Asset Management Orientation for PHA Boards

1. Asset Management Orientation for PHA Boards

2. Overview of Asset Management Orientation for PHA Boards Section 1: Overview of Asset Management Section 2: Asset Management Building Blocks Section 3: The Central Office Cost Center

3. Training Format • Designed for PHA Board members • Based on the curriculum presented at live, regional training sessions conducted in 2007 • Features include: • Fully narrated presentation slides • Ability to navigate between slides • Exercises in each section • Ability to download the training to your computer • Access to reference materials and websites

4. 1 3 2 4 5 Basic Instructions for Presentation Viewer . . . . . . .

5. Section 1: Overview of Asset Management

6. Overview of Asset Management Learning Objectives • Provide a brief history of the events leading up to Public Housing’s conversion to asset management • Identify key dates associated with the transition to asset management • Define asset management • Distinguish asset management from property management • Describe key roles and responsibilities under asset management, particularly the PHA Board’s role as owner

7. History and Background • 1998: Quality Housing and Work Responsibility Act • 1999: Negotiated-Rulemaking I, Funding of Harvard Cost Study • 2003: Cost Study Completed • 2004: Negotiated-Rulemaking II • 2005: Final Rule on Operating Fund Program • New Operating Subsidy Formula • Asset Management Requirement for PHAs with 250+ Units • 2006: PIH Notice 2006-33 (Interim Guidance/Financial Reporting) • 2007: PIH Notice 2007-09 (Final Guidance/Financial Reporting) • 2008 Appropriations Bill (Include full name here)

8. A Look at the PHA Inventory Data is based on the “Operating Fund Annual Report Calendar Year 2007,” October 31, 2007.

9. Gainers and Decliners Under the New Operating Fund Formula Data is based on the “Operating Fund Annual Report Calendar Year 2007,” October 31, 2007.

10. Central Tenet of Asset Management “PHAs shall manage their properties according to an asset management model, consistent with the management norms in the broader multi-family management industry. PHAs shall also implement project-based management, project-based budgeting, and project-based accounting, which are essential components of asset management.” Revisions to the Public Housing Operating Fund Program; Final Rule HUD, September 19, 2005

11. Key Implementation Dates • Determination of Asset Management Projects (AMPs) – Calendar Year 2006 • Implementation of new Operating Fund Formula – Calendar Year 2007 • Project-Based Budgeting/Accounting (PBB/A) – Fiscal Year 2007 • Cost Reasonableness Standards – Fiscal Year 2008 • New Public Housing Assessment System – Effective Second Year of PBB/A • Full implementation of Asset Management – Fiscal Year 2011

12. Effective Dates for Implementation *Extension through 2011 on case-by-case basis

13. Asset Management Definition Asset management…is a process of making investment decisions for a collection (portfolio) of assets, based on the mission, goals, and objectives of the owner, lender, sponsor, or regulatory body.

14. Asset Management vs. Property Management • Asset Management • Mission/goals/policies • Strategic decision making • Property Management • Day-to-day management/operations

15. A Look at Entities, Roles and Functions Entity Role Function Owner Asset Management PHA Board PHA Staff or Mgmt Company Property Management Operator Oversight and Monitoring Regulator PIH Field Offices

16. Difference in PHA Missions • Who to serve • Quality of housing • Standard of affordability • Social goals

17. Operating Fund Program Final Rule and Small PHAs • PHAs with fewer than 250 units are not required to convert to asset management. Still, they will be: • Subject to new funding formula • Required to use the new year-end financial reporting template (FDS, or Financial Data Schedule) • Affected by change in PHAS • Small PHAs may choose to implement asset management and follow the key business rules like any larger PHA

18. PHA Board: Owner Role • Review activities for conformance with missions and goals • Evaluate progress and recommend corrective action • Monitor performance • Stay up-to-date on industry information • Foster relationships with key stakeholders

19. Asset Management Changes from Appropriations Act of 2008 The Consolidated Appropriations Act of 2008 contained two provisions which pertain directly to asset management. The two provisions are: • PHA election to be exempt from asset management for PHAs with 250-400 units • Use of Capital Fund proceeds to pay for central office costs The first provision is only effective for CY 2008. The second is considered permanent legislation.

20. 400-Unit Exemption for CY 2008 • For the purpose of being exempt from asset management, the size threshold increased from 250 units to 400 units • Does not change small PHA threshold for other program areas • PHAs between 250-400 units that elect to convert will not have option of “alternative asset management model” (available only for PHAs of less than 250 units) • Exemption only authorized for CY 2008 • PHA must notify HUD via CY 2008 operating subsidy submissions by April 25, 2008

21. 400-Unit Exemption: Implications • Will not implement fee for service model, and will not create a COCC • Will not receive the $4 PUM asset management add-on • All units will be combined into one AMP, possibly affecting Project Expense Levels (PELs) • Refer to PIH Notice 2008-16 for additional implications

22. Capital Fund Program Changes • PHAs may transfer Capital Funds to Operations for payment of central office costs • In implementing this provision, PHAs must maintain cost allocations for overhead costs (in lieu of fee-for-service/management fees) and, therefore, not establish a COCC • Overhead costs must still be considered reasonable and necessary • Large PHAs may still only transfer up to 20% to “Operations”

23. Workshop 1.1: Asset Management Change Assessment • How might asset management change the way your PHA does business? As a group, please discuss and provide an answer to the question above.

