One is to conduct a market analysis using something like the
Market Comparison Survey Form.
Participant Guide page Toolbox-17
Review the form and the elements that you look at when surveying the
competition.
• Another way to determine pricing is to use software that helps you
determine prices for a certain unit type based on current and
forecasted market conditions.
• Your supervisor will help you learn how to use this software if it is
something that your property is using to determine pricing.
Optional: If you have any information about how this software works
or the data you need to supply for it to work, you may provide that
information here.
Participant Guide page 2-12
• Something that you will want to know is when to increase rents.
• Your experience and information from historical reports will help
you determine when the time is right.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Rental rate
adjustments,
(continued)
Participant Guide page 2-12 and 2-13
Show Slide #33 – When to consider a rent increase
Review the slide.
• Something to think about is when your busy traffic season
is…typically this is in the Spring and Summer, but can vary based
on location. You want to be sure that there will be plenty of traffic
to fill your vacancies.
• You should also consider how much time has passed since the last
increase.
Participant Guide page 2-13
Show Slide #34 – Rental increases: Current residents
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Rental rate
adjustments,
(continued)
Review the content on the slide. See the Participant guide page 2-13 for
additional content to discuss regarding each bullet on the slide.
Review the subtopic “How many units to increase” to mention that all unit
types should be increased if you are going to increase rates, unless there is
a problem with renting a particular unit or type of unit.
Ask students what they would do if there were a high demand for
one-bedroom units and they didn’t have any available, but they did have
several vacant two-bedroom units. Would they adjust the rent of the twobedroom unit? What effect would that have on income compared with letting
it sit vacant for a few months?
Answers include: market the unit as a one-bedroom with a den or office,
charge less for the rent since it would be less costly than losing full rent for
several months.
Use the flipchart to show a calculation, for example:
1 bedroom = $650
2 bedroom = $800
Lease 2 BR for $700 = loss of $100/mo. for 12 month lease
Loss to rent 2 BR at lower price= $1200
Loss to have 2BR sit vacant for 2 months = $1600
Discuss the fact that there would be a large gap between rents if this rate
adjustment were made and whether that would be an acceptable situation.
Questions
What questions do you have so far about anything we have
covered?
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy
• Now let’s talk about managing occupancy.
Participant Guide page 2-15
Show Slide #35 – Managing Occupancy: Reports
Review the slide that discusses the different reports you will want to look at
to help you get a picture of your occupancy and the income from your
occupancy now and in the near future.
Review the content in the subtopic “Occupancy reports” pointing out what is
on an occupancy report, and how software can be used to update the
situation on a daily basis.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
• Occupancy reports are usually looked at along with traffic and
sales reports, in order to see how many people have called, come
to the office, or responded via the Internet, and what percentage of
these resulted in a signed lease.
• We can look at an example of a report that contains such data.
Participant Guide page Toolbox-18
Point participants to the Toolbox to see the sample Weekly Activity Report.
Point out the items on the report.
Participant Guide pages Toolbox-20 and 21
Show Box Score #1 and Box Score #2 report samples. Review these reports
pointing out the different styles and types of data included on the reports.
Mention how this data helps keep you aware of the “big picture” regarding
occupancy.
Point out how on the Box Score #1 report it shows the traffic analysis
information and the leasing agents and their closing percentages.
Participant Guide page Toolbox-6
Point out the closing percentage formula that is in the Toolbox on page 6 so
that they know how to perform this calculation manually.
Participant Guide page Toolbox-24
Point out the Leasing Activity Report sample and the different ways it
analyzes the sources, agents, and units.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
Participant Guide pages Toolbox-25 and 26
Review the All Units Summary Report, pointing out the exposure calculations
that are provided. Review the Lease Expiration Report showing how you can
see when each unit’s lease will expire for planning purposes.
Participant Guide page Toolbox-10
Point out the calculation for determining leasing exposure.
Look at the month-to-month lease percentage formula and explain the impact
of these types of leases. Many companies limit the amount of MTM leases
they have at any one time because the resident can leave anytime and you
cannot plan the timeframe or amount of cost that you will incur as a result.
Participant Guide page 2-15
What did we say was the biggest source of income?
Answer: Rent
• Let’s look at how we can see how much we are collecting in rent.
It’s a report called a rent roll.
• This can be produced at any time to show the collections and
occupancy at that moment.
• You can compare rent potential with money lost from vacancy,
concessions and collection losses.
Explain that this affects your income targets and ultimately the owner’s
objectives.
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
Participant Guide page 2-16
Review the subtopic “What should be included on a rent roll.”
Participant Guide pages Toolbox-27 and 30
Review the Rent Roll Sample #1 and Rent Roll Sample #2 reports. Point out
the summary at the end of the rent roll on page Toolbox-29 and on page
Toolbox-32.
• Another report that is helpful is the Delinquency report. As it
sounds, this report tells you who are late on their rent payments
and other fees, and what is being done about it.
Participant Guide page Toolbox-33
Review the sample of the Delinquency Report.
Participant Guide pages 2-16 and 2-17
• A collection summary analysis should be done to see how well
collection procedures are working. First, look at the rent roll to see
what is owed, look at the bank deposit summary to see rent paid
and look at the delinquency report to see who is delinquent.
• If you don’t collect your rent from your current residents, you won’t
meet your income objectives!
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
What can you do if you discover that you have not done such a
good job of collecting rents? Let’s say your delinquency report shows
a lot of late payments…what can you do?
Answers include: assessing late fees in addition to returned check fees as a
deterrent, giving residents discounts for payment on time , and using the
eviction process as a way to get payment or to get rid of residents who will
not pay so that you can get in some residents who will pay!
