Financial Management PRESENTED BY: SAMPLE

Transcription

1 Financial Management SA M PL E PRESENTED BY:

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3 LIMITS OF LIABILITY AND DISCLAIMER OF WARRANTY 2014 by the National Apartment Association, 4300 Wilson Boulevard Suite 400 Arlington, VA All rights reserved. The course materials or any part thereof may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, or otherwise, without the prior written permission of the National Apartment Association Education Institute (NAAEI). NAA retains copyright to the original materials and to any translation to other languages and any audio or video reproduction, or other electronic means, including reproductions authorized to accommodate individual requests based on religious or medical deferments from classroom participation. DISCLAIMERS Although NAAEI programs provide general information on apartment management practices, NAAEI does not guarantee the information offered in its programs is applicable in all jurisdictions or that programs contain a complete statement of all information essential to proper apartment management in a given area. NAAEI, therefore, encourages attendees to seek competent professional advice with respect to specific problems that may arise. NAAEI, their instructors, agents, and employees assume no responsibility or liability for the consequences of an attendee s reliance on and application of program contents or materials in specific situations. Though some of the information used in scenarios and examples may resemble true circumstances, the details are fictitious. Any similarity to real properties is purely coincidental. Forms, documents, and other exhibits in the course books are samples only; NAAEI does not necessarily endorse their use. Because of varying state and local laws and company policies, competent advice should be sought in the use of any form, document, or exhibit. POLICY STATEMENT REGARDING THE USE OF RECORDING DEVICES, AUDIO VISUAL EQUIPMENT, AND OTHER MEANS OF REPRODUCTION OR RECORDING OF THE CERTIFIED APARTMENT MANAGER MATERIALS All program contents and materials are the property of the National Apartment Association Education Institute, which strictly prohibits reproduction of program contents or materials in any form without the prior written consent. Except as expressly authorized in writing in advance, no video or audio recording of NAAEI programs or photocopying of Certified Apartment Manager materials is permitted. Authorized recording of programs or duplication of materials may be done only by the instructor on site National Apartment Association

4 ACKNOWLEDGMENTS SUBJECT MATTER EXPERTS The NAA Education Institute wishes to thank the following apartment industry professionals for contributing their time and expertise to the rewrite of the Certified Apartment Manager Research, Analysis and Evaluation program: Lead Subject Matter Expert Susan E. Weston, CAM CAPS, NAAEI Faculty Licensed Texas Broker Professor, University of North Texas School of Business The Susan Weston Company 2655 Mount View Drive Dallas, TX Office Cell David Jolley, CAMT Howard L. Campbell, Ph.D. Fisher & Phillips, LLP Kimball, Tirey, and St. John, LLP Sue Weston, CAM, CAPS KEY CONTRIBUTORS 2014 National Apartment Association

5 Table of Contents Chapter 1: Investments 1-1 Chapter Overview Background Factors in Investment Investment Performance Measurements Advantages and Disadvantages of Apartment Investments Apartment Ownership Mortgage Loans Chapter 2: Adding Value to the Investment 2-1 Chapter Overview Background Rental Income Factors that Affect Rental Rates Rental Rate Adjustments Managing Occupancy Expenses Chapter 3: Economic Analysis of a Property 3-1 Chapter Overview Background Financial Statements Concepts The General Ledger Chapter 4: Budgets 4-1 Chapter Overview Background Types of Budgets Budget Development & Management Chapter 5: Property Valuation 5-1 Chapter Overview Background Ways to Determine Property Value Toolbox Toolbox-1 Overview... Toolbox-1 Annual Turnover Percentage... Toolbox-3 Annualizing a Number... Toolbox-3 Average Effective Rent... Toolbox-4 Average Renewal Increase... Toolbox-4 Average Square Feet/Unit... Toolbox-5 Capitalization/Valuation... Toolbox-5 Closing Percentage/Ratio... Toolbox-6 Continued on next page 2014 National Apartment Association i

6 Table of Contents, Continued Cost of Advertising Per Lease... Toolbox-6 Cost of Advertising Per Traffic... Toolbox-6 Effective Gross Income (Net Rental Income)... Toolbox-7 Economic Occupancy Percentage... Toolbox-7 Effective Rent... Toolbox-8 Gross Potential Rent (GPR)... Toolbox-8 Hourly Rate on Annual Basis... Toolbox-9 Leasing Exposure... Toolbox-10 Month-to-Month Leased Percentage... Toolbox-10 Net Operating Income (NOI)... Toolbox-11 Operating Expenses Per Unit (Annual)... Toolbox-11 Operating Expense Ratio... Toolbox-11 Price Per Square Footage... Toolbox-12 Prorated Rent... Toolbox-12 Daily Rate... Toolbox-12 Prorated Move-In/Prorate Move-Out Rent... Toolbox-12 Projected Traffic Required to Meet Leasing Goals... Toolbox-13 Renewal Percentage... Toolbox-13 Total Leased Percentage... Toolbox-13 Unit Type/Unit Mix Percentage... Toolbox-14 Vacancy Percentage... Toolbox-14 Variance Percentage... Toolbox-15 Weighted Average Rent Leased and Market... Toolbox-15 Calculating Weighted Average Leased Rent... Toolbox-16 Calculating Weighted Average Market Rent... Toolbox-16 Market Comparison Survey Form... Toolbox-17 Weekly Activity Report Sample... Toolbox-18 Explanation of Weekly Activity Report... Toolbox-19 Box Score Report Sample #1... Toolbox-20 Box Score Report Sample #2... Toolbox-21 Leasing Activity Report Sample... Toolbox-24 All Units Summary Report Sample... Toolbox-25 Lease Expiration Report Sample... Toolbox-26 Rent Roll Sample #1... Toolbox-27 Rent Roll Sample #2... Toolbox-30 Delinquency Report Sample... Toolbox-33 Bank Deposit Summary Report Sample... Toolbox-34 Monthly Income Summary Report Sample... Toolbox-36 Monthly Transaction Summary Report Sample... Toolbox-37 Lost Rent Summary Report Sample... Toolbox-38 Concessions Report Sample... Toolbox-39 Demographics Report Sample... Toolbox-41 Continued on next page 2014 National Apartment Association ii

7 Table of Contents, Continued Cash Flow Statement (Completed)... Toolbox-42 Cash Flow Statement Template... Toolbox-43 Sample General Ledger Extract Report... Toolbox-44 Sample Chart of Accounts... Toolbox-45 Market Rent Schedule... Toolbox National Apartment Association iii

8 Chapter Overview Chapter 1 Investments In this chapter The table below lists the topics in this chapter. Topic See Page Background 1-2 Factors in Investment 1-3 Investment Performance Measurements 1-5 Advantages and Disadvantages of Apartment Investments 1-7 Apartment Ownership 1-8 Mortgage Loans National Apartment Association 1-1

9 Background CAM responsibilities Definition of investment Types of investments Investment objectives As a Certified Apartment Manager (CAM), you are responsible for many financial matters including the daily activities of collecting rents, making purchasing decisions, processing invoices and/or paying bills, making bank deposits, etc. On a higher level, you are also responsible for the property as a financial investment. Your knowledge, skills and decisions will directly contribute to the financial success of the property you manage. The value of the property is directly related to its financial performance. An investment is the use of funds to earn a profit. There are many types of investments and most of us participate in personal investments every day. Personal investments can be as simple as having a savings account to more complex investments such as buying a home or a business. In a general sense, the objective of an investment is to earn money with money. All investments, whether personal or business, must have specific and measurable objectives. To clarify objectives, investors might ask themselves questions such as: Why do I want to obtain some specific amount of money? How much money will I need and when will I need it? What economic conditions could alter my investment goals? Am I willing and able to make the sacrifices that are necessary to ensure that my financial goals are met? Do I want to be actively involved in managing my investment? 2014 National Apartment Association 1-2

10 Factors in Investment Risk Income Safety in an investment means minimal risk or loss. An investor must decide how much risk they are willing to take and how much loss they can afford. Any investment, no matter how small, involves risk. Risk is the probability that foreseen or unforeseen events might occur. Common risks that affect multifamily housing investments include: general economic and market conditions job losses or job growth political climate supply/demand interest rates neighborhood conditions population changes household growth the interaction of a group of real estate investments in a portfolio, and the operations of the property itself Risk is also associated with time. Long-term investments are generally considered riskier because they are subject to the impact of more risks over time. An investor will expect higher returns on a long-term investment because they face risk for a longer period of time and wants to compensate for giving up some safety. Investments that have low risks, such as savings accounts or money market certificates, are typically associated with low returns. Conversely, when an investor chooses a riskier investment there is an expectation that the returns will be much higher. Low risk equals low return and high risk equals high return. The income factor refers to the expected income from an investment. To some extent, income depends on the amount of risk involved. Conservative investments, such as savings accounts and some bonds and stocks generally provide a predictable amount of interest or dividends each year. Riskier investments are perceived to have the potential of offering high returns. Income from investments may not always be in the form of cash. In some instances an investment may act as a shelter against income taxes. Continued on next page 2014 National Apartment Association 1-3

11 Factors in Investment, Continued Growth potential Liquidity Management challenges To an investor, growth potential means their investment will increase in value. Investors looking for growth potential will look for opportunities to invest in expanding rather than stable or mature companies, businesses and/or markets. It is important to understand that investing for growth means that present income is given up for potential growth or future income,, and that early returns may be low, as profit is reinvested in the business or property. Liquidity is defined as the ease with which an asset can be converted to cash. An investor must decide how long he or she is willing to have money tied up in an investment. This will influence the type of investment chosen. Stocks may be considered a fairly liquid investment because they are easily sold. Real estate, on the other hand, is much less liquid because it is more difficult to find a buyer for an apartment community than a stock, for example. Certain types of investment are more labor intensive and require more hands-on oversight than others. Apartment real estate is certainly one investment that can pose a variety of management challenges National Apartment Association 1-4

