1. Best Practices of Asset Management Asset Managing Your Portfolio: Presented by: David Fromm, NeighborWorks® America

2. Creating Value as an Asset Manager The top ten asset management tasks Top ten indicators valued by asset managers Most common problems in affordable housing Most valued partnerships and why How to get the most from your property management firm How to participate in pre-development as well as workout/disposition strategies NeighborWorks® America September 2012 2

3. NeighborWorks® America 3 1. Tickler File/Planning Schedule 2. Operating Budget Variance Review 3. Balance Sheet Review 4. Portfolio Review 5. Property Manager Review 6. Staffing the Board’s Asset Management Function 7. Evaluate New Projects 8. Monitor Owner Fees and Incentives 9. Gather and Interpret Key Data 10. Initiate Work Out Plans Top Ten Monthly Tasks

4. 1. Tickler File/ Planning Calendar Annual Budget Reports Annual Audit Tax Returns Real Estate Tax Agreements Owner obligations/loan requirements/ warranties NeighborWorks® America 4

5. 1. Tickler File/ Planning Calendar Capital Plan Income Certifications Property Inspections Corp. report to Secretary of State Contracts NeighborWorks® America 5

6. 2. Operating Budget: Variance Review Evaluate performance against benchmarks  Revenues  Expenses Make recommendations in MAJOR revenue and cost drivers NeighborWorks® America 6

7. 3. Balance Sheet Review Changes/size of  Cash balances  Accounts receivable  Accounts payable  Reserve Balances Ratios  Working capital  Current ratio  Owner ’ s equity  Debt to equity NeighborWorks® America 7

8. 4. Portfolio Review Pick ways to analyze  PUPY, PUM, PBR, %  Type, Location, Size Monitor for compliance (debt service coverage ratios, cash flow) Analyze trends Link mission, obligations and opportunities NeighborWorks® America 8

9. 5. Property Manager Review Evaluate based on annual management plan and budget Meet formally, monthly or quarterly Specific areas:  Financial  Compliance  Physical  Social ( “ double bottom line ” ) NeighborWorks® America 9

10. 6. Staff the Board ’ s Asset Management Function Property and portfolio performance against Board’s goals Economic performance of properties Impact of properties on organization: $ + Overall performance of property manager Current trends effecting properties NeighborWorks® America 10

11. 7. Evaluate New Projects Realistic operating assumptions: NOI Design Reserve requirements Cash flow expectations Debt structure Reporting and compliance requirements Market conditions Service programming Fees: prop and asset mgmt Staffing NeighborWorks® America 11

12. 8. Monitor Owner Fees and Incentives Asset management function often covered by these fees Communicate expectations clearly to property manager Alert ED and Board to any change in projections NeighborWorks® America 12

13. 9. Gather and Interpret Key Data Public laws Regulations and programs Real estate market conditions and opportunities (refi opportunities) Adequacy of insurance NeighborWorks® America 13

14. 10. Initiate Workout Plans Identify key players Create plan Identify “workout team” Select workout leader Monitor progress NeighborWorks® America 14

15. Top Ten Indicators 1. Debt Service Coverage (DSC) 2. Rent Increase Implemented 3. Cash Flow 4. Compliance with Annual Budget 5. Stakeholder Satisfaction 6. Unit Turnovers on Schedule 7. Rent Collection 8. Portfolio Review and Board Requirements 9. Capital Needs and Reserve Balances 10. Property Standards NeighborWorks® America 15

16. 1. Debt Service Coverage (DSC) Debt Service Coverage (DSC) Indicates how well the property can meet its hard debt requirements. A DSC of 1.2 is good. May be less in higher cost markets  DSC Calculation = NOI/Annual Hard Debt (Principal + Interest)  Key indicator tracked by investors and lenders  Anything over 1.0 indicates positive cash flow  Is a work out needed? NeighborWorks® America 16

17. 2. Rent Increase Implemented Rent Increases  Annual  On time  Track with pro forma  Increasing rents 2% has TWICE the impact of reducing ALL costs NeighborWorks® America 17

