The State of the Industry in Asset Management: Positioning Our Portfolios for Growth and Sustainabil

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The State of the Industry in Asset Management
Positioning Our Portfolios for Growth and
Sustainability

• CDNs Property and Asset Management Working Group
  (PAMWG)
• Oct. 18, 2007

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Who is the Property and Asset Management Working
Group?

• Sue Wiswell, ROSE
• Maralea Lutino, Catholic Charities
• Martin Soloway Linn Brillman, CPAH
• Robin Smith, HDC of NW Oregon
• Sean Hubert, CCC
• Ray Hackworth, Maggie Palumbo, NW Housing
  Alternatives
• Karen Walker, CDN
• Marie Kure, TVHP
• Maria Elena Guerra, FHDC

• Tanya Stagray, Hacienda
• John Walker, NAYA
• Brian Bieler Becky Crew, REACH
• Melissa Rinehimer, Human Solutions
• Juli Garvey, Cascadia
• Tyesha McCool, Sabin
• Molly Rogers, HDC
• Sarah Stevenson, Innovative Housing
• HAP
• PCRI

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Why do we do this work?

• Because
• Hardworking people should be able to afford
  housing and still have enough money for groceries
  and other basic necessities.
• Housing gives people an opportunity to build
  better lives. To succeed, you need a place to
  call home.
• Children deserve an opportunity to succeed in
  school and life, which is tied to having a stable
  home.

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Agenda

• Overview of portfolio in the Portland region
• Challenges to long-term sustainability
• Industry-wide issues
• Macro economic issues
• Project revenues not covering the full costs of
  service delivery
• Long-term capital planning
• The Compliance Burden
• A Better System is Possible

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The Affordable Housing Pipeline
Develop- ment (3-5 years)
Operations 15,000 units (40-60 years)
Includes units owned by CDCs in PAMWG plus HAPs
public and affordable housing
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What it Takes to Fulfill our Mission

• We blend an increasing number of sources

• LIHTC
• OAHTC
• Oregon Trust Fund
• HOME
• CDBG
• TIF
• RD
• Private foundation grants and loans

• HOPWA
• Section 8
• Metro
• Office of Sustainable Development
• State Weatherization
• Business Energy Tax Credits

An average project relies on 10-12 permanent
funding sources that likely require reporting and
compliance
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Multiple and Often Conflicting Expectations for
Affordable Housing

• Build the units as cheaply as possible
• Keep the rents as affordable as possible
• Operate projects profitably enough that public
  funds can be recycled back to new projects
• Build environmentally sensitive projects
• Serve those who are most in need and are the
  highest consumers of public resources

• Build quality units so that they blend in with
  the community
• Build as many units as possible
• Operate projects profitably to support services
  to the residents
• Operate projects profitably to sustain the
  sponsoring organizations
• Operate projects profitably to be self-sustaining
  for 60 years
• Encourage mixed-use projects to promote economic
  revitalization

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MFI Rent Restrictions in Comparison to Whom We
Actually Serve
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Challenges to long-term sustainability

• Industry-wide issues
• Macro economic issues
• Project revenues not covering the full costs of
  service delivery
• Long-term capital planning

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• ORGANIZATIONAL
• SUSTAINABILITY

Operating Support
Revenues from Portfolio
Developer Fees to Organizations
THE FOUR LEGGED STOOL REVENUE STREAMS FOR
HOUSING NON-PROFIT ORGANIZATIONS
Fund Raising
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• ORGANIZATIONAL
• SUSTAINABILITY

Operating Support
Revenues from Portfolio
Developer Fees
THE FOUR LEGGED STOOL REVENUE STREAMS FOR
HOUSING NON-PROFIT ORGANIZATIONS
Fund Development
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• ORGANIZATIONAL
• SUSTAINABILITY

Operating Support
Revenues from Portfolio
Developer Fees
THE FOUR LEGGED STOOL REVENUE STREAMS FOR
HOUSING NON-PROFIT ORGANIZATIONS
Fund Development
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• ORGANIZATIONAL
• SUSTAINABILITY

Operating Support
Revenues from Portfolio
Developer Fees
THE FOUR LEGGED STOOL REVENUE STREAMS FOR
HOUSING NON-PROFIT ORGANIZATIONS
Fund Development
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Revenue Issues Median Family Incomes stagnant
in Portland and not keeping up with proforma rent
assumptions
2 rent increase assumed in typical proforma
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Relationship Between Changes in MFIs and
Occupancy Levels
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Real Costs of Resident Services

• Help transition people from homelessness to
  housing
• Promote self-sufficiency
• Prevent evictions
• Mediate between residents and between tenants and
  property management
• Provide information and referrals
• Conduct workshops and classes
• Partner with community agencies
• Coordinate youth and family programs
• Evaluate program effectiveness

Other revenue sources are needed to cover 79 of
the true resident services costs, such as fund
raising
21 of resident services costs were covered by
project income for average CDC
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Real Costs of Asset Management

• Oversee housing operations
• Negotiate and monitor contracts with property
  management
• Develop policies and procedures for managing
  assets
• Monitor project performance and financial
  position
• Evaluate and pursue refinancing options
• Oversee compliance and program reports
• Conduct regular inspections of properties
• Prepare capital budgets

Other revenue sources are needed to cover 44 of
the true asset management costs, such as
operating support
56 of asset management costs were covered by
project income for average CDC
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Expense Issues Extremely low-income projects
have higher expenses and cannot carry debt

• THE CASH FLOW WATERFALL
• Limited Partner Fees
• Secondary Debt Service and Interest Accruals
• Asset Management Fees
• Resident Services
• Organization Overhead