Participant Guide pages Toolbox-34, 36, and 37
Review the sample Bank Deposit Summary Report, Monthly Income
Summary Report and Monthly Transaction Summary Report
• You can use these reports to see income versus budget. They
show the money that has been deposited, and the different
categories of money that have been collected during the month.
We will talk more about these different categories in Chapter 4
when we look more closely at budgets.
Participant Guide pages Toolbox-38 and 39
Review the Lost Rent Summary Report and the Concessions Report and talk
about how these reports show you the rent you are losing due to the current
rent vs market rent, and the concessions you are currently giving as well as
when they are going to end.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
Participant Guide page Toolbox-41
Look at the Demographics Report. Explain that this shows you the profile of
your current residents. You can look at your marketing sources, traffic
analysis and leasing activity to see where improvements can be made in who
you are attracting.
Explain how, when looked at together, all the reports help you get a picture of
how you’re doing with your occupancy and your income. Mention that the
property manager will need to look at what these reports are telling him or
her, and determine what can be done to improve the income situation at the
site. In addition to collecting rent from those who live there, which is the
most obvious source of income, the manager may want to:
• increase traffic
• close more leases
• market to different people
• improve the property, or
• increase rents
Participant Guide page 2-17 to 2-19
Show Slide #36 – Managing Occupancy: Methods
Review the slide.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
• There are some other things you can do to manage your
occupancy. One thing is to know your occupancy trend. This is a
forecasting tool that let’s you look at the future percentage of
leased units for a particular timeframe. This will help you plan your
marketing strategies and to make you aware of your potential
expenses.
Participant Guide page 2-18
Review the example of the calculation to determine the percent occupancy.
• Another thing you can do is to stagger your lease expirations. This
will help to avoid a large number of leases all expiring at the same
time.
What would happen if a lot of leases expired at the same time?
Answers: you would need to rent a lot of units or face an income loss, you
would need to conduct make-ready maintenance on a lot of units and at the
same time, increasing costs and the burden on the maintenance staff.
Participant Guide page 2-19
• You may consider strategies such as shorter or longer leases
rather than the traditional 12 month lease, and even making the
month that the leases expire coincide with the heavy traffic months.
• You can stagger the months during which leases expire, the date of
the month during which leases expire.
• You do need to be aware of your state laws and regulatory
requirements, since there may be mandates about lease terms, and
some government-assisted properties are not allowed to offer less
than a 12 month lease.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Managing
occupancy,
(continued)
Refer participants to the subtopic “Turnover ratio” and explain what it is, and
how it is determined.
Participant Guide page 2-20
Discuss how you are looking for a general picture not a particular month’s
turnover. Explain that this will allow you to assess future occupancy and
potential expenses. It also will help point out if you are experiencing a high
turnover so that you can try to figure out the cause.
The national average for turnover in an individually metered, garden
style, market rate apartment community was 55% according to the 2009
NAA Income and Expense Analysis Survey.
Participant Guide page 2-21
Review the reasons that turnover may vary.
Questions
What questions do you have about managing occupancy?
Continued on next page
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Financial Management
Chapter 2: Adding Value to the Investment, Continued
Expenses
• Earlier we talked about what you can do to add value to the
property. The first thing was to increase income. The next was
controlling expenses.
• As a CAS, you will be responsible for controlling costs. We talked
about some of the types of expenses you may incur.
Who can tell me what some of the expenses are?
Answers could be: maintenance, administrative, salaries and personnel,
taxes, insurance, utilities, contract services, advertising and marketing
Participant Guide page 2-22
• Let’s look at some of the categories of expenses that you will have
to deal with, and talk about which ones can be controlled.
Show Slide #37 – Expenses
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Expenses,
(continued)
• Fixed expenses do not vary with the occupancy level of the
property. They include:
o property taxes
o insurance payments.
Review the information on page 2-22.
Participant Guide page 2-23
• Variable expenses are controllable expenses and sometimes vary
with occupancy. They include:
o utilities
o maintenance contract
o landscaping
o turnover costs
o recurring repairs and maintenance
o marketing/advertising
o payroll and benefits
• Some of these are controllable by doing things like retrofitting
restroom fixtures to save water and thereby saving money on that
utility.
• Other things that can be controlled are rates charged by vendorsyou may be able to negotiate a deal to not accept a rate increase
that they are suggesting or to delay the increase for a year.
• Bigger companies have the power to negotiate and can often get
discounts. You may also be able to get a revenue share for the
community from cable and phone providers if you make a certain
company the “preferred provider” at your community. Some
companies classify this as an income source rather than an
expense deduct.
• If you advertise in a printed guide, ask for a discount. They are at a
disadvantage as compared with Internet companies now, and may
be willing to drop their rates.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Expenses,
(continued)
• Working efficiently can also save you money. For example, if you
need to have a unit painted in order to turn it, you may have
internal staff whom take care of make-ready maintenance but they
are backed up, you may be able to hire contractors to have it done
in a day as opposed to waiting a week for your own staff to take
care of it.
• If you figure out the cost of advertising per lease and cost of
advertising per traffic, you can keep an eye on inefficient
advertising methods and stop using them. It’s good to spend your
money where it works best for you. You want to know that you
have traffic coming in and that there are signed leases as a result
of that traffic.
• Let’s look again briefly at how you can determine these costs.
Participant Guide page Toolbox-6
Review the examples of cost of advertising per lease and cost of advertising
per traffic.
Participant Guide page 2-23 and 2-24
• Capital expenses are expenses for things like appliances, heating
and air conditioning equipment and costs for large improvements
like new roofs or swimming pools.
Review the content in the subtopic “Capital expenses” which continues onto
page 2-24. Review the depreciation example.
Participant Guide page 2-24
• A replacement reserve account is money that is set aside for
projects like paving parking lots and putting on new roofs. This is
like a savings account in which you put money on a regular basis
so that when you need to do a major project you have the funds.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Expenses,
(continued)
• Some lenders require these funds. This is more common with HUD
assisted properties.