12 Investment Performance Measurements Overview Rate of return on investment (ROI) Cash-on-cash return Serious and successful investors will not only know their financial objectives and goals but will also know how to measure the performance of their investments. Investment performance is used to guide investment decisions about buying, selling, increasing or decreasing an equity (ownership) position, and is a way to make sure financial goals are met. Note: Because real estate investments are not considered liquid assets, investors in real estate are generally not as concerned about having ready cash. One significant and frequently used measurement of performance is rate of return on investment. The term yield is used interchangeably with the term return in the industry. Rate of return may be defined several ways, but for our purposes, it can be simply stated as the percentage of return on each dollar invested. It can be calculated as follows: Cash Flow/Investment = ROI Investment means the capital investment or down payment. This is not the same as equity, since equity would include the growth in the value of the asset and the amount of the principal paid off. Example: If a property generates $10,000 in cash flow to an investor who made a $100,000 down payment on that property, his ROI is $10,000/$100,000 or 10%. This method measures the cash received in each period against the original cash invested. It can be further separated into before-tax and after-tax returns. The investment is always the same. What changes is the cash flow more or less and the amount of the principal paid off to date in monthly payments. Continued on next page 2014 National Apartment Association 1-5

13 Investment Performance Measurements, Continued Capitalization rate Internal Rate of Return (IRR) This method measures the net operating income (NOI) against the total cost of the investment. The cap rate is determined by dividing NOI by the purchase price. The cap rate is expressed as a decimal or percent. Reference: See the Toolbox for the Capitalization/Valuation formulas. This rate measures the outflow and inflow of capital over time. IRR is primarily used when trying to decide which investment to make among several choices. Typically, an investment is considered attractive if the IRR is greater than the cost of capital. Rates of return are always calculated on an annual basis using annualized numbers National Apartment Association 1-6

14 Advantages and Disadvantages of Apartment Investments Advantages of apartment investments Disadvantages of apartment investments Some advantages of investing in apartment communities include the following. Receiving periodic cash payments from the cash flow generated by the property. Potential for investment appreciation (increase in value of the property). Reduction in income taxes. Ownership of residential income property allows the owner to use depreciation when reporting taxable income. Depreciation deductions reduce the amount of taxable income. The ability to invest using leveraged funds (borrowed money). Unlike other investments that require 100% of the value in cash, a real estate investment may be leveraged, and in many cases, the cash investment required is only 10%-25% of the full value. Thus, an apartment building worth $100,000 may be owned for as little as a $10,000 cash investment. Some disadvantages of investing in apartments include the following. Real estate is one of the least liquid investments or assets. Many investors will be required to actively participate in management of the property. There are exceptions however, such as corporations, TICs, and REITs. Owning property involves some high risks such as property damage due to fire or flooding. There is also the risk of loss of income, rents and other revenues due to a property s location and/or market conditions. While property insurance can help reduce losses from damage to the physical improvements and equipment, it is not possible to insure against losses due to changes in market conditions National Apartment Association 1-7

15 Apartment Ownership Forms of ownership The table below describes the ways to own or invest in a property and the advantages and disadvantages of each. Type Description Advantage Disadvantage One individual owns Formation and There is unlimited and manages the dissolution of business liability and limited property. is easy and has a low ability to borrow. Direct Ownership/ Sole Proprietor Partnership Limited Liability Partnership Limited Liability Corporation S Corporations Two or more people jointly own and manage property. The limited partners contribute capital but do not actively manage the business. Most LLCs consist of two or more members, but many states allow a single-member LLC. A corporation that is taxed as if it were a partnership the corporation s income is taxed only as the personal income of the shareholders. This is an effective way to avoid double taxation while retaining the legal benefits of incorporation. cost. Formation of business is easy and has a low cost. There is increased availability of capital and credit and retention of profits. Liability is limited to the amount invested by each partner An LLC, like a limited liability partnership, is recognized as a separate legal entity from its members. Ordinarily, only the LLC is responsible for the company s debts. Shareholders can personally claim their share of losses incurred by the corporation to offset personal income. There is unlimited liability and potential difficulty in withdrawing investment from partnership There is a lack of uniformity in state laws. Some states have state insurance requirements. There is joint and several liability. Taxable in some states. There is a lack of uniformity in states governing LLCs. There are a limited number of shareholders providing less flexibility in income allocation. Continued on next page 2014 National Apartment Association 1-8

16 Apartment Ownership, Continued Forms of ownership, (continued) Type Description Advantage Disadvantage Established by federal A REIT must, by law, Investors have no law in The pay virtually all its control over when a purpose of a REIT is to taxable income to its company will sell its allow small investors to shareholders every holdings or how it will pool their investments in year. manage them. REITs real estate while also are fairly liquid assets diversifying their risks, obtaining professional management and maintaining liquidity. Real Estate Investment Trusts (REITs). Tenants in Common (TICs) A TIC is a form of real estate asset ownership in which there are two or more persons of an undivided fractional interest in an asset, where ownership shares are not required to be equal and where ownership interest can be inherited. At closing, each co-owner receives an individual deed to their undivided percentage interest in the entire property. This structure allows the deferment of capital gains tax that would be owed on a property that is sold. Also, provides a way for someone to be able to enjoy ownership in an institutional type property with a lesser investment. TICs have also become a vehicle for investors looking for a new 1031 exchange. Disadvantages include the newness of the investment structure and thus liquidity is unproven. The TIC sponsor controls the hiring of the management agent and investors have no control over how the investment will be managed National Apartment Association 1-9

17 Mortgage Loans Mortgage loan definition Types of mortgage loans A mortgage, one of the most common sources of financing real estate investments, is a legal instrument that pledges a described property as collateral or security for the repayment of a loan under certain terms and conditions. The table below describes the types of mortgage loans. Type fixed rate variable rate balloon bullet loan Description Traditionally, fixed-rate mortgage loans are made for long terms of 20 to 30 years and carry a fixed interest rate. Level payments, meaning the same dollar amount of payment, are made each period for the entire loan term. The payments are applied to the principal and interest owed until the loan is paid in full. This process is referred to as amortization. Commercial mortgage documents typically include an amortization table which details exactly how much interest and how much principal is paid with each mortgage payment. A variable rate mortgage or Adjustable Rate Mortgage (ARM) is a type of mortgage that has an interest rate that is adjusted periodically based on a financial index. The most common adjustment intervals range from one month to three, five and ten years. A balloon mortgage behaves like a fixed-rate mortgage for a set number of years (usually five, seven or ten) and then must be paid off in full in a single balloon payment. Balloon loans are popular today and often used by those expecting to sell or refinance their property within a definite period of time. Bullet loans are structured so that interest payments and the loan principal are paid off in one lump sum at a specified time. They may require monthly payments of interest. Bullet loans are frequently used in new construction and substantial rehabilitation situations where no income is received for a period of time from the property. Continued on next page 2014 National Apartment Association 1-10

18 Mortgage Loans, Continued Mortgage terminology Where mortgages are obtained The table below defines mortgage terminology. Term principal interest rate amortization escrow account replacement reserve payment Mortgage loans may be obtained from: Definition The amount of money borrowed, or the debt not counting interest, left on a loan. The percentage of an amount of money that is paid for the use of that money for a specified time. The process of retiring a debt or recovering capital investment, typically through scheduled, systematic repayment of the principal. A trust account set up by the lender into which the borrower must make payments. Escrow accounts are generally used to ensure that property taxes and insurance bills are paid, thus reducing the lender s risk. Not all mortgages include escrow accounts, but they are frequently used. Some loans require payments to a replacement reserve account. This is often the case with HUD insured or assisted properties and state agency financed properties. Lenders on market rate properties are beginning to require such accounts as a means for ensuring that money is available to maintain the property during the term of the loan. commercial banks finance companies savings and loan institutions insurance companies pension funds mutual funds, and the federal government through government sponsored enterprises or government chartered corporations, such as the o Federal Home Loan Mortgage Corporation (FHLMC) (Freddie Mac), Federal National Mortgage Association (FNMA) (Fannie Mae) Continued on next page 2014 National Apartment Association 1-11

19 Mortgage Loans, Continued Federallyinsured mortgages The federal government insures mortgages through the Federal Housing Administration (FHA) and the U.S. Department of Agriculture s Rural Housing Services programs. Tax credit financing State and local government programs offer tax credit financing (Section 42) and tax-free bond financing National Apartment Association 1-12

20 Chapter Overview Chapter 2 Adding Value to the Investment In this chapter The table below lists the topics in this chapter. Topic See Page Background 2-2 Rental Income 2-3 Factors that Affect Rental Rates 2-5 Rental Rate Adjustments 2-8 Managing Occupancy 2-15 Expenses National Apartment Association 2-1

21 Background Cash flow CAM responsibility What is value? Cash flow for an apartment investment is the money that remains after all sources of income are collected and all the property operating expenses including capital improvements and debt service are paid. Reference: See the Toolbox for a sample Cash Flow Statement. Also, see Chapter 3 for information on calculating cash flow. As a Certified Apartment Manager (CAM), you are responsible for generating and collecting as much income as possible, controlling expenses and meeting the financial goals of the investment. Note: As a CAM, your biggest opportunity to make a positive impact on the cash flow is through increasing income. Many expenses are fixed and, even if variable, are only variable to some degree. They occur no matter how high or how low the occupancy on your property might be. Income can grow significantly with aggressive rents and creative other ancillary income sources. Value is determined by the owner and the owner s objectives for the property. A property to be sold will have different criteria for value than one being rehabbed for retention. Generally, value is an increase to the bottom line more Net Operating Income (NOI), increased revenue, and reduced expenses bring more NOI. Value can also be added as: reduced staff turnover and lower personnel costs reduced resident turnover with better customer service aggressive demand-driven rental rates set by unit type resourceful new avenues for added income through resident services, and better collections of resident charges 2014 National Apartment Association 2-2