50-60 MFI Project
0-30 MFI Project
1.15 DCR
The 2005 average operating expense per unit
(without reserves) for PDC funded projects was
3,800. With reserves, it would be 4,050 (at
250 pupy). If escalated at 3 per year, the
2007 amount would be 4,300.
Debt
Operating Expenses
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New Ways to Look at Underwriting and Revenue and
Expense Assumptions
Percent variance possible on operating expenses
before project cannot meet required debt
payments Percent variance possible on rental
revenues (rents less than maximum, bad debt or
vacancies over 5 before project cannot meet
required debt payments)
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Operating Expenses as a Percent of Revenues
Looking Long Term
Median Income Served 30 40 50 60 Operating
Expense to Net Revenue Ratio 104 72 56 45
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Revenue and Expense Recommendations

• Underwrite to assure adequate cashflow to cover
  true costs.
• Adequately fund resident services.
• Include new financial indicators of risk in
  underwriting beyond debt coverage ratio.

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Are we setting aside enough in replacement
reserves?

• Needed annual reserve contributions for long-term
  capital improvements range from 600-900 per unit
• Most regulatory agreements require projects to
  set aside 250-300 per unit per year in a
  replacement reserve
• Of those projects that reported to PDC in 2005,
  the average net reserve deposit per unit was 169
  for the year
• 26 of those projects did not increase their
  reserve balance at all

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Start a New Paradigm We Cant Always Reserve Our
Way Out

• Needed annual reserve contributions would make
  operating expenses exceed revenues on most
  projects
• Larger initial capitalization of reserves would
  leave money sitting in reserve accounts earning
  an interest rate lower than construction cost
  increases
• Replacement reserves bridge between capital
  infusions
• Additional resources needed at major
  recapitalization milestones
• (Market projects would rehab on sale every 7
  years or so.)

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Physical Condition Recommendation

• Revise strategy to fund long-term capital
  improvements

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The Compliance Burden

• An escalating challenge for Oregons affordable
  housing industry

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A Year in the Life of a Typical Project
The average number of annual external reports per
property is 29!
OHCS
Risk Share Monthly Occupancy
Equity Investor Reports
PDC Reports
Annual Recertifications
Internal Reports
HOME Reports
Yearly inspection/audit from OHCS, HOME, HUD and
lenders
Permanent Lender Annual Report
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Where did our data come from?

• 13 PAMWG member organizations with a total of
  8,629 affordable units
• 7 property management companies with 19,089
  affordable units
• Shadowed asset managers, met with site managers,
  and performed one-on-one interviews with a
  variety of industry leaders

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Compliance Survey Major Findings

• Participating owner and property management staff
  spend 264,000 hours on compliance and reporting
  to funders annually
• 264,000 hours is equivalent to 132 full time
  positions
• If the resources currently spent on compliance
  and reporting were reallocated, there would be
  one additional staff person for every 65 units

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Major Findings (continued)

• Owners and property managers spent 7.5M on
  compliance and reporting yearly
• The per unit per year (PUPY) costs for compliance
  and reporting to external stakeholders is 403

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Thats 50 Units of Affordable Housing a Year!!!
Based on 2006 average construction costs for all
housing types.
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Change Over Time
Eight Year Ago
Today
One property management company reported that
their compliance staffing increased 400 in 8
years
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Compliance and Inspection Impact on Tenants

• An average project experiences 4-6 inspections a
  year
• Repeated invasions into financial and personal
  aspects of their lives
• Missing work and other financial hardships
• Reduces affordability (average of 34/month)

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Compliance and Inspection Impact on Tenants
(cont)

• Residents 55 are especially threatened and
  confused by constant inspections and the
  recertification process
• Managers spend less time on resident matters and
  preventative maintenance
• Contributes to the stigma that affordable housing
  can unintentionally place on residents

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Compliance and Inspection Impact on Financial
Viability
15,000 difference in annual net cash flow for a
50 unit project
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Where Should We Spend Our Time?

• Marketing
• Leasing
• Maintenance
• Risk mgmt
• Year 15 planning
• Curb appeal
• Tenant services
• Resident meetings

Compliance and reporting
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A Better System is Possible
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Owners Report

• The best outcome is to obtain agreement
  from all parties to use one standardized
  reporting packet. The costs involved in reporting
  the same data for the same project in 3 formats
  is a significant hardship financially on our
  organization.
• -HDC Survey Respondent

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Washington States Unified Compliance System

• One reporting format and coordinated inspections
• Division of labor in compliance monitoring across
  the participating jurisdictions
• Owners are able to devote more time, energy, and
  resources to managing properties and planning
  ahead
• Fosters funder collaboration

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Recommendations

• Funders should establish a unified compliance and
  reporting system
• Centralized data warehouse
• Advance notice of changes communicated to owners
• Standardized rating system and definitions
• Combine Inspections
• Waive recertification for LIHTC properties
• Underwrite for the true costs of asset management
  
• One suggestion is to base these costs on the
  number of funders involved with a given project

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Summary of Recommendations

• Underwrite to assure adequate cashflow to cover
  true costs.
• Adequately fund resident services.
• Include new financial indicators of risk in
  underwriting beyond debt coverage ratio.
• Revise strategy to fund long term capital
  improvements.
• Reduce increasing costs of public reporting and
  compliance.

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Acknowledgements

• Special Thanks To
• Portland Development Commission
• Metro Multi-Family Association
• Joy Hunt, PAMWG Intern and PSU Graduate Student

• Funders
• Enterprise Community Partners
• Bureau of Housing and Community Development