• Debt service, which is your mortgage payment, is another expense.
This payment is not considered an operating expense, but it is
subtracted from income when calculating cash flow. We will talk
more about that in the next chapter.
Participant Guide page 2-24 and 2-25
Show Slide #38 – Cost Benefit Analysis
• Before spending money, it is a good idea to look at how the
expense will benefit you in the long run.
Ask a participant for a time when he or she has done a cost benefit
analysis in their own life.
Answers may include: Purchase a new car vs. keep an old car running and
be payment free for a while, buy a house vs. rent, depending on the market
conditions, installing central air in the house rather than using air conditioners
in the hot months.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Expenses,
(continued)
• At an apartment community, the benefits may be financial, such as
increased income, a cost savings (and ultimately an increase to
income) or the benefit of having satisfied employees who don’t
leave and therefore cost you money to hire new staff and train
them.
• Another benefit may be time, such as when you need to move new
residents into an apartment and it would be faster for you to hire
outside contractors to turn it rather than having in-house staff do it.
On the other hand, in-house staff would be less expensive, and if
you didn’t have anyone waiting for the apartment, you could save
money.
Tell them that doing a cost benefit analysis will be helpful to them for many of
the decisions that they make as a CAS.
Participant Guide page 2-25
Show Slide #39 – Accounting Tools
• There are several accounting tools that you can use to help you
keep track of where money is coming from and where it is going.
Review the slide.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Expenses,
(continued)
Participant Guide page 2-25 and 2-26
Review the subtopic “Budget control log” pointing out:
• this tool helps you operate within your projected budget by tracking
expenses as they occur and comparing them with budgeted amounts
• expenditures should be recorded according to the company’s accounting
practices, whether when incurred or when paid
• this will help you avoid any surprises at the end of the month because
you will be able to post your known expenses and then add others as
they occur
• this log will not match the financial statement on a monthly basis, nor is it
intended to.
Review the subtopic “Invoices”, pointing out how to review and what to do if
an error occurs.
Explain the importance to trying to pay all invoices within the discount period
if one is offered in order to save money.
Participant Guide page 2-27
Review the subtopic “Check request/payment voucher”. Discuss the process
of completing a check request, once an invoice is approved for payment, and
what the check request voucher should contain. This may be a manual or
electronic process, depending on the property. The accounts payable
department writes and sends the checks.
Review the subtopic “Petty cash” and describe the purpose of this account
and how it should work.
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Expenses,
(continued)
Participant Guide page 2-28
• Resident records are another way you can keep track of money that
has come in. We have looked at several reports that show what
residents pay in rent and when their leases expire, but a rent
history report is useful because it shows all the fees they owe,
such as rent, utilities and other fees, as well as what they have paid
historically.
• Security deposits are routinely collected from new residents. When
they leave their apartments, you owe them their deposit back. You
can deduct certain things from this deposit, and you must provide
the resident with a report detailing what you deducted and why,
along with any balance owed to him or her. This helps you to keep
track of the money that is coming out of the account in which you
keep security deposits.
• There are state laws regarding the handling and disposition of
security deposits and you are responsible for knowing the law in
your state. There is a list in your Resource Materials book that tells
you the laws by state.
Participant Guide page 2-29
Discuss the alternative to paying high security deposits by using a bonded or
insured deposit.
Review the subtopic “Collection of former resident accounts” pointing out:
• collection methods vary
• they are regulated by state and federal law
• companies who collect for you usually get a percentage of the money
they bring in as their fee
Continued on next page
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Chapter 2: Adding Value to the Investment, Continued
Questions
What questions do you have before we move on?
Transition
• That brings us to the end of this chapter. Now its time for our
second skill check.
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Skill Check #2
What this Skill
Check covers
Show Slide #40 – Skill Check #2
• This Skill Check covers the material from Chapter 2: Adding Value
to the Investment.
Setup
Explain to participants that they will now complete the second skill check for
this course. They will work individually to complete the skill check, and once
complete (or time runs out) you will provide the answers which they can use
to score themselves and use as a study guide for the exam.
This skill check can be completed using their Financial Management
Participant Guide to look up the answers.
Refer to Skill Check #2 in the Skill Checks tab of the Participant
Guide.
Explain that they have 15 minutes to complete the skill check, and then you
will:
• call time, and
• provide an answer key.
Continued on next page
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Skill Check #2, Continued
Working Time
Allow participants 15 minutes to work. As they work, walk around the room
offering help where needed and to see how they are doing. Once the time
has lapsed, ask participant to stop. Some may not complete the skill check
in the time provided and that is OK. The answer key contains all the
information they need to study for the exam, and this is just a way to
reinforce what they have learned.
Debrief
Distribute the Answer Key to Skill Check #2 to each participant.
Explain that the Answer Key is a good tool for them to use when studying for
the exam.
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Chapter 3: Economic Analysis of a Property
Estimated time: 1 hour and 15 minutes
What we’ll
cover
• In this chapter we will cover the different calculations that you will
need to perform in order to analyze the financial condition of your
property.
• We will talk about financial statements and will calculate the cash
flow of a property.
Show Slide # 41
Background
Participant Guide page 3-2
• There are 2 questions that managers and investors usually ask
when analyzing a property.
• How well has the property performed over a given period of time?
• Where does the property stand at a given point in time?
• Financial statements are used to answer these questions.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Financial
statements
• The first of the 2 financial statements we will look at is the balance
sheet.
