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Monitoring the Health of Your Multifamily Developments

Monitoring the Health of Your Multifamily Developments. 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

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Monitoring the Health of Your Multifamily Developments

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  1. Monitoring the Health of Your Multifamily Developments

  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 2

  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 3

  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 4

  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 5

  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 6

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

  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 8

  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 9

  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 10

  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 11

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

  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 13

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

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

  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 16

  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 17

  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 18

  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 19

  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 20

  21. NYC Marathon • Gerard Vigneron • 4:58:31 • 34,277 • 80 • 1st in Peer Group • Record: Bob Horman (80) 3:39:18 Monitoring Multi-Family Developments Page 21

  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 22

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

  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 24

  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 25

  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): 0-4.99% • Bin 4 (Poor): NCF <0% (i.e., negative NCF) Monitoring Multi-Family Developments Page 26

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

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

  29. More Drilling Down Monitoring Multi-Family Developments Page 29

  30. Yet More Monitoring Multi-Family Developments Page 30

  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 31

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

  33. Enough About Reporting: Other Monitoring Techniques • Site Visits and Drive-Bys • Encouraging Third-Party Info • How’s My Driving: 1-800-555-1212 • Compliance Monitoring: Relationship between financial problems and occupancy compliance • Capital Needs Analyses Monitoring Multi-Family Developments Page 33

  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. Monitoring Multi-Family Developments Page 34

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