U.S Department of Housing and Urban Development Office of Affordable Housing Programs Under Contract with ICF International Monitoring the Health of Your Multifamily Developments

Monitoring Multi-Family Developments Page 2 What Is A Successful Home- Assisted Rental Project? Owner/manager understand & comply with applicable programmatic regs Project can repay loans Project revenue covers operating costs over long term Attractive and well-maintained Public agency/owner/manager know early warnings & prevent problems from occurring

Monitoring Multi-Family Developments Page 3 Basic HOME Principles During the “affordability period” HOME units: Are rented only to Low- and Very-Low-Income Households Have rents at/below HUD-established limits Are maintained in standard, decent condition Are rented with leases and fair housing procedures

Monitoring Multi-Family Developments Page 4 Compliance Monitoring Important to ensure that rental projects meet compliance requirements for affordability period If project is not compliant: Are not providing quality housing to eligible households Requires a lot of PJ oversight May fail and HOME funds have to be repaid

Monitoring Multi-Family Developments Page 5 Enhanced Monitoring But to be successful, projects must also be physically and financially viable, and this affects their ability to remain in compliance Can’t just monitor for compliance, also must monitor for viability

Monitoring Multi-Family Developments Page 6 Rental Compliance System Can consider rental project compliance as system of integrated steps Success at each step affects all others Feedback from steps at end of process used to improve overall performance Many PJs “compartmentalize” staff, tasks & processes Do underwriting staff confer with monitoring staff about potential project risk areas? Does data from monitoring affect future underwriting decisions?

Monitoring Multi-Family Developments Page 7 RENTAL COMPLIANCE SYSTEM (cont) Underwriting Selects Projects That Are Likely to Succeed PJ/Owner Agreement Outlines Obligations Application Process Reinforces HOME Compliance Standards PJ Watches For Troubled Projects and Intervenes Early PJ Monitors Each Project For Compliance in Key Areas: Affordability; Tenant Relations; Unit Quality Owner Addresses Monitoring Findings & Reports to PJ PJ Actively Manages Its Portfolio of Projects

Monitoring Multi-Family Developments Page 8 Periodic Reporting Annual Rent and Occupancy report from owner is required (§92.252(f)(2)) Suggest additional and more frequent reports Benefits of periodic owner reports: Help verify project compliance Track property performance over time Reports should: Include quantitative and narrative information Be easy to complete and read

Monitoring Multi-Family Developments Page 9 Annual Report To PJ HOME requires annual rent and occupancy report to PJ from owner May include non-financial, financial, and narrative information Non-financial information relates to occupancy and property quality Financial information relates to property’s income, expenses, cash flow Narrative information typically covers property management issues

Monitoring Multi-Family Developments Page 10 PJ Monthly Or Quarterly Reports Not a HOME requirement May help PJ catch problems earlier Suggest obtain periodic reports from owner or property manager on: HOME unit status Overall occupancy rates Unit turn over Property financial status Significant maintenance issues Attach a rent role

Monitoring Multi-Family Developments Page 11 Reviewing Reports Steps in reviewing reports: Establish indicators Compare properties to indicators Review for “red flags” Categorize properties: Good, fair, poor, troubled Follow-up with appropriate action Important to review reports periodically – don’t wait for end of year Lots of problems can pile up in a year!

Monitoring Multi-Family Developments Page 12 Early Intervention Requires Information It is cheaper to fix a problem early, than late

Monitoring Multi-Family Developments Page 13 Reporting, Generally How others report: Baseball, Weather, Stock Market, Healthcare Industry standards (RBI, heating degree days, Nasdaq index, cholesterol level) MF industry lags

Monitoring Multi-Family Developments Page 14 Baseball – Key Indicators Pitchers W/L Ratio ERA BB/K Batters Slugging BA OBP

Monitoring Multi-Family Developments Page 15 Weather: Brilliant Info Design Multidimensional information Long-term and short- term trend Recent actuals and near-term projections

Monitoring Multi-Family Developments Page 16 What If…Applied to MF Larger bars show portfolio range Smaller bars show peer range Boxes show actual performance of asset Context, historical trend, projected outcomes