Participant Guide page 3-3
Show Slide #34 – Balance Sheet
Balance Sheet
May 31, 2001
ASSETS
Petty Cash
Cash
Cash Fund
Prepaid Insurance
Building
16,350,000
Less Depreciation
885,000
Building Net
Land
Furniture & Equip
400,000
Less Depreciation
100,000
Furniture & Equipment Net
Escrow
Total Assets
LIABILITIES
Accounts Payable
Notes Payable
Accrued Interest Payable
Accrued Property Tax
Security Deposit Liability
EQUITY
Partners Equity
Distributions to Partners
Prior Period Earnings
Current Earnings
Module 8: Financial Mgmt
Total
Equity
Chapter
2
300
11,055
7,700
15,465,000
3,750,000
300,000
223,000
19,534,055
55,000
12,275,000
637,700
422,000
96,000
13,485,700
9,010,355
-432,500
-2,544,500
15,000
6,048,355
34
19,534,055
• The balance sheet represents the financial status of a property at a
moment in time. It is not used on a daily basis.
Review the 3 sections of the balance sheet:
• asset = economic resources that benefit an investment. (property, cash,
bonds)
• liability = economic obligations to non-owners
• equity = the excess of the assets after deducting liabilities. This will vary.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Financial
statements,
(continued)
• The other financial statement is the income statement.
Participant Guide page 3-3
Show Slide #35 – Income Statement
Income Statement
Income
Rental Income
Other Income (Fees, Vending, Utilities)
Vacancy & Collection Loss
Effective Gross Income
Operating Expenses
Fixed Expenses
Real Estate Taxes
Insurance
Variable Expenses
Payroll
Repair & Maintenance
Utilities
Contract Services
Administrative & General
Management Fee
Advertising & Leasing
Other Expenses
Interest
Replacement Reserves
Total Expenses
Net Income
12/31/2000
$19,450,000
1,815,000
-97,500
$21,362,500
$1,268,000
97,600
238,100
598,800
1,636,000
335,000
272,000
102,000
190,000
$4,737,500
912,000
200,000
1,112,000
5,849,500
Module 4: Fair Housing 15,513,000
35
• The income statement measures performance for a span of time.
• All revenues and expenses are recorded and represent increases
or decreases in the owner’s claim, compared to the budget.
• The purpose is to inform managers and owners of the operations of
the property.
• This will allow you to make comparisons, set goals and maintain
control.
Concepts
• There are many concepts to understand in order to be able to
determine and report the net operating income of the property.
• We will talk about each of these concepts now, and then finish up
the discussion by calculating the cash flow of a property.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Participant Guide page 3-4
Show Slide #45 – Accounting methods
Review the slide.
• One of the first things to understand is which accounting method
your property uses to report financial data.
• The accrual method gives a more realistic picture of net operating
income within the period.
Show Slide #46 – Cash Flow
Review the slide. Talk about the fact that this may be a positive or negative
number.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Participant Guide page 3-5
• As a CAS you are going to be more concerned with net operating
income than cash flow because you will have limited ability to
control capital expenses and debt service.
• Let’s take a look at what a cash flow statement looks like so that we
can see what goes into the calculation.
Participant Guide pages Toolbox-42 and 43
Refer participants to the Cash Flow statement in the Toolbox. The completed
sample on page 42 shows the actual calculation. There is also a blank
template on page 43 that participants can use on the job if they like.
Point out that there are different parts of the calculation, and that at the end
you determine whether there is any money left or not.
• We are going to talk about each part of this calculation now.
Write the following heading on the flipchart:
Cash flow calculations
Post this flipchart where all can see it and leave it up for the remainder of
class.
Note: You will be adding the different formulae to the flipchart during this
chapter.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Participant Guide page 3-5
Show Slide #47 – Gross Potential Rent (GPR)
• The first thing we need to look at is the Gross Potential Rent or
“GPR”. This is the total rent being collected from all leased units
plus the market rent of all vacant units.
• This is the 100% possible income figure.
• All other income and expenses are measured and evaluated as a
percent of GPR.
• Let’s look at an example.
Write the following on the flipchart:
250 Units
230 occupied at average monthly rent of $759 = $174,570
20 vacant units at average market rent of $810 = $ 16,200
GPR = $190,770
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Participant Guide page 3-5
Show Slide #48 – Market Rent
Review the subtopics “Market rent” and “Loss to lease” and talk about the
loss that is created when you charge less than market value for rent.
Show Slide #49 and #50 – Loss to Lease and Loss to Lease Example
Review the example provided at the bottom of page 3-5. Talk about the fact
that if lease rents are close to market rents and loss to lease is minimized,
some managers feel that market rents may need to be increased. This is an
example of something you can do to increase income as we talked about in
the previous chapter on when to raise rents.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Participant Guide page 3-6
Show Slide #51 – Vacancy, Concession, and Collection Loss (VAC)
• Vacancy, concession and collection loss or “VAC” is the next thing
we need to understand. This is the total value of rent loss from
o vacant units
o concessions given to residents
o collection losses from writing off bad debt
o amount of rent loss from non-revenue units (those used as
offices, model units or rent free units provided to employees.)
• Total VAC can often run higher than 10% of GPR.
Explain that some companies treat vacancies and concessions as expenses
so they appear below the revenue line on the operating statement (cash
flow).
Show Slide #52 and #53 – Effective Gross Income (EGI) and Other Income
(OI)
• Effective Gross Income or “EGI” is the next concept you need to
understand.
Who can tell me what EGI is?
Answer: Net rental income or total rental income.
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• EGI can be calculated like this.
Write the following formula on the posted flipchart under the header
“Cash flow calculations”
EGI = GPR-VAC
• To calculate EGI, you need to take your GPR and subtract all rent
loss from it.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Write the following on the flipchart
GPR = $4,892,000
VAC = ($678,000)
EGI = $4,214,000
Review the example.