24. End of Section 1

25. Section 2: Asset Management Building Blocks

26. Asset Management Building Blocks Learning Objectives • Introduce the five building blocks of asset management

27. Initial Priorities/Building Blocks Project-based performance assessment Project-based management Project-based accounting Project-based budgeting Project-based funding

28. Project-based funding Project-Based Funding • Separate subsidy form for each project • Project Expense Level (PEL) is a major component • Ensures appropriate resources are allocated to each AMP

29. $ OLD HUD PHA NEW HUD PHA/COCC $ Fees $ Subsidy AMP The Flow of Funds • Property Management Fee • Asset Management Fee • Bookkeeping Fee • Fee-for-Service • Program Mgmt. Fees.

30. Components of Formula Funding • To understand the amount of funds available to any project, one must understand the following: • Project Expense Level (PEL) • Utility Expense Level (UEL) • Add-Ons • Frozen Formula Income • Proration

31. Project Expense Level (PEL) • Model-generated estimate of cost to operate a project on a per unit basis, exclusive of taxes, utilities, and add-ons • Amount expressed in PUMs (per unit month) • Major coefficients that have a large impact on PEL • Unit Size (Bedroom Mix) • Local Market • Age of Property • Occupancy Type (Family vs. Elderly) • National average was $ 325 PUM in 2007 (excluding New York City Housing Authority)

32. Utility Expense Level (UEL) • Represents the average utility consumption for a project over the past three years, multiplied by recent utility rates • Amount expressed in PUMs • National average was $125.95 PUM in 2007 • Assigned UEL will vary by project

33. 2007 Add-Ons

34. Frozen Formula Income • Equal to a project’s rental income reported on 2004 financial statements, adjusted for changes in utility allowances • Effective for 2007 through 2009 • National average was $181.09 PUM in 2007

35. Proration • Each year, total subsidy eligibility is compared with appropriations for the Operating Fund program; the difference is proration • Expressed as a percentage • Example: • Eligibility = $4.0 billion • Appropriation = $3.6 billion • Proration = 90%

36. Effective Income - Operating Expenses = Net Income Determining Project Funding Project Expense Level (PEL) + Utilities Expense Level (UEL) + Add-ons = Formula Expenses - Formula Income = Subsidy Eligibility - Proration = Actual Subsidy + Rental Income + Other Income + Transfers = Effective Income

37. Project-based budgeting Project-based funding Project-Based Budgeting • Used for planning purposes • Budgeted amounts must reconcile to FDS • Must be approved by PHA Board • Not subject to HUD approval

38. Project-Based Budgeting (continued) What are project-based budgets? • Itemized projection of income and expenses over a specific period • Guideline for operating the project

39. Sample Conventional Budget Gross Potential Income (GPI) - Vacancy and Collection Loss + Miscellaneous Income = Effective Gross Income (EGI) - Operating Expenses = Net Operating Income (NOI) - Reserves for Replacement - Annual Debt Service (ADS) = Cash Flow

40. Ratios Used for Expense Benchmarking Operating Expense Ratio (%) = Operating Expense per Unit ($) = • Several variables may impact benchmarks • Expense benchmarks can be used to compare efficiencies across properties Operating Expenses Income Operating Expenses Number of Units

41. Workshop 2.1: Expense Benchmarks • Consider data from two similar apartment buildings shown on the next slide • Calculate the Operating Expense Ratio and Operating Expense/Unit Ratio • In groups, identify the project with the lowest costs • What other factors should be considered when evaluating the results of this cost comparison?

42. Workshop 2.1: Expense Benchmarks 86% 91% $7,500 $14,500

43. Calculating Expense Benchmarks Hamilton Place: Operating Expense Ratio: $150,000 (Operating Expense)/$175,000 (Income) = 86% Operating Expense per Unit: $150,000 (Operating Expense)/20 (Number of Units) = $ 7,500 Southside Apartments: Operating Expense Ratio: $145,000 (Operating Expense)/$160,000 (Income) = 91% Operating Expense per Unit: $145,000 (Operating Expense)/10 (Number of Units)= $ 14,500

44. Where Can I Find Benchmarks? • Project Expense Levels (PELs) • Project Level Data • IREM Income/Expense Analysis® Reports • www.irem.org • Housing Finance Agencies • NeighborWorks (small properties) • Rural Development • Local and Regional Market Studies

45. Project-based accounting Project-based budgeting Project-based funding Project-Based Accounting • Year-end project statements submitted to HUD • Can only charge projects for services actually received • Fees must be considered reasonable

46. Project-Based Accounting (continued) • For conventional properties, the financial performance of each property is tracked individually and reported to the owner • This allows the manager and owner to make the best possible decisions for each individual property • Similarly, PHAs will assemble project level financial data

47. Project-Based Accounting Under the Final Rule Annual year-end financial statements on each AMP will be required • Revenues, expenses, balance sheet • To be included with the Financial Data Schedule (FDS) • FDS will also be revised to include a column for the COCC

48. Entity-Wide FDS Financial Reporting Model (Existing)

49. Asset Management Project FDS Financial Reporting Model (New)

50. Project-based management Project-based accounting Project-based budgeting Project-based funding Project-Based Management • Arrange services in the best interest of the project • Assign management personnel to each project