Monitoring Multi-Family Developments Page 17 Key Indicators – Multifamily Financial Debt Service Coverage Net Cash Flow (NCF) – The bottom line (result) Operational Vacancy, Collections Operating Expenses (vs. budget, or as a ratio) Average Days Vacant Make-Ready

Monitoring Multi-Family Developments Page 18 Cause and Effect Follow the Flow of Effect and Cause (Diagnostic Drill-Down) Effect (NCF) vs. Cause (VL) Effect (VL) vs. Cause (Make-Ready) Effect (Make-Ready) vs. Cause (staffing levels, finances, management) Then, Address the Cause Which, Affects the Effect

Monitoring Multi-Family Developments Page 19 KI – Net Cash Flow All Potential Revenue (rents, other) Minus all Income Loss (VL + CL) Minus all Expenses (OpEx, R4R) Minus all Required Debt Service Equals NCF Important because it is the result of other indicators Important because it’s a measure of ‘cushion’

Monitoring Multi-Family Developments Page 20 Meaninglessness NCF at Whispering Pines is ($55) PUPA. Yes, negative NCF is bad, but… What about mission, Or context…

Monitoring Multi-Family Developments Page 21 NYC Marathon Gerard Vigneron 4:58:31 34, st in Peer Group Record: Bob Horman (80) 3:39:18

Monitoring Multi-Family Developments Page 22 Peer Reporting Context Matters Good peers are narrowly defined… …which requires a lot of uniform data… …which no one really has… StrengthMatters

Monitoring Multi-Family Developments Page 23 StrengthMatters™ Data Warehouse for Peer Benchmarking net Members upload electronically to a common CoA On-line, live, dynamic reporting functionality Transparency

Monitoring Multi-Family Developments Page 24 Alternatives for Context If not peer comparisons, then what? Exception (worst-first, or red-flag reporting) Trending (property vs. its own history) Comparisons to budget (property vs. its own goals) Comparisons to underwriting proforma (property vs. its own expectations) Feedback loop

Monitoring Multi-Family Developments Page 25 Exception Reporting Worst 10% get 90% Trick is: Which are the ‘worst 10%’? Sorting ‘Worst-First’ Red-Flag Reporting Sorting by actuals and ratios Total NCF vs. NCF/Unit Property A: ($500)/year (but ($25)/unit) Property B: ($100)/unit/year (but ($4k)) Using ‘Bins’

Monitoring Multi-Family Developments Page 26 NeighborWorks America MFI Measures 7 Key Indicators on 1,000 properties, quarterly Results for each property is ‘binned’ based on range of outcomes: Excellent, Good, Fair, Poor. NCF is measured: NCF as a % of GPI (EGI) Bin 1 (Excellent): >10% Bin 2 (Good): 5-10% Bin 3 (Fair): % Bin 4 (Poor): NCF <0% (i.e., negative NCF)

Monitoring Multi-Family Developments Page 27 Exception Reporting into ‘Bins’

Monitoring Multi-Family Developments Page 28 Drilling Down into the Bins

Monitoring Multi-Family Developments Page 29 More Drilling Down

Monitoring Multi-Family Developments Page 30 Yet More

Monitoring Multi-Family Developments Page 31 Trending Allows for seeing relative performance (the subject as its own peer) Familiarity Don’t actually need charts or graphs

Monitoring Multi-Family Developments Page 32 Percentiles Shows relative performance, without showing other data Percentile is ranking: 75 th Percentile means three quarters scored lower, one quarter scored higher Multiple percentiles (each say something different) NCF/unit among all properties: 75 th NCF/unit among peers (urban high rise, §8): 39th NCF total: 99th NCF change year-year: 10th

Monitoring Multi-Family Developments Page 33 Enough About Reporting: Other Monitoring Techniques Site Visits and Drive-Bys Encouraging Third-Party Info How’s My Driving: Compliance Monitoring: Relationship between financial problems and occupancy compliance Capital Needs Analyses

Monitoring Multi-Family Developments Page 34 Capital Needs CNA is a reliable predictor of financial crisis EUL, RUL, Cost are predictable. Decent CNA can give 3+ years warning of capital shortfall Combine with analysis of NCF, refinancability, rent increase potential, etc.