Participant Guide page 3-7
• Other income is something you need to understand. This is the
money collected for items other than rent. We talked earlier about
some of the sources of income that you have at a property.
Who can name some things that you can collect money for,
other than rent?
Answers include: laundry, vending, cable, deposit forfeitures, parking,
amenity charges, late fees, pet fees, application fees, administrative fees,
lease premium fees.
• Other income can be up to 10% of your total income. In 2009, the
NAA Income and Expense Report survey found that for garden
apartment communities the per unit income, other than rent, was
$658!
Participant Guide page 3-7
• Now we have talked about EGI (Effective Gross Income) and OI
(Other Income). You use these 2 numbers to come up with your
Gross Operating Income or “GOI”.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Write the following on the posted flipchart below the formula for EGI
GOI = EGI + OI
• You add all sources of income together to get your Gross
Operating Income.
Write the following on the flipchart
EGI = $4,214,000
OI = $ 145,000
GOI = $4,359,000
Review the example.
• Now that you have calculated all the potential income that you can
have on a property, you can start deducting the expenses you
have.
Participant Guide page 3-7
• Operating expenses are the first of the expenses we will talk about.
These are all fixed and variable expenses that are incurred while
managing the property.
• Capital expenses and Replacement Reserve Account payments are
not typically considered as operating costs, although some
companies may handle that differently.
Who can tell me some examples of fixed and variable
expenses? We talked about these in the last chapter.
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Answers include: salary/personnel costs, insurance, taxes, utilities,
management fees, administrative fees, marketing, contract services, repairs
and maintenance costs.
• Let’s calculate the total operating expenses for a property.
Write the following on the flipchart
Operating expenses:
Administrative & Management fees
Marketing
Repairs & Maintenance
Personnel
Utilities
Taxes & Insurance
Contract Services
183,900
101,000
164,000
365,000
133,000
779,000
77,900
Ask students to calculate the Operating expenses of this property.
Answer: $1,803,800
• Taxes and insurance and personnel costs are the greatest of these.
Participant Guide page 3-8
Show Slide # 54 – Gross Operating Income (GOI)
• Once we know our operating expenses, we can determine what our
Net Operating Income or “NOI” is.
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Write the following on the posted flipchart below the formula for GOI
NOI = GOI – OE
• Let’s look at an example.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Write the following on the flipchart
GOI = $4,359,000
OE = $1,803,800
NOI = $2,555,200
• Another thing that is helpful to understand is the Operating
Expense ratio. This is also known as the expense to income ratio.
It tells you how well you are doing at controlling expenses.
• Remember we said one of the ways that you add value is to control
expenses.
Participant Guide page 3-8
Show Slide # 55-57 –Operating Expense (OE), Net Operating Expense
(NOI), Operating Expense Ratio
Review the subtopic “Operating expense ratio” pointing out
• that the ratio depends on the age of the property, location and which
expenses are included
• the formula to calculate the percentage, and
• the national average is 40.%
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• We can look at an example of the operating expense ratio using the
numbers we just came up with.
Write the following on the flipchart
Operating expenses = $1,803,800
GPR
= $4,892,000
= 37%
• We have talked about almost all of the components with which to
calculate our cash flow.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
• We said that our operating expenses didn’t include two additional
expenses we have to consider.
Participant Guide page 3-9
Show Slide #58 and #59- Capital Expense (CE) and Debt Service
Review the subtopics “Capital expenses” and “Debt service”.
• Before we do the cash flow calculation, there are a couple of useful
things that you can figure out once you know your GOI and total
expenses.
Show Slide #60 – Break-even Occupancy Ratio
Review the slide.
• This ratio is important to know so that you are aware of the
occupancy ratio that you need to maintain in order to pay the
operating expenses and debt service for the property. In this case
you need 71% occupancy!
• This may also be expressed per square foot, for the purposes of
determining rental rates and trying to find ways to increase the
return on investment.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Show Slide #61 – Break-even rent per sq. ft.
Review the slide.
Participant Guide page Toolbox-47
Refer participants to the completed Market Rent Schedule. Point out that the
formulas for how the numbers are calculated are provided in the header row.
Mention that another way to calculate the amount of revenue you should be
getting is to calculate it per square foot, as some of the reports show square
footage of all units of a certain size and the total revenue that should be
coming in based on that square footage. Point out other useful information
on this schedule.
Participant Guide page 3-10
• We are ready to calculate the cash flow of a property now that we
have looked at each of the components that we need to understand
in order to do it.
• Let’s look at a sample calculation first and then you will calculate
one yourself.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Concepts,
(continued)
Write the following on the posted flipchart below the formula for NOI
Cash Flow = NOI – CE/RRA – DS
Review the cash flow equation, including the information in the notes section.
Talk participants through the example of the calculation. Explain that the
Capital Expense number includes the Replacement Reserve Account money
set aside for such projects.
Activity #5:
Calculate
cash flow
Refer participants to Activity #5 in the Activities tab in the
Participant Guide.
Show Slide #62 and #63– Cash Flow Calculation and Activity #1: Cash
Flow
Setup
Tell participants that they will work individually using their calculator to
calculate the cash flow for the NAA Apartments using the data provided. Tell
participants they first need to determine the new numbers, and that you will
allow them a few minutes to work on that and then show them the
calculations for those numbers. Then, they can calculate the cash flow with
all the new numbers.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
Activity #1:
Calculate
cash flow,
(continued)
Working time
Allow participants to:
• determine the new numbers to use for the GPR, Vacancy and Operating
Expenses (allow about 5 minutes for this)
• stop them and show them the calculations they should have used
(these are provided in the subtopic “Debrief of activity #5” below, and
can be shown on the flipchart), and
• tell them to go ahead and calculate the cash flow.
Allow about 5 minutes and then ask the group for their attention and do the
debrief.