22 Rental Income Factors that affect rental income How these factors work together Net or effective rent Concession and incentive programs Since the primary source of property income is rent, it is important to understand the factors that impact rental income rate, percent occupancy and collection percent. Rate speaks to the market rents. Knowing how to set a competitive rental rate is key to meeting income goals. Percent occupancy speaks to the physical occupancy. The percent of occupancy must be managed and kept at a level that produces sufficient income to run the business. Collection percent speaks to the economic occupancy of the property. Rent must be collected from all residents. Reference: See the Toolbox for the Economic Occupancy Percentage formula. The three factors are interdependent. The correct rental rate will help attract and retain residents, which provides income and affects occupancy. However, if the rent collection percentage is low, income objectives will not be met. Good management of all three; rental rates, occupancy, and rent collection practices is needed to have income. Any programs that reduce the market rent amount must be taken into account when comparing rents. A net rent or effective rent amount must be identified before comparing your property and competing properties. If you compare only market rents you will not get an accurate understanding of rental rates among your competitors. Reference: See the Toolbox for the Average Effective Rate and Effective Rent formulas. Consider the impact of concession or other incentive programs on market rents. At certain times in some markets it may be necessary to offer rent concessions on new leases or renewals. Typically, such practices are approved by supervisory personnel. Continued on next page 2014 National Apartment Association 2-3

23 Rental Income, Continued Factors that affect successful concessions Recordkeeping Impact of concessions on effective rent Keep the following in mind when considering concessions. When concessions are offered, they must be offered to all persons seeking apartments that day. Most companies reflect the market rent in the lease and use a concession addendum to define the terms of the concession. Some companies require rent to be paid on time to receive the concession. If the lease is terminated before expiration, some companies require repayments of concessions used to date. For example, one month free rent up front must be reimbursed if the lease term is not fulfilled. Some companies prepare leases with the rent amount after the concession reflecting what the resident is required to pay. This does not allow tracking of market rent and concession practices as well as market rent leases and concession addendums. The community manager must ensure that records are kept that note all concession programs offered during that period. Records must be kept for a minimum of two years. This will provide background information should fair housing issues ever arise. This is a most important concept to understand when evaluating rental pricing strategies. Anytime concessions of any term, variation, or amount are provided, the property will collect less rent than if the resident were paying current scheduled market rent. It is useful to understand how much less. Example: If the scheduled market rent is $700 and you are giving one month free, your effective rent is less than $700. In this example, it is $642 (market rent $700 X 12months (lease term) = $ $700 (free month) = $7700/12 = $642. A larger concession (two months) or a concession spread the term of lease also means effective rent that is less than market rent by varying amounts depending on the size and term of the concession. The financial impact of concession policies should be understood and evaluated before their implementation. The effective rent or the net rent is what matters National Apartment Association 2-4

24 Factors that Affect Rental Rates CAM responsibility Law of supply and demand Economic conditions As a Certified Apartment Manager (CAM), you must be aware of the variety of events and trends in your area. You will need to know whether your area/region is expanding economically, resulting in higher incomes and greater demand for housing, or experiencing an economic downturn. If you know what is happening in your area (a closing of a major employer, increased growth and competition in neighboring areas, or perhaps a natural disaster) you will be better able to assess the long and short-term economic effects on your property. Supply and demand is an economic concept that generally states that if demand is high and supply is low, higher prices for a commodity or service can be obtained. The key for using the principles of supply and demand is identifying when imbalances in supply and demand occur. Very simply, if your local area has very few apartment homes to lease but has high demand, there is an imbalance. To benefit from, or use the principles of supply and demand, you can raise the rental rate because people will be willing to pay a higher rent. Conversely, if there are too many apartment homes available to lease, but demand is low, there is an imbalance as well. We have excess supply. Rents may have to be set at competitive rates to attract residents. Local economic market conditions also affect rental rates. Areas that are expanding attract businesses and people to fill jobs. The most important factors impacting economic conditions for apartment housing are: population growth household formation, and job creation When the local economy grows, rental rates may be increased. Areas that are experiencing a downturn, such as a loss of a major employer, may have to reduce rental rates. When interest rates are lowered, many renters take advantage of lower interest rates to become homeowners which can have a direct impact on rental rates. Continued on next page 2014 National Apartment Association 2-5

25 Factors that Affect Rental Rates, Continued Housing trends Competitors offerings Property features HUD and governmentassisted housing programs New construction of apartment units that offer better amenities and new apartment homes with in-unit washers and dryers, a swimming pool, parking, etc., can also impact current rates. New construction of single-family homes will also increase competition, and older apartment communities may be forced to adjust their rental rates to maintain existing residents and attract new ones. Conversion of rental homes to condominiums will also change the balance between supply and demand for rental homes. Consider the types or styles of apartments, rental rates, and amenities, such as carports, garages, in-unit washers and dryers, health clubs, Jacuzzi tubs, swimming pools and spas, etc, that your competition is offering. Estimate how much you think the various amenities add to the base rent of a unit. Is a fireplace or washer/dryers worth $10, $20, $50 or more in rent? Can any amenities be added to your site? For some amenities, you can charge premiums especially if no one else has them. Other times, you may not be able to charge extra rent because your competitors also have features such as washers and dryers in the apartment. Consider various features of your property that are appropriate for charging premiums (an additional amount) on the rent. For example, residences facing a pond or woods rather than the highway can be leased at slightly higher rates. Perhaps you would charge more for residences on the second floor. Rental premiums such as views, fireplaces, and floor levels are typically part of the rental income. HUD Rental rates for properties renting under HUD and other governmentassisted housing programs are subject to the regulations set by the federal and/or state government involved. Essentially, such programs are income restricted and rent limited; that is residents must be income eligible and, if they are, the rent charged to them will be limited to what is allowed by the governmental program financing or assisting the property. Annually, HUD establishes fair market rents in areas around the country that set rent levels for program participants. Program requirements are usually established within the mortgage and funding documents that are required for participation in government assisted housing. Continued on next page 2014 National Apartment Association 2-6

26 Factors that Affect Rental Rates, Continued HUD and governmentassisted housing programs, (continued) Government Assisted Housing Government assisted housing programs are designed to serve low and moderate income groups based on income levels. Such housing providers tend to serve a mix of the income levels, as defined in the following table. Income Level low very low extremely low income Definition income below 80% of area median income income below 50% of area median income income below 30% of area median income Affordable housing tax credit programs (Section 42) are administered at the state government level and are designed to serve a moderate income level renter. In return for tax credits, the developer agrees to build and rent units for moderate income renters. Income eligibility and rent limit restrictions also apply to this program. References: See the topic Rental Rate Adjustments later in this chapter for information on changing rental rates in HUD and government-assisted housing. See also the Fair Housing Participant Guide for additional information National Apartment Association 2-7

27 Rental Rate Adjustments Factors to consider before lowering the rent The rental rate and vacancy balance Rental rates and the bottom line It is important to remember that price is not the only factor that dictates occupancy. Lowering the rent will not always gain occupancy nor will raising the rent necessarily lose occupancy. There are many more factors to analyze before reverting to lowering the rent. Rent reductions should only be an action of the last resort and only after a sound analysis of the current conditions in the market and at the community evaluating people, product, promotion, and price. Changing the rental rates is like a balancing act or art form. Sometimes it is wise to remember that the goal is not 100% occupancy, but rather to maximize income. Physical occupancy simply means the apartment is occupied. If you have priced the unit too low, you are leaving money on the table while the unit is occupied. If you price the unit too high, you may incur additional vacancies. Similarly, as you increase market rents and pass increases on to renewing residents, care must be taken. When deciding how much to change rents, there are some calculations you should use that will give you some insight into the big picture and the effects on the bottom line or potential net income of your property. Assume the market value of an apartment home is $800 and you raise the rent 10% to $880. If the unit remains vacant for 15 days because it is overpriced, you ve lost $400 (1/2 of the $800 you could have charged.) How many months would it take at the higher rate to make up the loss from the 15-day vacancy? The answer: $400/$80 = 5 months. If you are considering lowering rental rates, you need to know how the new rent schedule will impact potential income and prepare for its effects. Alternatively, a vacant apartment produces no income and costs money when it remains vacant (e.g. utilities). Continued on next page 2014 National Apartment Association 2-8

28 Rental Rate Adjustments, Continued Rental rates and the bottom line, (continued) Factors to consider before adjusting the rent If market value is $800 and you price a unit at 10% below market value ($720), it may not be vacant very long. But, you would lose $80 a month at the lower rate, and for a twelve-month lease, you could lose $960. Another approach would be to not lower the rental rate. If you leased the apartment home in 30 days, income lost would be one month s rent of $800 or a gain of $160 annually than if you had used the $720 rental rate outlined above. Before adjusting the rent, it is a must to analyze the traditional 4 Ps: people product promotion, and price Factor People Questions to ask Is the staff well trained with the right skills? Are the right people in every position? Are we cutting rents to compensate for poor performers? Is staff appearance professional? Are the best people working high traffic times (the weekend) and are they asking for the sale? Do they exude energy and enthusiasm? Is excellence demanded from my employees or are they allowed to just get by? Is the property being managed effectively and efficiently? Do my residents receive prompt service? Is the asset being managed with the owner s investment goals in mind? Are vendors providing what is required in their service contracts? Continued on next page 2014 National Apartment Association 2-9

29 Rental Rate Adjustments, Continued Factors to consider before adjusting the rent, (continued) Factor Product Questions to ask Does the property (product) have outstanding curb appeal? Does it look and feel well maintained or is there deferred maintenance apparent? Is preventive maintenance performed in a timely manner? How do the amenities, the models, and the leasing office show? Is the tour route clean and inviting? When was the model last refreshed and preventive maintenance work done? Is the model route walked every day before business opens? What does the parking area look like? Is signage fresh? Are there abandoned or disabled vehicles? Do current residents get the service they expect? Continued on next page 2014 National Apartment Association 2-10

