AFFORDABLE HOUSING FINANCE • January/February 2011
Asset management is the unheralded side of the business, overshadowed by the excitement of building a new development or the challenge of negotiating the purchase of a property.
However, maintaining a portfolio is just as important, especially as many low-income housing tax credit (LIHTC) developments grow older and many housing markets become more competitive.
AFFORDABLE HOUSING FINANCE asked several industry veterans to share early warning signs that a property may be headed for trouble.
“It's a fresh new year and a time to take a fresh look at your property operations,"
says Stephen Roger, a managing director at Centerline Capital Group in New York City.
He sorts the warning signs into two groups—ones that owners can see from their offices and others that can be spotted on-site at a property. From their desks, owners can detect red flags by examining financial indicators and third-party reports, says Roger. When visiting a development, owners can pick up on possible trouble by seeing how the on-site staff behaves and the condition of the property.
Other experts also stressed the importance of noticing trends, whether it's a dip in revenue or a rise in concessions.
“Finding out what is wrong is a matter of disciplined detective work that should result in a written turnaround plan,” says Roger.
It takes work to unearth a problem and avoid the wrong conclusions. He cites the case of a seniors housing development in Houston that had a high turnover. After trying different strategies to solve what was assumed to be a product, a management, or a market issue, the problem continued.
Eventually, officials asked residents why they were moving.
The surprise answer was that in this recession, elderly parents were moving in with their children's families and using their Social Security income to help their kids from losing their homes to foreclosure, says Roger.
Other new challenges may be surfacing in these tough times, including the emergence of a shadow market in some areas.
“There are single-family homes that banks are leasing and condos that never sold and are now rental properties,” says Patricia Curley, vice president at Boston-based Recap Real Estate Advisors. These developments can create new competition for affordable housing properties.
A good asset manager needs to be aware of what's going on in a market, not just limited to LIHTC projects, she says.
1. FALLING OCCUPANCY.
This is an obvious sign that trouble may be brewing.
Owners often have an annual budget that outlines the level of expected occupancy at a site, but that's only a start. They need to monitor deviations from those expectations, says Amy Anthony, president of Preservation of Affordable Housing, a Boston-based nonprofit that has rescued and refinanced more than 6,400 affordable apartments.
Seeing those variations early on can help identify and resolve problems.
Others also point to falling occupancy as an important indicator of what's going on at a development.
Let's say a property that typically has 94 percent occupancy trends down to 87 percent over recent months. The on-site manager claims that a large number of residents have vacated due to the loss of jobs. An examination of the marketing efforts should be undertaken, says R. Lee Harris, president and CEO of Cohen- Esrey Real Estate Services in Overland Park, Kan. “Is the on-site manager doing everything possible to generate qualified traffic?” he asks. “How effective are the rental tours? A mystery shopper may be in order to determine this."
2. DECLINING INCOME.
The revenue side of the books is often more telling than the expense side, says Jenny Netzer, CEO of Boston-based Tax Credit Asset Management. This is because expenditures fluctuate. For example, a property may purchase new carpets one month but not the next. As a result, it's harder to get trending with expenses, says Netzer.
“If the general partner has several years of financial history with the property and notices that budget versus actual comparisons aren't matching favorably at the present time, it's worth a careful look at the income and expense categories that are missing the mark,” adds Harris.
The problem can be a number of things, including an unrealistic budget, inadequate purchasing procedures, or a failure to collect rents in a timely manner, he says.
Recap's Curley also cites a slowing in the collection of rents as a red flag that can't be ignored. It's an issue that's going to trigger a domino effect of other problems, she says. If rents are not promptly and properly collected, it could lead to insufficient funds in the bank to pay vendors and maintain the property. That could affect the ability to turn over vacant units to new paying residents.
“If a resident is not paying because he recently lost his job, we try to be understanding and work with them on a solution," says Curley, who oversees asset management. However, owners have to know and enforce their lease provisions.
If there is a larger collection problem at a property, it may be a sign that an owner needs to evaluate the property's tenant criteria.
3. RISING EXPENSES.
Although expenses can vary from month to month, owners still need to monitor what's happening with accounts payable. A mounting stack of bills may be a sign that there's a squeeze on the property, says Anthony.
Roger adds that a reduction in supplies and an increase in contracts shows less work is being done in-house and more by expensive contractors.
4. INCREASING CONCESSIONS.
Higher concessions are often red flags that there are issues at a property or in the market.
It may not be a sign that rents have to be adjusted, but it does signal that an owner needs to look at the competitive environment, according to Netzer.
5. MOUNTING COMPLIANCE ISSUES.
Third-party reports provide valuable insight into what's happening at a development.
Compliance notices and Internal Revenue Service (IRS) Form 8823, which is used to report noncompliance at a LIHTC property, are alarms that signal where a property is falling short.
Low or declining scores from housing agencies, cities, or lender inspections are also big red flags. Liens, lawsuits, and a higher number of insurance claims and police reports are also revealing, says Roger.
If a property starts to receive a rash of 8823s from the state housing agency, it could lead to serious issues with the IRS if the violations relate to rentals to overqualified individuals, says Harris.
“In situations such as this, it is important to review the screening and qualification process,” he says. “And, the solution could be as simple as a re-education of the rental staff to understand the screening and qualification requirements and processes."
6. MAINTAINING RESERVES.
Owners should watch to make sure deposits are being made and reserves maintained.
State housing agencies often have minimum reserve requirements. Staff should not dip into those accounts unless the reserves have more than the required amount of money.
7. REVOLVING STAFF.
A high turnover of the property staff can be one more sign of trouble.
While the warning signs above are ones that an owner or financial partner can see from his or her office, there are other signs that one should watch for onsite, says Roger. He offers a few questions owners can ask themselves during a visit: ”ºDoes the property manager have a written budget and business plan?
”ºDoes the staff seem like a team?
”ºAre marketing materials out of date or non-existent?
”ºAre the management office and model units ready and well maintained?
What to Watch For
To make sure their developments stay on track, affordable housing owners need to pay attention to:
TRENDS Variations from past performance are telling. Is there a change in occupancy or income from prior years? Or, is a property falling short of expectations? Deviations, even slight ones, serve as red flags that something is wrong.
THIRD-PARTY REPORTS Annual inspection scores and other reports offer valuable insight. Examine why a score has changed from prior years and address those issues. Also, consider if those issues are part of a bigger problem.
THE HOUSING MARKET Owners need to know what's happening in a property's market area. A shadow market from single-family homes or conventional apartments could affect an affordable housing development's performance.