Debrief of
Activity #1
To get new GPR = 1,249,325 x 103.5 = 1,293,051.37
To get new Vacancy = Use new GPR (1,293,051) x 8% = 103,444
To get new OE ratio = Use the new GPR x 41% to get the new Operating
Expenses (1,293,051 x 41% = 530,150.91)
Cash Flow calculation: (bolded numbers show changes)
Current
New
GPR
$1,249,325
$1,293,051
Vacancy
112,439
103,444
Effective Gross Income
1,136,886
1,189,607
Other Income
55,000
55,000
Gross Operating Income
1,191,886
1,244,607
Operating Expenses
482,300
530,151
Net Operating Income
709,586
714,456
Capital Expenses
112,000
112,000
Debt Service
424,373
424,373
Cash Flow
173,213
178,083
Note: If time and skill level permit, feel free to continue this exercise and
change several assumption numbers with the results for cash flow being
different. This will allow the student to understand the inter relationship
between the numbers and the factors that impact NOI and cash flow. You
can try to increase all rents by $5.00 or make Operating Expenses a certain
number of dollars per unit and show how that impacts cash flow.
Tell participants that as a CAS they will likely have a manager or supervisor
to assist them with their financials as they get started.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
General
Ledger
Participant Guide page 3-11
Show Slide # 64- General Ledger
• The last thing we are going to talk about regarding economic
analysis is the general ledger.
• The general ledger is the record of the accounts that support the
major financial statements. The sub –accounts or ledgers are
given names or numbers. These are often called the Chart of
Accounts.
• Accounts are organized into groups. An example would be under
Marketing and Promotion, you may have sub-accounts for:
o advertising
o off site marketing
o flags and banners
o apartment guides
o Internet advertising sources
• You will need to know the account numbers at your property so
that you can record transactions.
• You will likely have to code your invoices prior to getting them paid.
• Let’s look at a General Ledger Report and Chart of Accounts so
you can see what they look like.
Participant Guide pages Toolbox-44
Review the G/L report and the chart of accounts to see how items are
categorized and coded.
Participant Guide page 3-11
Review the subtopic “Financial or operating statements” and point out that
the CAS will need to know the cut-off date for recording transactions within a
reporting period, so that the right things can make it onto the income
statement or operating statement.
Continued on next page
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Chapter 3: Economic Analysis of a Property, Continued
General
Ledger,
(continued)
• On the income statement or operating statement, the accounting
activity is compared with the budget and the variance is
determined. The variance between actual and budgeted amounts
may be positive or negative.
• Let’s look at how the variance percentage is determined.
Participant Guide pages Toolbox-15
Review the content and example of Variance percentage. While a negative
variance in income is unfavorable, a negative variance in expenses is a
favorable outcome.
Questions
What questions do you have before we move on?
Transition
• That brings us to the end of this chapter. Now its time for the next
Skill Check.
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Financial Management
Skill Check #3
What this Skill
Check covers
Show Slide #65 – Skill Check #3
• This Skill Check covers the material from Chapter 3: Economic
Analysis of a Property.
Setup
Explain to participants that they will now complete the third skill check for this
course. They will work individually to complete the skill check, and once
complete (or time runs out) you will provide the answers which they can use
to score themselves and use as a study guide for the exam.
This skill check can be completed using their Financial Management
Participant Guide to look up the answers.
Refer to Skill Check #3 in the Skill Checks tab of the Participant
Guide.
Explain that they have 15 minutes to complete the skill check, and then you
will:
• call time, and
• provide an answer key
Continued on next page
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Skill Check #3, Continued
Working Time
Allow participants 15 minutes to work. As they work, walk around the room
offering help where needed and to see how they are doing. Once the time
has lapsed, ask participant to stop. Some may not complete the skill check
in the time provided and that is OK. The answer key contains all the
information they need to study for the exam, and this is just a way to
reinforce what they have learned.
Debrief
Distribute the Answer Key to Skill Check #3 to each participant.
Explain that the Answer Key is a good tool for them to use when studying for
the exam.
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Financial Management
Chapter 4: Budgets
Estimated time: 1 hour
What we’ll
cover
Participant Guide page 4-1
Show Slide # 66
• In this chapter we will talk about what a budget is, what it’s used
for, and the different types of budgets.
• We will also talk about the development process, and how you can
use your analytical skills to manage your budget and make
decisions based on what you see happening.
Background
Who can tell me what a budget is?
Answer: A budget is an itemized summary of estimated income and
expenses for a given period of time.
• As a CAS, you may be responsible for creating a budget for your
property. But, even if you aren’t, you will need to interpret the
information so that you can explain the differences between actual
income and expenses compared to budget.
• The budget is the way to plan your financial activities.
• Let’s talk about the purpose of a budget.
Participant Guide page 4-2
Show Slide #67 – Purpose of a budget
Purpose of a budget
1.
2.
3.
To estimate expected income and
expenses to determine what
occupancy levels will be needed to
cover expenses and provide a return
on investment
To monitor the property’s
performance
To evaluate performance of personnel
Module 8: Financial Mgmt
Chapter 4
42
Continued on next page
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Financial Management
Chapter 4: Budgets, Continued
Types of
budgets
Review the slide. Add information as necessary using the Participant Guide.
Participant Guide page 4-3
• There are three (3) types of budgets. They are:
o lease-up
o modernization/retrofit, and
o stabilized
• First we will talk about the features of a budget that is created for
use during lease-up.
Show Slide #68 – Lease-up Budget
Review the slide adding any additional points from the Participant guide.