30 Rental Rate Adjustments, Continued Factors to consider before adjusting the rent, (continued) How much to increase? Factor Promotion Price Questions to ask Is the property using the best, most cost effective marketing sources with advertising that is creative and eye-catching? Are the right prospective clients being reached? What are the main traffic sources and are they providing the quantity and quality of potential residents? Are you measuring the cost per traffic and the cost per lease of your advertising sources? Are you responsive in a timely manner to Internet inquires? Is outreach being done a regular basis? Are your rents competitive in the marketplace? What is your availability in total and among various floor plans? Do we have correct pricing based on total availability and the types of floor plans available? Is there sound lease renewal pricing? Is pricing based on incomplete or inadequate market knowledge? Are we quick to lower rents and slow to take advantage of improvements in the marketplace? Do rents simply stimulate traffic instead of getting in front of the right potential residents? Before setting the new rates, consider the current inflation rate. You should raise the rates to the highest amount the market will bear without jeopardizing occupancy. Reference: See the topic Factors that Affect Rental Rates in this chapter for additional information. See the Toolbox for the Average Renewal Increase formula. Continued on next page 2014 National Apartment Association 2-11

31 Rental Rate Adjustments, Continued Perform a market analysis first Automated revenue management systems When to increase the rent Before changing a rent schedule, you will need to conduct a market survey of competing properties. The Market Comparison Survey Form is a good tool for educating yourself about your competition. It allows you to look at the all the competition at one time. Reference: See the Toolbox for a sample Market Comparison Survey Form. See the Marketing Participant Guide and the Community Analysis Participant Guide for additional guidance. Automated revenue management is new to the housing industry. These systems rely on data and market forecasting tools to systematically produce pricing models for apartment communities. The systems use data-driven pricing to derive the best price for individual apartment units based on current and forecasted market conditions. In the past, the site manager often set prices based on neighborhood competitors combined with traffic analysis and notices to vacate and to identify demand without the benefit of automated systems. Rent should be increased as the market allows. Regular intervals are not always possible. Your experience and historical information from reports will indicate the appropriate time. Typically, spring is the season of highest traffic. This may vary from market to market, or within markets (e.g. student apartments). Also, consider how much time has passed since the last increase. Note: Where possible, it is better to increase rents so that any resulting move-outs occur at the beginning of the peak-leasing season so that there is ample traffic to fill vacancies. Consider increasing rent: on any floor plan that remains 95 percent or more occupied or that are full even when the community s turnover ratio averages below 55 percent when rents fall below levels indicated by a comparative rent analysis anytime a community is full, and upon owner request Continued on next page 2014 National Apartment Association 2-12

32 Rental Rate Adjustments, Continued When to increase the rent, (continued) Consider current residents How many units to increase Note: Some communities have a dual increase policy. The renewal increases are one rate and market increase rates are some percentage higher than the renewal rate. When the renewal collected average is close to the market average then it s time to increase both rates. Methods for increasing rent Companies have widely varying policies on passing on market rate increases to current residents. The market influences much of the policies at the time of the increase. Whatever the decision, do not fail to consider current residents and their continued residency as you consider the increase. Rent increases on existing residents may be accomplished in the following ways. Increase the rent as leases expire. Increase the rent selectively on expired leases in addition to new expirations each month by determining a quantifiable, nondiscriminatory standard such as years of residence or number of previous renewals. Increase the rent across the board for all residents, if the lease, laws and conditions permit. This is the least common method. Recommended renewal rates Some may recommend that rental rates for existing residents (renewal rates) be set slightly below the new market rates. Psychologically, this discount is an advantage for existing residents and may make the increase easier to accept. Check with your supervisor for direction in this regard. If your lease requires 30 days notice of rent increase, it is recommended that notification of increase be sent to residents 60 days prior to the effective rent increase date. This will give them time to look around and decide not to move, or give you more time to prepare for a move-out. If only 30 days notice is given, residents may feel forced to make an immediate decision, give notice and subsequently move. Market rents should be increased on each unit type, unless you have a problem or difficult-to-lease unit. If vacancies are substantial in this unit type, you may want to consider a very small increase or no increase. Continued on next page 2014 National Apartment Association 2-13

33 Rental Rate Adjustments, Continued HUD and governmentassisted housing programs Changes in rental rates may require certain forms and documentation be submitted and approved before rents can be changed. References: See the topic Factors that Affect Rental Rates earlier in this chapter for information on changing rates in HUD and government-assisted housing. See also the Fair Housing Participant Guide for additional information National Apartment Association 2-14

34 Managing Occupancy Occupancy reports Rent roll Many companies require various occupancy reports at regular intervals. Reports may be gathered daily or weekly and are used to monitor and anticipate occupancy at your property. A typical occupancy report will include the current leases, number of new leases, move-ins and move-outs and vacancies. Many property management software programs create these reports automatically based on the daily input of data by the site office staff. For example, if a notice to vacate is received at the site, it is posted on the computer and is added to the list of available units to lease and deducted from the leased percentage of units on site. Occupancy reporting is typically accompanied by traffic and sales reporting as well. Daily, weekly, monthly, year to date (YTD), and annual data is available on most software programs. It allows measurement of leasing performance such as closing ratios for individual leasing professionals and the property as a whole. Gross sales and net sales (sales minus cancels and rejects) are also part of these reports. Occupancy is not possible without leasing and move-ins. Reference: See the Toolbox for the following: Sample Weekly Activity Report Explanation of Weekly Activity Report Box Score Report #1 Box Score Report #2 Leasing Activity Report All Units Summary Report Lease Expiration Report Closing Percentage Ratio formula Leasing Exposure formula, and Month-to-Month Leased Percentage formula. A rent roll provides a comprehensive record of occupancy and collection activity. It is important to maintain an accurate rent roll as it is a source document for other reports. A rent roll may be produced at any given time to reflect the collections and occupancy at that moment in time. The rent roll can be used to compare rent potential with money lost from vacancy, concessions and collection losses. If you are not meeting income targets, your owner will not achieve the goal set for return on investment. Such results will likely impact your personal performance evaluation as well. Continued on next page 2014 National Apartment Association 2-15

35 Managing Occupancy, Continued Rent roll, (continued) Rent rolls come in a variety of formats from the manual rent roll completed once a month to software programs that allow real time rent rolls to be printed within minutes. What should be included on a rent roll Collection summary analysis Rent rolls should include: unit number unit type unit description resident name(s) status of resident square footage in the unit market rent rate actual rent rate move-in date other recurring monthly charges lease term lease expiration date notice (if applicable) intended move-out date amount of deposit(s) any balance due date of last rent increase, and amount of last rent increase Reference: See the Toolbox for samples of Rent Rolls. Evaluation The property s collection practices may be evaluated by interpreting several reports available on the property level. These include the rent roll, delinquency reports, and bank deposit summaries. Companies may gather this information daily or weekly, depending upon their cash management system. If site information is tied directly to the company s computer system, real time collection analysis can occur. Whether the amounts are real time or not, they are used to reflect income versus budget and, sometimes income as compared to the previous month and/or the previous year to date (YTD). Continued on next page 2014 National Apartment Association 2-16

36 Managing Occupancy, Continued Collection summary analysis, (continued) Delinquency report Occupancy trend What you can track The beginning balance indicates the total amount of rent billed at the property for all residents at the beginning of the period. Throughout the month as rent is collected, delinquencies reviewed, and bank deposits are made, you can track: this month s collections compared to last month s (are they increasing or decreasing?) this month s collections compared to what was billed (how are you doing on collecting the rent?), and this month s collections compared to this month s budget (will you achieve the income projected? Is there a negative or positive variance?). Each company has specific bookkeeping operation requirements, whether the records are kept manually or through a computer program using a software application. Generally, every system allows analysis of collection efforts. The delinquency report lists residents who are in arrears and the amount each resident owes. The report may also require notation on the action taken to collect outstanding rents. It is common practice to prepare a delinquency report on several occasions throughout the month to coincide with specific late dates and statutory or company policies regarding eviction filing dates. Generally the delinquency report is used as a tool to document who owes rent and other fees and when and how they have been contacted and what the results of those contacts have been. Companies will vary their approach here because of either computer programs or manual posting of delinquent accounts. Most delinquency reporting provides an aging of rent receivables to help focus collection procedures. Generally, delinquency status updates are given to the property supervisor for monitoring. As with any business, forecasting future operations is an important management skill. In the apartment management business, forecasting occupancy is a critical part of managing financial performance. For example, when asked, a community manager might say their property is 95% occupied and trending at 90%. The physical occupancy is 95% and the leased occupancy is 90%. Continued on next page 2014 National Apartment Association 2-17

37 Managing Occupancy, Continued Occupancy trend, (continued) Lease expiration management The future percentage of leased units indicates the occupancy trend and acts as a guide for management decisions concerning marketing strategies and potential expenses. Most automated programs report intent to vacate notices at the time given and thus reflect potential future occupancy. The following equation is used to calculate the potential occupancy rate for an upcoming period. Percent Leased = (Current Units Occupied + Vacant and Leased Notice to Vacate and Not Preleased+ Notice to Vacate and Preleased) / Total Number of Units Example: A community of 270 units has 245 units occupied, 5 units are vacant, but leased and 4 units with vacate notices in the next 30 days and not preleased. The leased percentage is ( ) = 246/270 =.911 or 91.1% In addition to knowing the percent of occupancy, it is important to know what types of units are vacant. The calculation is also applicable for analyzing leasing trends for specific unit types. Remember, you are watching for trends. Another way to manage occupancy is to control lease expiration dates so that all or most of the leases do not expire at the same time. This means you will have to have some flexibility in creating lease terms. Not every lease must be six or twelve months. You should consider things like seasonal differences and location. For example, for a property located in Michigan, a lease that ends in December is far less desirable than a lease that ends in May. Many companies are aggressively managing lease renewals by using: Staggered monthly expiration dates. Generally expirations are aligned with traffic counts i.e., allow more leases to expire in months with typically higher traffic (in the summer months for example) so that potentially vacating units can be reoccupied more quickly. A secondary benefit of such strategy is the resident is allowed more flexibility in lease terms. There may be a choice of months that are better for your property in terms of more traffic. Continued on next page 2014 National Apartment Association 2-18

