Risks and Opportunities in Asset Management Today September 24, 2010

1. Vermont Housing & Conservation Board Risks and Opportunities in Asset Management TodaySeptember 24, 2010

2. The Risks • Low Average Property Size • Modest Staff Capacity • Overstaffing • Weak Market Conditions • Stalled Pipeline • Low Property Management Fees • Negative Bottom Line for Property Management Division • Negative Trends in Operating Advances to the Properties • Poor Stakeholder Reviews • Outdated/Insufficient Systems and Procedures • Unstructured Asset Management • Non Real Estate Culture

3. #1: Low Average Property Size • Economies of scale are difficult to achieve: 100 vs. 20 unit property • Example 1 • 1 unit vacant in a 100 unit property = 1% vacancy rate. • 1 unit vacant in a 20 unit property = 5% vacancy rate. • Example 2 • Audit cost per property = $10,000 • 100 units = $ 100 pupy • 20 units = $500 pupy • Self-managers of small properties seldom earn enough in fees to cover their central office cost. • Why? Property management does its work by the project but gets paid by the unit. • Example: • 100 units x $400 pupy mgmt fee = $40,000 • 20 units x $400 pupy mgmt fee = $8,000

4. #1: Low Average Property Size • Solutions • Establish threshold size for future projects • Seek adjacencies for future projects • Standardize design to increase replacement/repair efficiencies • Restructure financing of two or more smaller properties into one Other ideas?

5. #2: Modest Staff Capacity • Affordable housing is increasingly complex • Stakeholder requirements demand growing set of administrative and financial skills • Sustainable design can require sophisticated systems and increased reliance on contractors • LIHTC projects need • marketing savvy • Can’t be run as a jobs • program without additional resources

6. #2: Modest Staff Capacity • Solutions • Do it right the first time • Get the time-quality-cost balance right re: using staff vs. contracting out • Leadership is key • Skilled • Passionate • Dedicated to outcomes • Must have standing within organization and with stakeholders • Train, train, train Time Quality Cost

7. #3: Overstaffing • Nonprofits tend to staff at higher levels than for profits on a per unit basis • May not have large enough portfolio over which to share minimum staffing thresholds • Tend to staff functions rather than use contractors • May promote on-the-job training that requires additional supervision • Hold onto under performing staff and hire additional staff to compensate – costly overall even if individual pay is modest

8. #3: Overstaffing • Solutions • Conduct manpower analysis of what is done by staff and what is done by contractor • Best solutions maximize occupancy and reduce costs • Learn staffing rules of thumb • Hire for skills and attitude • Understand staffing levels in proformas

9. #4: Weak Market Conditions • Soft markets threaten proforma’s long term revenue assumptions • Difficult to get back on track • A real threat for LIHTC projects; less so for those with project-based subsidies • Market alternatives may include single family homes • Units and features may be obsolete • May be more difficult to • overcome in transitional • markets

10. #4: Weak Market Conditions • Solutions • Learn market-rate leasing techniques • Concessions • Mini-models • Special offers • Evening and weekend hours • Social networking • Know the competition and neighborhood • Reposition • Seek tenants with special needs you can fill

11. #5: Stalled Pipeline • Self-managers need portfolio of 500+ units to be financially viable • New project pipelines are source not only of development fees, but of property management growth and financial health. • Absence of a robust pipeline is a real threat unless alternative resources are found.

12. #5: Stalled Pipeline • Opportunities • Build internal capacity if the stall is temporary • Good time to update systems and technology • Outsource property management if it will take too long to get to scale • Consider managing for others (although only if you are already strong and have some over-capacity)

13. #6: Low Management Fees • Below market management and other allowable fees are fairly common on a pupy basis • Management fees are often calculated as a percentage of collections. Low rents and high receivables effect management fees. • Initial fees sometimes set below market to achieve lower operating costs, particularly if self-manage. Don’t expect third party managers to automatically agree to below market fees.