Mention that
• budgets should not be adjusted, although you may adjust your forecasts
as you learn more about actual income and expenses during this time,
and
• you should note the circumstances and events that occur and that affect
the budget so you can explain the variances and make
recommendations
Continued on next page
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Chapter 4: Budgets, Continued
Types of
budgets,
(continued)
• Modernization budgets are the second type of budget. These are
used when a property is being updated or undergoing retrofitting.
Participant Guide page 4-4
Show Slide #69 – Modernization Budget
Review the slide.
• The third type of budget is one for a stabilized property. This
means that the property has been established for a period of time
and should be operating under normal conditions.
• The budgeting process for this situation is more of a routine.
Continued on next page
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Financial Management
Chapter 4: Budgets, Continued
Types of
budgets,
(continued)
Participant Guide page 4-4
Show Slide #70 – Stabilized Operating Budget
Review the slide. Explain that for this kind of budget you focus on what you
spend your money on (upkeep) and how to maximize income. Remind them
that their responsibilities as a CAS are to increase income and control
expenses.
Ask participants if anyone has worked at a property that was in a
lease-up situation or undergoing modernization of some kind and have them
talk about what impact that had on their day-to-day operations.
Budget
development
and
management
Participant Guide page 4-5
• While you may or may not be responsible for creating the budget
for your property, it is useful to understand how a budget is
developed, so that you can manage it better once it is your
responsibility to follow it.
• Let’s talk about the budget development process.
Continued on next page
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Financial Management
Chapter 4: Budgets, Continued
Budget
development
and
management,
(continued)
Review the process table pointing out:
• the first step is to know the owners’ investment goals for the property
(Remind them that as a CAS they are also responsible for meeting the
financial goals of the investment, and you can’t do that unless you know
what the owner’s goals are!)
• there are many sources of information that you can use to come up with
the numbers to use in your estimates
• assigning the numbers to each category is a matter of looking at the
recurring expenses and putting those in, and then adding other
estimates to the remaining categories.
• There are some tips to help you develop your budget data should
you be the one developing the budget.
Participant Guide pages 4-6 and 4-7
Show Slide #71– Tips for developing budgets
Review the slide, using the content in the Participant Guide to further explain
each point.
Continued on next page
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Financial Management
Chapter 4: Budgets, Continued
Budget
development
and
management,
(continued)
• During the budgeting process, we often use extrapolation to
forecast figures.
• Extrapolation is to estimate a number by extending known
information.
• This is like being able to tell what your costs will be for the coming
months by looking at what they were in the previous months.
• When you do this, though, be careful that the data you are using
doesn’t contain any high or low numbers that are based on unusual
circumstances.
Participant Guide page 4-8
Review the examples in the subtopic “Extrapolation”.
Review the subtopic “Annualization” explaining it’s essentially the same as
extrapolation. Tell participants that there is an example of how they can
annualize a number in the Toolbox on page 3.
Continued on next page
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Financial Management
Chapter 4: Budgets, Continued
CAS
responsibilities
• As a CAS there are certain things that you will be responsible for
when it comes to working with budgets. Let’s look at them.
Participant Guide page 4-9
Show Slide #72 – CAS Responsibilities
Review the slide.
• You can use a Budget Control log and operating reports to help
you stay within budget as much as possible.
• Since a budget is full of estimates, there will always be variances
between budgeted numbers and actual income and expenses.
• By comparing these numbers you will be able to see what is
happening and be able to explain any variances. That is typically
done using the reports on a monthly basis.
Continued on next page
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Chapter 4: Budgets, Continued
CAS
responsibilities
(continued)
Mention that the income statement or operating statement usually has
budget and actual information on same document as well as YTD
comparisons and sometimes prior year comparisons
• As you notice variances between budgeted and actual amounts,
you will need to analyze them. Some will be easier to analyze than
others, such as when an emergency repair is necessary. Other
things are more difficult to analyze.
• There are some questions you should ask yourself when
analyzing budget variances.
• Let’s review them now.
Participant Guide page 4-9
Review the questions to ask when looking for reasons for a budget
variance.
Ask participants if they can think of anything that has happened in
their own community that has impacted their ability to rent apartments or
raise rental rates?
Participant Guide page 4-10
• In addition to analyzing the variances you will need to explain
them.
• Variances should be explained using the terms “favorable” or
“unfavorable”.
• You should also know how to discuss the percentage of change
in addition to the actual dollar amount. Remember that there is a
formula for determining the variance percentage in the Toolbox
on page 15.
Continued on next page
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Financial Management
Chapter 4: Budgets, Continued
CAS
responsibilities,
(continued)
• Once you are aware of the issue and the cause, you should be
able to make a recommendation as to what can be done about it.
• For example if rental income is low due to low occupancy, the
recommendations could be to increase advertising, lower rents,
or add a new service to attract residents.
Questions
What questions do you have on anything we have talked
about with regard to budgets?
Transition
• Now it’s time for another Skill Check.
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Financial Management
Skill Check #4
What this Skill
Check covers
Show Slide #73 – Skill Check #4
• This Skill Check covers the material from Chapter 4: Budgets
Setup
Explain to participants that they will now complete the fourth skill check for
this course. They will work individually to complete the skill check, and once
complete (or time runs out) you will provide the answers which they can use
to score themselves and use as a study guide for the exam.
This skill check can be completed using their Financial Management
Participant Guide to look up the answers.
Refer to Skill Check #4 in the Skill Checks tab of the Participant
Guide.
Explain that they have 15 minutes to complete the skill check, and then you
will:
• call time, and
• provide an answer key
Continued on next page
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Financial Management
Skill Check #4, Continued
Working Time
Allow participants 15 minutes to work. As they work, walk around the room
offering help where needed and to see how they are doing. Once the time
has lapsed, ask participant to stop. Some may not complete the skill check
in the time provided and that is OK. The answer key contains all the
information they need to study for the exam, and this is just a way to
reinforce what they have learned.