38 Managing Occupancy, Continued Lease expiration management, (continued) Turnover ratio Staggered expiration dates. Also flexible is the day of the month on which the lease expires. By allowing the lease to expire on various days throughout the month, turnover activity isn t restricted and jammed into the first and last days of the month. Similarly, lease termination dates early in the week allow the maintenance staff to spread out their makeready duties more evenly. Some companies have leases begin on Mondays, for example, to avoid administrative demands on weekends. This procedure allows greater leasing focus on the peak traffic days of Saturday and Sunday. Variable pricing. Rents may be adjusted based on the lease term selected. For example, a resident insists on a six-month lease when you are attempting to move the expiration date to an eight-month term when you would have more traffic to cover the potential move-out. If the resident will not change their mind, you could offer them an eight-month renewal at one rental rate and the six-month renewal at a higher rate. Obviously this practice works much better in firmer markets than soft. It is very similar to short term lease provisions where a higher premium is paid for the flexibility of a shorter lease. Note: Carefully follow state laws and any applicable regulatory requirements regarding lease terms. Some states legislate minimum and maximum allowable lease terms and some government assisted properties are not allowed to offer less than a 12 month lease. How it is determined Turnover ratio is the total number of move-outs for a given period divided by the total apartment units. Example: A 246-unit property with nine (9) move outs in December has a turnover rate of 4% in December. 9/246 =.0366 or 4% If this property had a 4% turnover each month the total would be 48% in a year. Continued on next page 2014 National Apartment Association 2-19

39 Managing Occupancy, Continued Turnover ratio, (continued) Turnover is generally measured as an annual percentage. Using one month to annualize your turnover may skew the number. Your property could have experienced an especially low or high number of move-outs in a given month that would not accurately reflect the whole year s move-outs. Historical data including same month in prior year(s) or annual turnover for 3-5 year periods can also be useful for budgeting and occupancy management. Example: Consider a 260-unit property that has move-outs through the year as shown in the following table. Month Move outs January 5 February 2 March 6 April 9 May 15 June 15 July 14 August 17 September 16 October 6 November 9 December 7 A total of 121 units moved out or a turnover ratio of 47%. Notice the range of move-outs from 2 to 17 in any one month. Reference: See the Toolbox for the Annual Turnover Percentage formula. What it is used for The turnover ratio is frequently used to assess occupancy and potential operating expenses. When a community s turnover ratio is in excess of the average for the industry, it is important to determine the reason(s). High turnover rates are costly, and as a CAM, you are accountable for knowing why your turnover rate may exceed the average for your market and what steps you can take to reduce the ratio. Continued on next page 2014 National Apartment Association 2-20

40 Managing Occupancy, Continued Turnover ratio, (continued) Per the 2013 Survey of Operating Income and Expenses in Rental Apartment Properties published by NAA using 2012 reported data, the national average for turnover in individually metered, garden, market rate apartments was 54%. Turnover ratios vary by region of the country and also differ depending on building type, for example, garden style apartments versus high rise. Turnover rates will also be impacted by various economic factors National Apartment Association 2-21

41 Expenses CAM responsibility Fixed expenses In addition to maximizing income, you will also be responsible for controlling costs on your property. Several types of expenses are incurred when managing an apartment community. In addition to day-to-day expenditures, you will also have to manage the costs associated with preventive maintenance programs and identify, plan, and implement capital improvement programs. As a Certified Apartment Manager (CAM), you are responsible for the expenses incurred in operating the business. The budget is a guideline for anticipated expenses and you should be very familiar with it. Some expenses will be fixed; variable expenses should be carefully managed. Fixed expenses include items that do not vary with the occupancy level of the property. Fixed expenses include the following. Property taxes are usually based on the assessed value of a property and may include other charges such as the local tax rate (millage rate) and fees for services such as storm water control and solid waste disposal. Tax bills should be carefully reviewed so that all charges are understood. This function is often done at the corporate level and is not typically a community manager responsibility. Many areas reassess properties on a scheduled basis or when the property is sold, which may result in a change to the property taxes. Real estate and personal property are not taxed in the same way as income. Insurance payments are made for a variety of coverages. Types of insurance include liability, casualty, automobile and workers compensation. The loss history of the property will affect the premiums charged. Reference: See the Risk Management Participant Guide for additional information. Depreciation: Depreciation is not an expense in the sense that there is a cash outlay. It is a deduction from income that is allowed for tax purposes to cover the costs of normal wear and tear on buildings, equipment, furniture and fixtures. Land is not subject to depreciation. Continued on next page 2014 National Apartment Association 2-22

42 Expenses, Continued Variable expenses Capital Expenses (CE) Variable expenses are controllable and vary as conditions change. Many variable expenses are associated with occupancy. Variable expense examples include: utilities maintenance contracts landscaping turnover costs marketing (advertising and promotion) management fees recurring repairs and maintenance administrative costs, and payroll and benefits. Variable expenses are often computed on a per square foot basis, per unit basis and/or as a percentage of total expenses. Some companies refer to variable expenses as controllable expenses (within the ability of the community to control) as contrasted with non-controllable expenses such as property taxes and insurance. Reference: See the Toolbox for the Cost of Advertising Per Lease formula and Cost of Advertising Per Traffic formula. Capital Expenses (CE) refer to items like appliances, HVAC equipment, and costs for large improvements such as replacing roofs or adding a swimming pool. Capital expenses are treated differently than fixed or variable expenses on income statements. Capital expenses are for component items that have a useful economic life. While the definitions for many of these items are covered by accepted accounting rules and IRS regulations, different companies use different depreciation schedules and capitalize different items. The entire cost of a component is not deducted from income in one year. Instead, the cost is depreciated for the term of its life. Companies will use different depreciation schedules based on the age of a property or when it was acquired. Therefore, capital expenses are not included when calculating NOI. However, some companies may measure NOI after capital expenses to determine income available for debt service. Continued on next page 2014 National Apartment Association 2-23

43 Expenses, Continued Capital Expenses (CE), (continued) Replacement reserve account Debt Service (DS) Cost-benefit analysis Example: New appliances were purchased for $10,000. If appliances have a life expectancy of 10 years, $1,000 would be depreciated each year for 10 years. A tax advisor will have information about how long common capital expenses can be depreciated. On some operating statements, capital expenditures are noted as extraordinary expenses or non-recurring expenses, generally denoting large items of cost that do not normally reflect daily operating expenses for example, carpets and appliances. They are not formally depreciated, but simply relocated and combined so true daily operating expenses can be more easily identified. Other expenses include money that is set aside for anticipated future expenses, such as repaving parking lots or re-roofing buildings. This expenditure is referred to as replacement reserves. This account is a like a special savings account into which money is deposited on a monthly, quarterly or annual basis so that future funds are available for large capital projects. Some lenders may require that a replacement reserve account be maintained, and may require certain minimum payments. This type of account is more common with HUD assisted properties. Debt Service (the loan or mortgage payment) is another expense. Debt Service is a separate expense that is not considered an operating expense and is not included when calculating net operating income (NOI). Reference: See the subtopic Debt Service (DS) in the topic Concepts in Chapter 3 for additional information. Before spending any money, it is wise to make a specific analysis of the potential costs and the benefits to be derived from those costs. This process is called cost-benefit analysis. The most important thing to remember about a cost-benefit analysis is to look at both the potential expense and the potential income for every alternative. Example: You are thinking about increasing the print advertising at your community. You have compared options such as the newspaper, flyers, community newsletters, etc. for rates, frequency, and distribution to get the best exposure. Continued on next page 2014 National Apartment Association 2-24

44 Expenses, Continued Cost-benefit analysis, (continued) Budget control log The most difficult part of the analysis is estimating the potential income to be generated from increased advertising. In this case, we would have to track the advertising expense and compare it to the increases in rental income. For example, if monthly advertising costs were $2,000 and monthly rental income increased by $2,500, the advertising campaign would be considered a success. Cost-benefit analysis can also be used in analyzing whether to use in-house staff or contractors on particular large or special projects. Another comparison may be for the cost of training versus the result in a more qualified and motivated employee. Often, properties will compare the cost of in house labor doing unit turns (painting, carpet shampoo, and cleaning) compared to hiring outside contractors. Cost-benefit analysis does not always need to be a financial or cost comparison. In truth, it could be cost versus time, more revenue, better people, etc. Reference: See the Toolbox for the Cost of Advertising Per Lease formula and the Cost of Advertising Per Traffic formula. A budget control log is a tool designed to help a manager operate within the projected budget. It contains information about the status of each account on a regular basis for each accounting period, usually by month. Expenditures for each account should be recorded in compliance with the company s accounting practices either when it is incurred or when it is paid. This will determine whether an expense is posted when it is incurred or when it is to be paid. When used properly, the manager doesn t have to guess about what monies are available to spend for each account. Most companies use the budget control log to help avoid financial statement shock at the end of the month, when unexpected expenses appear. The log helps eliminate those surprises by anticipating expenses. Generally, community managers post their known monthly expenses (landscaping, pest control, etc.) and then continue through the month noting expenses as they occur. Continued on next page 2014 National Apartment Association 2-25

45 Expenses, Continued Budget control log, (continued) Invoices Purchase discounts A budget control log should include the account name, account number and annual budgeted amount, perhaps depicted in monthly amounts. Each month purchase orders and payments are entered in the appropriate columns and a balance is created. Generally invoices for PO s issued are marked off on the budget sheet as they are received. Again, the property manager must follow the company s rules for posting the expense when incurred or when paid? Example: An order for miscellaneous maintenance parts for $250 may be placed in late April. Should it be recorded in the April budget sheet when ordered or the May budget sheet when it will be invoiced and paid? It is important to note that the budget control log will seldom match the financial statement on a month-by-month basis. This is not the intent of the log. Rather, it is a record or tool to track expenses as they are occurring and compare them immediately to the budgeted amounts. All invoices should be verified for quantities ordered, prices, receipt of all items and correct billing. The packing slip and purchase order number should be verified before approving payment. When being billed for services, you need to confirm that the service was actually rendered. If an invoice has a billing error, if the quantities shipped do not match the quantities ordered or if damaged goods were received, contact the vendor in writing and by phone. Describe the discrepancy in detail and ask for a credit to your account or credit memo. Write a file memo that includes all the details and adjustments agreed to by the vendor. Send a copy of this memo to the vendor and your accounting department. Some vendors offer discounts from 2 to 5% to customers who pay promptly for goods or services purchased. Frequently, the discount terms are written on the invoice. A well-managed community will want to pay all invoices within the discount period to maximize its funds. Continued on next page 2014 National Apartment Association 2-26