18. 3. Cash Flow Cash Flow  Defined in partnership and/or regulatory agreement; definition is not universal; good asset managers hit the cash flow targets  Often only source of asset management fees  Often source of deferred developer fees NeighborWorks® America 18

19. 4. Compliance with Annual Budget Annual Budget  Reflects annual financial plan for the property  Review monthly or quarterly, depending on property  Make adjustments to meet NOI target; don ’ t wait until the end of the year  Watch revenue and expense changes with greatest impact NeighborWorks® America 19

20. 5. Stakeholder Satisfaction 3rd Party Relationships  Accurate and timely reports, budgets  Successful physical and financial inspections  No audit findings  No mortgage defaults  Positive resident survey NeighborWorks® America 20

21. 6. Unit Turnovers On Target NeighborWorks® America 21 Unit Turnovers  High turnovers increase vacancy losses and increase operating costs (double whammy)  Slow re-occupancy is unrecoverable revenue  Indicator of potential problems:  Property condition/safety  Stiffer competition/more attractive alternatives  Deteriorating economy  Poor management Quick turns and low vacancies add revenue: occupancy is KEY

22. 7. Rent Collection Rent Collection  MUST be consistent, fair and timely  Once residents get one month behind, very difficult to catch up  Create realistic collection TARGET and check collections weekly (even daily) until in line  Bad debts are rarely collectible and rarely budgeted in pro formas NeighborWorks® America 22

23. 8. Portfolio Review and Board Requirements Portfolio Review  Analyze performance and trends in entire portfolio as well as individual properties  May be meeting Board goals for properties but some stronger properties could help weaker ones  Goals for residents NeighborWorks® America 23

24. 9. Capital Needs and Reserve Balances Capital Needs and Reserve Balances  Capital Needs Assessment (C N A) is current and on track with plan  Reserve and operating balances in line with needs  Operating reserve target: 3 - 6 months of operating expenses NeighborWorks® America 24

25. 10. Property Standards Property Standards  Curb appeal  Professionalism and appearance of staff  Common area upkeep  Signage  Private area upkeep (patios, balconies)  “Look Up” test NeighborWorks® America 25

26. Most Common Problems In Affordable Housing The Market The Financing The Management Physical Condition Property not competitive Overleveraged Subsidy and/or other restrictions Functionally obsolete Hazardous Deferred maintenance Unresponsive Combative Not skilled enough NeighborWorks® America 26

27. Most Valued Asset Management Partnerships Property Manager  Has most impact on a day-to-day basis  Affects portfolio capacity of the asset manager  If asset manager can not handle 15 - 20 properties because of property management demands, consider doing your own management unless there ’ s an independent resource to pay for asset management. Lenders & Investors  Best financial terms don ’ t always make the best partner; evaluate long term compliance and oversight relationship & costs  Have significant influence on your reputation (pro and con) NeighborWorks® America 27

28. Most Valued Asset Management Partnerships Board of Directors  Set property goals  Evaluate disposition strategies Finance Managers  Negotiate property vs organizational financial needs Housing Development Staff  Influence new project design, budget, staffing plan, resident mix, marketability Other NeighborWorks® America 28

29. Getting the Most from Your Property Management Firm Understand what it costs to operate a property management firm to better evaluate whether or not you ’ re getting your money ’ s worth. 63% to 75% of fee revenue goes to support non-site staffing, including supervisory and accounting. Understand that a management company seeks long term relationships. A management company loses money in the first year, breaks even in the second and begins to make some money in the third year of a contract. NeighborWorks® America 29

30. Getting the Most from Your Property Management Firm The Management Contract should detail expectations of management company re:  meetings,  overseeing capital projects,  reporting, staffing.  If you want reports different than standard reports, specify. If you want a say in who the staff is, specify. Dealing with residents: clarify how resident complaints will be handled. NeighborWorks® America 30

31. Getting the Most from Your Property Management Firm Meet monthly and have a standing agenda that includes  budget variance review,  resident issues,  capital projects,  upcoming compliance/inspection activities.  Walk the property and look at all vacant unit NeighborWorks® America 31

32. Getting the Most from Your Property Management Firm Test early and often for redundancies of effort by property and asset managers. Appreciate that this is very hard work and it is very easy to fail. Cultivate a long term relationship(s). The more you shop around and make management company changes, the fewer “good” managers will want to work with you. Communicate, communicate, communicate. NeighborWorks® America 32