Debrief
Distribute the Answer Key to Skill Check #4 to each participant.
Discuss the answers. Explain that the Answer Key is a good tool for them to
use when studying for the exam.
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Financial Management
Chapter 5: Property Valuation
Estimated time: 30 minutes
What we’ll
cover
• In this chapter we will talk about the reasons that you may want to
know the value of a property, and the different methods used to
determine the value.
Show Slide # 74 and # 75- Chapter 5 and Property Valuation
Background
Participant Guide page 5-2
• Property valuation is the process of determining the value of a
property.
• There are many different reasons why you may want to know the
value of a property.
• Let’s review them now.
Ways to
determine
property
value
Review the subtopic “Purposes of valuation.”
• There are several approaches or methods used by appraisers and
other real estate personnel to value properties. We will look at
each of them briefly.
Participant Guide page 5-3
Show Slide #76 – The Cost Approach
Review the slide.
Continued on next page
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Chapter 5: Property Valuation, Continued
Ways to
determine
property
value,
(continued)
• This approach is useful for insurance purposes and for accounting
purposes when depreciation has to be estimated for taxes.
• This is not typically the approach used to value multi-family
income-producing property.
Participant Guide page 5-3
Show Slide #77 – The Sales Comparison Approach
Review the slide.
• This approach is just like doing the market comparison survey we
talked about earlier, when we discussed raising rental rates.
• Using this method, appraisers compare different properties and
focus on similarities and differences among properties and
transactions that affect value. Only in this case you are trying to
compare sales prices rather than rental rates.
Review the list of items that appraisers will compare in this method in the
subtopic “Sales approach comparison” at the bottom of page 5-3.
Continued on next page
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Chapter 5: Property Valuation, Continued
Ways to
determine
property
value,
(continued)
Participant Guide page 5-4
Show Side #78 – The Income Capitalization Approach
Review the slide.
• From an investor’s point of view, earning power is the major
element affecting value. The more the net operating income, the
higher the value.
• In an apartment property, the income stream has a value based on
current income, and what value could be expected in future
income.
• Since most investors purchase apartment properties as an
investment, this is the most common approach used to value multifamily housing communities.
• However, if an appraiser is valuing a property for the purpose of
financing a purchase where a loan is involved, all three (3) methods
are required to value the property. So they don’t just use one
approach, they do the cost, sales and income approaches to verify
their numbers.
• There are several other things that an appraiser looks are when
determining value.
Review the table at the bottom of page 5-4, to describe the other things that
are looked at, and their different attributes.
Continued on next page
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Chapter 5: Property Valuation, Continued
Ways to
determine
property
value,
(continued)
Participant Guide page 5-5
Show Slide # 79- Direct Capitalization
• Direct capitalization is the primary method used in income
capitalization. It is a tool that you should be aware of but it’s not
something that you will use on a daily basis. It will be useful to
understand when thinking about ways that you can increase the
income and ultimately the value of the property you are managing.
• The estimated income that is used for this calculation is based on
the reason for the valuation.
Review the different sources of income that may be used that are listed on
page 5-5.
Review the example of the value calculation using NOI that is shown at the
bottom of page 5-5.
Participant Guide page 5-6
Review the example of how a manager could increase income, and using the
cap rate, determine how much value that income would add to the property.
Questions
What questions do you have about property valuation
methods?
Transition
Well, that brings us to the end of the materials that we will cover today!
It’s time for the last Skill Check!
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Financial Management
Skill Check #5
What this Skill
Check covers
Show Slide #80 – Skill Check #5
• This Skill Check covers the material from Chapter 5: Property
Valuation.
Setup
Explain to participants that they will now complete the final skill check for this
course. They will work individually to complete the skill check, and once
complete (or time runs out) you will provide the answers which they can use
to score themselves and use as a study guide for the exam.
This skill check can be completed using their Financial Management
Participant Guide to look up the answers.
Refer to Skill Check #5 in the Skill Checks tab of the Participant
Guide.
Explain that they have 15 minutes to complete the skill check, and then you
will:
• call time, and
• provide an answer key
Continued on next page
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Financial Management
Skill Check #5, Continued
Working Time
Allow participants 15 minutes to work. As they work, walk around the room
offering help where needed and to see how they are doing. Once the time
has lapsed, ask participant to stop. Some may not complete the skill check
in the time provided and that is OK. The answer key contains all the
information they need to study for the exam, and this is just a way to
reinforce what they have learned.
Debrief
Distribute the Answer Key to Skill Check #5 to each participant.
Discuss the answers. Explain that the Answer Key is a good tool for them to
use when studying for the exam.
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Course Wrap-Up
End of Course
• That brings us to the end of the Financial Management course. I
hope that you will find the information that you learned in this
course helpful to you as you continue your management careers.
Course
Review
Thank the participants for attending the class and ask them to complete the
course evaluation before they go. Remind them that they can use their
Answer keys to the Skill Checks to study for the exam and wish them luck!
Course exam
There is a comprehensive 200-question, multiple-choice exam at the
completion of the CAS coursework. The exam is timed for 2 hours and 30
minutes.
The exam can be taken at any time through the following Web site:
www.castleworldwide.com/naaei. Please keep in mind that participants will
not be able to access the online exam until they are eligible.
Participants will need an eligibility code to access the exam. The eligibility
codes will be distributed by the local apartment association after completion
of the required coursework.
Upon completion of the NAAEI exams, participants will receive their results
immediately. All participants will receive diagnostic information on their
performance in the major content areas of CAS. If a participant passes their
exam, they will receive a passing notice. If participants do not pass the exam,
they will receive their score report, in addition to a profile of their strengths
and weaknesses based on the sections included in the exam. Participants
who do not pass the exam, may take the exam again after 7 days for a $30
fee.
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