46 Expenses, Continued Check request/ payment voucher Petty cash fund After approving an invoice for payment, many companies must then complete a check request pay voucher. This is the method by which a check is generated and the expense is recorded on the chart of accounts and thus appears in the reporting period on the financial statement. A voucher is basically a transmittal form into the company s financial records. The manager or corporate accounting office often completes this voucher. This procedure can be done manually or electronically if a company is using a software application that permits invoice processing on line. A check request should include the requestor s name, payee, date due, invoice amount, vendor number, vendor s invoice number, account number, description of goods or service and authorized signature. The check request is either sent by mail or transmitted electronically to the accounts payable department where the check is written, signed and mailed. In addition to the chart of accounts and vendor list, a file for each vendor company should be maintained. The file should contain copies of invoices, purchase orders, check request and all accompanying paperwork. This file will provide a means to quickly resolve any questions or differences concerning payments. Reference: See Chapter 4: Budgets for additional information. Frequently, management companies have a petty cash fund to handle minor expenses such as purchasing stamps, gas or incidental office supplies. The fund may consist of a small amount of cash or a checking account. The manager and supervisor generally complete a signature card for the account. The amount of the fund is usually based on the size of the property, staff availability and other factors. As purchases are made with the petty cash funds, vouchers with the amount, purpose, date, and account number are completed to maintain a record of the expense. Receipts should be attached to a voucher when possible. Generally once a month or when the fund reaches some threshold amount, the manager must process a petty cash reimbursement request. This form simply summarized the vouchers, amounts and expense codes. The receipts and vouchers are attached or placed in an envelope. Frequently a check request or voucher must also be submitted before the fund is replenished. Continued on next page 2014 National Apartment Association 2-27

47 Expenses, Continued Petty cash fund, (continued) Company policy usually dictates how much money is kept in petty cash, what types of expenditures can be made using petty cash funds, and how often it is replenished. Resident records Resident security deposit Today most companies use computerized rent history reports. A resident file is maintained in the database and various reporting programs allow you to access information such as: names of all residents names of occupants move-in date deposit amounts (security, pet, amenity, key card) lease rental rate other recurring charges (electricity, water, garage, parking, etc.) history of rent increases, and balances and payment history It is a general industry practice to require a security deposit from a resident at the time of move-in. Frequently an amount equal to one month s rent or a fixed dollar amount is collected. The general purpose of the security deposit is to assure the resident will pay the rent when it is due, keep the apartment in good condition and generally fulfill the lease obligations. Almost every single state has very specific rules about deposits, including what you call them, when you can collect them, when you need to return them, what charges can be applied against them, what, if any, interest is earned on the security deposit, and what kind of reporting needs to be made. It is your obligation as the manager to know your state s laws and requirements regarding the handling of security deposits. At move-out, a report generally must be made explaining the disposition of the security deposit and the application of delinquent rent if any. Deductions made from the security deposit should be itemized and an explanation should be mailed to the former resident with a check attached for any refund that may be due including interest, if any, as prescribed by law. The letter may be a demand for payment if the prior resident owes rent, fees, or damages in excess of the deposit. Continued on next page 2014 National Apartment Association 2-28

48 Expenses, Continued Resident security deposit, (continued) Collection of former resident accounts Deposit amounts may be governed by state law or regulatory requirements, but are very much impacted by what the market will allow. In soft markets, deposits are often reduced or waived to encourage leasing. Firm markets bring higher deposits. Different qualifying situations dictated by the community s resident selection criteria (accept or accept with conditions processing) may require higher or lower deposits (if allowed by law). Reference: See the Management of Residential Issues Participant Guide for additional information. One of the newest alternatives to paying large security deposits is the use of a bonded or insured deposit. Several industry service providers offer programs that allow applicants to pay small premiums and the company will guarantee the full deposit at move-out if the owner needs it for repairs or other lease performance issues. Most companies aggressively pursue collection of accounts from previous residents with balances owed to the property. The method of pursuing collection varies from phone calls and follow-up made from the property or the corporate office (in house) to third party collection firms, and reports to credit bureaus. Collection efforts are heavily regulated by both state and federal laws, including proper registration of the past due account and supporting documentation for the file. Companies who collect accounts on behalf of the owner usually negotiate the final amount paid and receive a percentage of the amount owed by the former resident as their fee National Apartment Association 2-29

49 Chapter Overview Chapter 3 Economic Analysis of a Property In this chapter The table below lists the topics in this chapter. Topic See Page Background 3-2 Financial Statements 3-3 Concepts 3-4 The General Ledger National Apartment Association 3-1

50 Background Purpose of an economic analysis Reporting The purpose of an economic analysis of a property is to be able to answer two important questions that managers and investors usually ask. How well has the property performed over a given period of time? Where does the property stand at a given point in time? All financial operations of a property are reported to owners in a variety of financial statements on a monthly, quarterly and/or annual basis National Apartment Association 3-2

51 Financial Statements Balance sheet The income statement The balance sheet is a representation of the financial status of a property at a moment in time. It is composed of the following two counterbalancing sections. Assets are economic resources that benefit an investment. Assets would include real and personal property, and cash or bonds. Liabilities are the economic obligations to non-owners. Owner s equity is the third term applied to a balance sheet. Owner s equity is the excess of the assets after deducting all liabilities. The owner s equity varies as assets and liabilities change. The balance sheet is not an operating statement. It is not a tool that is used for management on a daily basis since it shows no activity it is a window into the property s financial position at a given point in time. The income statement measures performance for a span of time a month, quarter or longer. All revenues and expenses are recorded and represent, compared to the budget, increases or decreases in the owner s claim. At the end of a given period, these items are summarized in the form of an income statement. The purpose of an income statement is to inform managers and owners of the operations of the property in order to make comparisons, set goals and exercise better control National Apartment Association 3-3

52 Concepts Accrual and cash basis accounting Accounting or bookkeeping Cash flow There are two methods used to report financial status. The accounting method used affects the reporting of net operating income. Accrual basis accounting records all income and expenses in the period they were earned or incurred regardless of when they are actually received or paid. Cash basis accounting records all income and expenses when they are actually received or paid. When relating net operating income to a specific time period, it makes sense to offset expenses against revenues in the same period. Using the accrual method gives a more realistic picture of net operating income in the period. The cash method may give a distorted picture of profitability. Many people confuse accounting with bookkeeping but there are important differences. Accounting deals with the entire system for providing financial information from the design of the systems through its operation to interpretation of the data obtained. Bookkeeping is the routine, day-to-day recordkeeping that is a necessary part of accounting. Cash flow refers to cash flow from operations. It is often referred to as the operating statement. Cash flow is used to summarize financial activities to assess property performance. Cash flow is the amount of money left after all sources of income are collected and operating expenses, capital expenses including replacement reserve payments if required, and debt service have been paid. Positive cash flow refers to a positive amount of money remaining; a negative cash flow means expenses have exceeded income and the owner must put money into the operation of the property. Continued on next page 2014 National Apartment Association 3-4

53 Concepts, Continued Cash flow, (continued) Gross Potential Rent (GPR) Market rent Loss to lease For property operations, the focus is more likely to be on NOI performance rather than cash flow since managers generally have limited ability to control capital expenses and debt service. Often, capital improvement programs are planned and implemented by senior level personnel. In addition, debt service is a function of the property s loan documents and financing terms and not the responsibility of the community manager. Gross potential rent is the current rent actually charged at 100% occupancy. It combines the sum of occupied units at current lease rates plus vacant units at market rates. GPR is frequently used as the 100% possible income figure. All other income and expenses are measured and evaluated as a percent of GPR. Reference: See the Toolbox for the Gross Potential Rent (GPR) formula. Market rent is the total annual income that would be received if 100% of all units were occupied and paying market rents. Loss to lease is the variance between market rent and GPR. Market rent that is lost due to lease rents under contract at rates lower than the market rate creates a loss. Many companies include loss to lease as a separate line item on the operating statement and measure it against market rent. If lease rents are close to market rents and loss to lease is minimized, aggressive managers feel market rents may need to be increased. Example: A property with an annual market rent of $1,375,025 and a loss to lease of $125,700 would be said to have a loss to lease of 9.1% 125,700/1,375,025 = or 9.1% The GPR is $1,249,325, Market rent of $1,375,025 less the loss to lease of $125,700. Continued on next page 2014 National Apartment Association 3-5

54 Concepts, Continued Vacancy, concession, and collection loss (VAC) Effective Gross Income (EGI) VAC includes the total value of rent loss from vacant units, concessions given, collection losses as a result of writing off bad debt, and the total amount of rent loss from any non-revenue units. Non-revenue units would include the unit(s) used for office space, models, or employee rent free units. An amount equal to no more than 2% of Gross Potential Rent (GPR) is a generally accepted standard for uncollectible/bad debt loss. However, you should consult your supervisor or owner to learn what percent has been determined acceptable for your property. Total vacancy, concession, and collection loss can often run higher than 10% of the Gross Potential Rent. Note: Some companies treat vacancy as an expense item, so it may appear below the revenue line on the operating statement. Concessions may also be treated in one of two ways on a financial statement-deducted from income- or shown as an expense item below the revenue line on the operating statement. Reference: See the Toolbox for the calculation of the physical Vacancy Percentage formula without concession loss and collection loss. Effective gross income is the amount of GPR less vacancy, concession and collection loss (VAC). Effective gross income may also be called net rental income or total rental income. It represents all of the rent and only the rent income at the property. Below is the formula for calculating the effective gross income. GPR VAC = EGI Reference: See the Toolbox for the Effective Gross Income formula. Continued on next page 2014 National Apartment Association 3-6