14. #6: Low Management Fees • Opportunities • Know the market – if self-manage, may be able to raise fees for in-house property management division • HUD Field Office Fee Schedule • Local LIHTC underwriting standard • Learn what it costs on a pupy basis to run your property management division. Compare to achievable fees.

15. #7: Negative Prop Mgmt Bottom Line • Virtually impossible for nonprofit to have break-even property management division • Average property size is too small – Size matters!! • Property management does its work by the property, but gets paid by the unit. • Avg fee = $450 pupy • 350 units in 10 properties = $157,500 • 900 units in 10 properties = $405,000 • Many self-managers do not count all of their indirect costs. • Should be a planned decision to cover a negative bottom line from other sources.

16. #7: Negative Prop Mgmt Bottom Line • Solutions • Consider using third-party manager until reach break-even size and/or generate sufficient revenue to have full complement of qualified staff. • Maximize fees • Keep payroll expenses at 75% or less of revenues. Typical non-profit property management division

17. #8: Negative Trends in Operating Advances to Properties • Advances to the properties can take different forms • Deferred developer fees • Outright loans • If self-manage: • Unpaid management, bookkeeping and other fees • Site payroll • What else? • Growing “due to related party” advances weaken the organization’s balance sheet

18. #8: Negative Trends in Operating Advances to Properties • Solutions • Make paying back advances a priority – plan for them • Determine whether or not any reserves are available • If self-manage renegotiate management agreements so payment of management fees is closer to top rather than bottom of “order of monthly payments” • Make repayment part of refinancing

19. #9: Poor Stakeholder Reviews • Stakeholders scrutiny is increasing – they do have “watch lists” • Substandard performance can yield financial and other penalties • Substandard performance can yield increased inspections and reporting • Poor reviews can halt approvals on pipeline projects What else?

20. #9: Poor Stakeholder Reviews • Solutions • Pass their tests! • Inspect ahead of time • Take corrective action ahead of time • Use third-party inspectors for physical and file reviews • Establish measurable standards – SMART • Establish stakeholder point of contact • Communicate before something goes wrong

21. #10: Outdated/Insufficient Systems & Procedures • Not often a priority until broken • Reactive, “fire-fighting” styles have little time for procedural upgrades • When a change is needed, often bring “inside” main office rather than solve at site level – accuracy may improve but timeliness may suffer • Redundancy is prevalent Found in organizational cultures where constant upgrading/refining is not regular and ongoing

22. #10: Outdated/Insufficient Systems & Procedures • Opportunities • Upgrade/update during periods of slow growth • Determine what works best centrally and what works best at the site • Use technology instead of FedEx to move documents • Invoices • Income Certs/Recerts • Establish company intranet for standard forms/updates • Scanners, pdas • Get help! It’s a big job.

23. #11: Unstructured Asset Management Partial list of Asset Management Functions • Functions are assigned but not prioritized or coordinated • No overarching strategy that directs and links the functions. • Handoffs are not formalized. Example – deal components not well tracked or understood over time creating “unintended consequences” – like a default

24. #11: Unstructured Asset Management • Solutions • Board sets broad goals for portfolio re: • Financial performance • Physical condition • Mission objectives • Stakeholder requirements • Board defines role of asset management and how it’s carried out: • Board committee • Staff committee • Staff position

25. #12: Non-Real Estate Culture • Organization’s practices are not aligned to deliver on portfolio underwriting assumptions or stated goals • Being the landlord may conflict with social objectives • Absence of capacity thwarts best intentions • Stakeholders back away Failure to act as performance and value deteriorate over time.

26. #12: Non-Real Estate Culture • Solutions • Know your deal! Get immersed in the details • Establish and monitor performance benchmarks • Trend balance sheets and operating statements • Know how to make adjustments • Create multi-year projections • Establish contingencies • Have a reserve strategy .

27. What other challenges have you faced? What were your solutions and/or your opportunities?