33. How to Participate in New Developments Help develop “ standards ” for new or redeveloped developments based on portfolio experiences and best practices:  Number of units  Management and other fees (bookkeeping, asset mgmt)  Number of bedrooms/unit  Operating costs (per unit and as a percentage of revenues)  Geography (property without a site office must be within a 30 to 45 minute drive of another property) NeighborWorks® America 33

34. How to Participate in New Developments Help develop “ design standards ” for new/ redeveloped properties  Site office location and size  Unit mix (what works in the market)  Materials used (durability)  Maximizing energy efficiency  Safety  Parking and trash removal (two major problems hard to cure if you don ’ t get it right the first time) NeighborWorks® America 34

35. 5. SKILLS REQUIRED Ability to evaluate reports of third party professionals re: physical condition; reasonably knowledgeable about physical standards; ability to identify and prioritize maintenance deficiencies Ability to analyze property documents (eg - be able to determine mortgage loan requirements and monitor for compliance ) Financial Analysis: spreadsheets, comparisons, variances; knowledge of standards (pupy, pum, %) Functional knowledge of property management operational benchmarks

36. 5. SKILLS REQUIRED (cont) Ability to evaluate adequacy of insurance coverage, exposure posed by outstanding law suits, potential claims not yet filed (eg. Safety locks on windows) Ability to monitor third party property contracts for responsibilities, payment schedules, deadlines, term, default, termination provisions Knowledge of local real estate market (be able to evaluate ability to increase rents) Ability to monitor changes in public laws that impact property operations; follow newspapers and industry publications

37. 5. SKILLS REQUIRED (cont) Ability to comply with or monitor compliance accuracy and timeliness of reporting requirements to state and local governments, investors, private and public lenders. Also must monitor completion and submission of annual audit to appropriate parties. Understand property’s position vis a vis an entire portfolio Ability to evaluate the Property Management Agent objectively within market choices Ability to determine whether property results are acts performed exclusively by Property Management Agent or other forces are involved

38. 5. SKILLS REQUIRED (cont) Ability to see a property’s “big picture” by identifying major cost and performance drivers: not just variances between budgets and actuals Ability to negotiate performance standards appropriate for property and Board goals Ability to motivate and provide incentives to Property Manager Ability to summarize analysis succintly, in writing and graphic form, and in person for Board Technical skills to prepare, usually with Property Management Agent, annual budget and capital schedule

39. 1. KNOW THY DEAL: DEAL BOOK summarizes: Structure of ownership  Partners  Fees & Incentives  Liabilities & Warranties Sponsor guarantees Structure of Debt Compliance Requirements Underwriting & Operating Assumptions Cash Flow Expectations Key Dates Cliffs Disposition Plan

40. KNOW THY DEAL: Sponsor Developer General Partner Limited Partners/ Investors Property Manager Lenders Regulators Residents

41. KNOW THY DEAL: Equity Sources  Low Income Housing Tax Credits  Public Investment  Private Investment  Grants  Cash Reserves Debt Sources  Banks  State Housing Finance Agency  HUD  CRA pools

42. KNOW THY DEAL: Partnership Agreement Regulatory Agreement Loan documents, promissory notes and mortgages Subsidy contract(s) Programmatic contracts Management Plan Operating Pro Forma  Initial Budget  Multi-year Projections Investment Pro Forma (sources and uses) Property Management Contract Ground Lease (if applicable)

43. KNOW THY DEAL: KEY document that summarizes how asset is projected to perform financially Identifies projected benchmarks for  Annual rent increases  Modest annual operating increases  Debt service coverage requirements  Reserve funding

44. The End Game Be pro-active: have an asset management plan for each development  Know Thy Deal  Trend and re-project the pro forma every few years  Perform Capital Needs Assessments every 5 years  Monitor/manage investor capital accounts – they do!  Trend and re-project the pro forma every few years  Demonstrate to stakeholders that you are planning for the future  Leave plenty of time to assemble the work-out team and necessary resources NeighborWorks® America 44