55 Concepts, Continued Other Income (OI) Gross Operating Income (GOI) Operating Expenses (OE) Other income is any money collected for items other than rent. Don t think it s a small amount! It is total collections from laundry, vending, cable, deposit forfeitures, parking, amenity charges, late fees, pet fees, application fees, administrative fees, and lease premium fees. There are more potential examples and each company determines its fee policies and other income classifications. It can measure up to 10% of your total property income. NAA s 2010 Income and Expense Report showed this number nationally as 7.2% of GPR for all individually metered market rate garden properties. For garden apartment communities, individually metered, per unit other income collected was $753 per unit. Gross Operating Income (GOI) is the sum of the Effective Gross Income (EGI) and other income (OI). Stated in another manner, it is simply total revenue. The GOI is the total amount of money the property has to use for paying expenses. Below is the formula for calculating the GOI. EGI + OI = GOI Operating Expenses (OE) include all expenses, fixed and variable, that are incurred in the course of managing the property. Operating expenses are categorized differently by different companies, but capital expenses and/or replacement reserve payments (if required) are not typically considered operating costs. Typical expense categories, according to NAA s Annual Income and Expense Survey, are salary and personnel costs, insurance, taxes, utilities, management fees, administrative, marketing, contract services, and repair and maintenance. Reference: See the Toolbox for the Hourly Rate on Annual Basis formula for payroll purposes and the Operating Expenses Per Unit formula. Continued on next page 2014 National Apartment Association 3-7

56 Concepts, Continued Net Operating Income (NOI) Operating expense ratio Net Operating Income is GOI or total revenue less OE. By applying a Capitalization rate (cap rate) to the property s NOI, you can determine the value of the property using the income approach to value. This is done typically without capital expenditures included. The formula for calculating the NOI is below. GOI - OE = NOI Reference: See Chapters 1 and 5 for additional information. See the Toolbox for the Net Operating Income (NOI) formula. The operating expense ratio (also known as expense-to-income ratio) is a tool to measure how well a manager is managing the community and controlling expenses. It calculates the percentage of the GPR that is being used to pay operating expenses. The ratio depends on the age (older properties usually have higher operating expenses), the location of a property, type of property (high rise, garden apartments) and what expenses are included. Concessions may be classified as an expense rather than a deduction to rental income. Resident utility reimbursements are sometimes counted as other income or may be offsets to utility expenses like gas, electric, and water. Note: The operating expense ratio is not used to calculate cash flow. The formula for calculating the operating expense ratio is below. OE/GPR = operating expense ratio The NAA 2010 Income and Expense survey shows a national average operating expense ratio of 40.2%. Reference: See the Toolbox for the Operating Expense Ratio formula. Continued on next page 2014 National Apartment Association 3-8

57 Concepts, Continued Capital Expenses (CE) These include non-recurring capital expenditures such as appliance replacement, renovations, major roofing, structural additions, and other items intended to add to the life of property and its fixtures. Debt Service (DS) Break-even occupancy ratio Break-even rent per square foot Debt Service (DS) refers to the mortgage or loan payment (total of principal and interest) if a loan or mortgage was used to buy or build the property. Most fixed rate loans have a constant amount due monthly. However, repayment of a loan or mortgage will depend on how the loan/mortgage was originally structured. Reference: See the subtopic Debt service in the topic Expenses in Chapter 2 for additional information. The break-even occupancy ratio calculates the occupancy level needed to produce enough income to pay the operating expenses and debt service of a property. The break-even point may also be expressed per square foot. (OE + DS)/GOI = break-even occupancy ratio It is useful to know the rent per square foot for a property when considering setting rents and controlling expenses with the intent of finding ways to increase ROI. (OE + DS)/total square feet = break-even rent per square foot Continued on next page 2014 National Apartment Association 3-9

58 Concepts, Continued Cash flow calculation Use the following equation to calculate the cash flow. GPR VAC = EGI+OI = GOI OE = NOI CE/RRA DS Notes: To calculate per unit income and expense, divide the total income or total expense by the total number of units. For per square foot calculations, divide the total income or total expense by the total square footage of all the apartment units on the property. The figure used for square footage is computed in several different ways. Be sure you know exactly what areas are to be included when calculating square footage. Some companies may include such things as outdoor patios, while others may not. Generally square footage is measured as net rentable, air conditioned space. Example: The following is the data for the NAA apartments. GPR 1,249,325 VAC 112,439 EGI 1,136,886 OI 55,000 GOI 1,19l,886 OE 482,300 NOI 709,586 CE 112,000 DS 424,373 The cash flow is: 1,249, ,439=1,136,886+55,000=1,191, ,300=709, , ,373= $173, National Apartment Association 3-10

59 The General Ledger Definition Chart of accounts Financial or operating statements The general ledger is a group of accounts that support the major financial statements. The sub-accounts or ledgers are assigned names or numbers and provide details of the activities that occurred. The sub-accounts are often referred to as the Chart of Accounts. You will also need to know the account numbers established by your owner to properly record transactions. Reference: See the Toolbox for a sample of a General Ledger Extract Report. Each operating company uses a chart of accounts that establishes account codes for each income and expense item and defines what should be posted to each account. This is how accounts are organized into recognizable groups. For example, accounts used for Marketing and Promotion expenses may include smaller sub accounts such as advertising, off site marketing, flags and banners, apartment guides, and Internet advertising sources. By structuring a framework to identify these income and expense categories, a management company can identify the source of its cash position by account. Managers are frequently required to code invoices before they are paid so that the expense can be properly reflected in the financial statement. Rental income and other income is generally assigned chart of accounts codes as well, although it is generally coded through the rent roll software system. Reference: See the Toolbox for a sample Chart of Accounts. To produce financial statements (balance sheet, income statement, or yearend statement) a cut-off date is determined and only those transactions recorded prior to that date are reflected on the statement. An income statement or operating income statement compares the accounting month activity to budget and reports a variance between budget and actual. It may also include a year-to-date listing of actual and budget activity and the variances as well of actual to budget. As a manager, it is important for you to know the cut-off date and make sure all transactions are reported in a timely manner. This is particularly important when your owner has several properties or a portfolio of properties, and the financial activities are combined to produce one financial statement from the home office. Reference: See the Toolbox for the Variance Percentage formula National Apartment Association 3-11

60 Chapter Overview Chapter 4 Budgets In this chapter The table below lists the topics in this chapter. Topic See Page Background 4-2 Types of Budgets 4-3 Budget Development & Management National Apartment Association 4-1

61 Background Definition A budget is an itemized summary of estimated income and expenses for a given period of time. CAM responsibilities Purpose of a budget Managers and owners use budgets to plan and monitor financial activities and track a property s performance. You may be responsible for creating a budget for the property you manage. You will also be responsible for explaining the variance (differences) between actual income and expenses compared to budget. Your understanding and insight concerning variances will help you manage and add value to a property. A budget is one part of a business or operating plan. Estimates of expected income and expenses are made to determine what occupancy levels and other sources of income will be needed to cover expenses and provide a return on investment. It is important to understand that every type of budget must be based on the owner s property performance and investment goals Budgets are also used to monitor a property s performance. By regularly comparing actual income and expenses to the budget, income shortfalls and expense overruns can be identified and corrective measures implemented. Lastly, budgets may be used to evaluate the performance of personnel. As you have learned, a manager is responsible for collecting income, controlling expenses and meeting financial goals set by the owner. Your ability to discharge those responsibilities will have a direct impact on how your performance is judged by the owner National Apartment Association 4-2

62 Types of Budgets Overview Budget during lease-up There are several types of budgets, but only three (3) types will be discussed here: lease-up modernization/retrofit, and stabilized A key element of any budget is the way the budget will be funded. Funding can come from several sources including current operating income and loans. Knowing where and when the money is coming will influence how expenses are planned. When a property is first constructed, a budget is created to guide activities during lease up. Special attention will be paid to those activities and costs required to attract residents, get leases signed and generate income. Projecting expenses during lease-up will be less precise than those for a stabilized property because there is no property history to which you can refer. Information for projecting expenses will depend on you and your supervisor s previous experience with other properties, and local, regional or industry standards. Budgets should not be adjusted. Forecasts and re-forecasts may have to be adjusted on a monthly or quarterly basis as you learn more about actual income and expenses, and make decisions about operations across the year. During lease-up, it is especially important to understand and note the circumstances and events that occur and affect the budget so that you can explain the variances and recommend appropriate courses of action. Continued on next page 2014 National Apartment Association 4-3

63 Types of Budgets, Continued Budget for modernization or retrofit Operating budget for a stabilized property Properties that are being modernized or undergoing retrofitting require specialized budgets. This type of modernization budget: will reflect larger allocations for capital expenses and labor than a stabilized property must be more flexible if much of the work is dependent upon subcontractors schedules and vendors supplies may include periods of no rental income for part or all of a building while major renovations take place, and may be prepared separately from the operating budget of a property and may be as short as a few months or cover more than one year Once a property is fully leased and operating under normal conditions, the budgeting process is a little more routine. An operating budget reflects varying expenses from month to month. For example, utility expenses for heating and cooling would be higher in the winter and summer months. Expenses for snow removal would only be posted for winter months, etc National Apartment Association 4-4

64 Budget Development & Management Process The table below describes the budget development process. Note: You may be required to develop a budget alone or with your supervisor. Stage Description 1 Make sure that you understand the owner s investment goals for the property, and determine the long and short-term actions necessary for the result. A single owner will likely have different investment goals than a corporation, a REIT, or a mid-sized owner 2 Gather information. There are numerous sources of information for developing a budget: the operating history for the property the previous budget including notes other properties (in the portfolio) of like size, age, condition, and geography (same city) other owners or supervisors current service contracts National Apartment Association historical data Institute of Real Estate Management historical data vendors and contractors for expected labor and material costs insurance agents utility companies taxing authority office, and industry income and expense surveys 3 Assign numerical values to each budget category. Companies who use budgeting software or proprietary computerized programs will frequently pre-populate expense fields with what are known to be locked in and recurring expenses. This ensures these costs are covered and gives a truer picture of the available anticipated cash for variable expenses. Additionally, formulas are generally added to the spreadsheet Note: Be sure to include a narrative about your assumptions including why and when so the projections can be supported. Continued on next page 2014 National Apartment Association 4-5

65 Budget Development & Management, Continued Tips on developing budget data The following tips will help you develop budget data. Tip Use round numbers. Use current figures. Description Rounding numbers allows for reasonable variation. Some accounting department like to stay with 10s, 50s or even 100s for rounding. Review the operating history of the property and prior year s budget, but consider current economic trends and the age of the property to forecast expenses. Correctly analyze those expenses not likely to be needed in the current budget year because they were completed in a prior year. It is also necessary to anticipate those future expenses that have not been part of a previous budget. Consider occupancy trends and pricing strategies to determine anticipated income. You will live by the budget you create. Simply adding a percentage increase across the board is not a well thought out strategy. You need to be able to justify every number. If revisions are necessary, it will be easier and more accurate to change a few specific projections instead of reducing every category by a flat percentage rate. Continued on next page 2014 National Apartment Association 4-6

66 Budget Development & Management, Continued Tips on developing budget data, (continued) Tip Prepare early. Seek Input. Description Begin preparing budget projections several months before they are due. This allows time to think about the business, conduct research and consult with contractors and vendors. Some managers keep a budget file and as items come up that need to be included, the manager can note them and drop them in the file. When it is time to begin budget preparation, the budget file will serve as a valuable resource for covering all of the items that need to be in your budget. If you are planning a major repair or installment in the coming year, you will have time to request multiple bids and weigh the expense against expected revenue. Ask your staff to help develop realistic projections. Your staff is an excellent source of information, and can help provide details and document financial assumptions. This is especially true of the Service Manager or Maintenance Supervisor. When people feel a sense of ownership in a project, they will more likely hold themselves accountable. Provide them with previous financial reports, a detailed list of major contracts and anticipated major expenses. Organize the information perhaps in a binder with a tab for each revenue and expense item so that it is readily available throughout the budget process. When the new budget is approved, insert a new budget sheet for each account with the beginning balance. Update the information each month. You now have a tool the entire staff can use. Continued on next page 2014 National Apartment Association 4-7

67 Budget Development & Management, Continued Extrapolation Annualization The budgeting process often uses extrapolation to forecast figures. To extrapolate is to estimate a number by extending known information. Information that is known for a few months can be extrapolated to a full year, just as information known for square footage can be extrapolated for an entire property. Before you forecast a number, be sure the historical records don t contain any extremely high or low numbers due to extenuating circumstances. This might cause you to forecast too high or too low. Examples: Examples of expenses that should not be used to extrapolate budget projections include: excessive plumbing breaks which caused unduly high plumbing expenditures, but have since been repaired, and uninsured losses that impacted the expenses Annualizing a number means generally the same thing as extrapolating. Example: The electricity bill has been $300 for January, February and March. To annualize the electricity expense for the year, you would multiply 300 by 12 months for a total annual expense of $3,600. If the electricity includes the heat, this should not be done. In this case, historical data for prior year same months should be used. Occupancy projections in the budget will also impact utility costs. When units are occupied residents are likely paying the charges, not the property. Reference: See the Toolbox for the Annualizing a Number formula. Continued on next page 2014 National Apartment Association 4-8

68 Budget Development & Management, Continued CAM responsibilities As a CAM, you are responsible for the following. Managing the budget. Once the budget is developed, the manager lives with it every day using a Budget Control Log and operating reports to ensure that meeting the budget is as attainable as possible. Since budgets are composed of estimates, there will always be differences or variances between the budgeted numbers and the actual income and expense numbers. As a manager, you are responsible for comparing the budget with actual numbers and identifying and explaining the variances. Most often this occurs in monthly reporting to the regional or corporate office or directly through the owner s reports. Analyzing variances. It is not enough to report that rental income is down because vacancy is up. You should be able to explain why actual vacancy is greater than projected in the budget. For example, move-outs due to job losses because of layoffs will impact vacancy. Both positive and negative variances need analysis and explanation. Events in your local market or region affect people s ability to rent an apartment home. Ask the following types of questions when looking for reasons for a budget variance. Have there been job layoffs? Is a new or established competitor attracting people? If so, why? Do they have lower rental rates or offer more amenities? Did they run a successful advertising campaign? Have you been able to raise rents compared to budget? If so, why? Are your budget variances a timing issue or likely to be permanent; that is, for example, are your utility bills late in being received, was the cable revenue payment not received in the month budgeted, etc. Some variances will be less complicated to analyze, for example, a major expense was incurred to make an emergency repair. The expense was a one-time event but will nevertheless affect the budget. If the emergency used three months of a budgeted expense, you will need to find ways to reduce future expenses, perhaps in other categories, to make up for the loss. Continued on next page 2014 National Apartment Association 4-9

69 Budget Development & Management, Continued CAM responsibilities, (continued) Analyzing the numbers Explaining variances. Variances should be explained using the terms favorable or unfavorable rather than words like up and down or good and bad. Increased expenses versus budget are negative variances (unfavorable). Increased income versus budget are positive variances (favorable). In addition to knowing the amount of the change between the budgeted number and the actual number, you should also be prepared to discuss the percent of change. Recommending action. Next, determine what, if any, action should be taken and when you should implement the plan. Should you increase advertising? Should you lower rents? Should you plan to incorporate a new service or amenity that will help attract residents? While it is important to understand and manage variances, it is equally as important to have a good understanding of normal income and expenses for the property. You should know what items account for the largest expenditures. You should note any steady increases or decreases in an expense, and determine the reasons for the trend. A trend can be a clue to an unresolved problem. On the other hand, the trend may result from sound management decisions you made and could be used to your benefit during performance reviews National Apartment Association 4-10

70 Chapter Overview Chapter 5 Property Valuation In this chapter The table below lists the topics in this chapter. Topic See Page Background 5-2 Ways to Determine Property Value National Apartment Association 5-1

71 Background Definition Property valuation is the process of determining the value of a property. Knowing the value of a property is helpful for making management decisions and analyzing and interpreting financial data. Purposes of valuation Owners and managers will want to know the value of a property when making major financial decisions. Major financial decisions include, but are not limited to: offering a price when buying a property asking an acceptable price when selling a property establishing a basis for real property exchanges reorganizing or merging ownership of multiple properties determining the terms of a sale price for a proposed transaction estimating the value for obtaining mortgage loans establishing the market value for condemnation proceedings estimating market value for tax purposes setting rent schedules and lease provisions deciding the feasibility of construction or renovation programs facilitating mergers, and estimating liquidation value for forced sale or auction proceedings 2014 National Apartment Association 5-2

72 Ways to Determine Property Value Overview The approach selected to value a property depends on the information available to estimate a value and the reason why a value needs to be known. Cost approach Sales comparison approach The cost approach estimates the current cost of reproducing or replacing the improvements (building), minus the loss in value from depreciation due to age, condition or obsolescence, plus land value. This approach analyzes the cost of the bricks and sticks to rebuild the property. There are two types of costs: direct and indirect. Direct costs are costs for labor and material. Indirect costs include administrative expenses, finance fees, taxes and interest and insurance. The cost approach requires that land and improvements be valued separately, so it is a useful approach for insurance purposes and accounting purposes when depreciation must be estimated for income taxes. The cost approach is important when there is no market activity, and a sales approach cannot be used to value a property. It is typically not the approach used to value multifamily income-producing property. The sales comparison approach is most useful when there are several similar properties in the local market that have been recently sold or are currently for sale. The fundamental principle of this approach is that the market value of a property is directly related to the prices of comparable, competitive properties. It is an approach identical to the market comparable studies that are done to find out about rental pricing of similar properties in your neighborhood except that it is to compare sales prices, not rental rates. Appraisers will compare properties and focus on similarities and differences among properties and transactions that affect value. These may include: differences in property rights buyer and seller motivation financing terms market conditions at the time of sale size and location physical features, and economic characteristics such as management, resident mix, rent concessions, lease terms, lease expiration dates, and so on Continued on next page 2014 National Apartment Association 5-3

73 Ways to Determine Property Value, Continued Income capitalization approach Income producing property is often purchased as an investment. From an investor s point of view, earning power is the major element affecting value. Typically, investors believe that higher earnings translate into higher value. The value of the income that the property nets is the basis for the value of the property. The more net operating income, the higher the value. The income capitalization approach uses methods, techniques and mathematical procedures to analyze a property s ability to generate income and convert future earnings to present day dollars (present value). In an apartment property, the income stream has a value based on what income is evident now and what value would be had in future income. It is a process that takes income and converts it to value. The table below shows several other key attributes that appraisers consider when determining value. Attribute supply and demand substitution highest and best use external influences Description If demand for a particular property type is high, prices tend to increase. However, an appraiser will also analyze supply in terms of existing properties that are unsold or vacant and properties being constructed, converted or planned. The principle of substitution holds that value can be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time. The use that maximizes an investment property s value is the highest and best use. Highest and best use of an improvement must be legally permissible, physically possible, financially feasible and produce maximum returns. Location, convenience of transportation, police protection, municipal regulations, the conditions of street lighting and the proximity to shopping and restaurants can have positive and negative effects on value. Continued on next page 2014 National Apartment Association 5-4

74 Ways to Determine Property Value, Continued Capitalization Capitalization is a method of income capitalization. It uses an overall capitalization rate (rate of return on investment), and one year s estimated income. The capitalization rate (often referred to as the cap rate) reflects the investor s desired rate of return for the investment. The cap rate is variable like an interest rate. However, it does not distinguish between the return on and the return of capital. The estimated income used for calculation often depends on the reason for the valuation, and is generally one of the following: Gross Potential Rent (GPR) Effective Gross Income (EGI) Net Operating Income (NOI) equity income mortgage income land income, and building income The calculation for value using NOI as an example is: Value = NOI / Overall capitalization rate Example: If an apartment property is selling for $1,000,000 and has an NOI of $80,000, net of vacancy loss and operating expenses, it would have a cap rate of 8%. The investor would recover 8% of his or her investment each year. If a similar property is selling at an 8% cap rate and has an NOI of $87,500, the value would be $1,093,750 (more value!). Continued on next page 2014 National Apartment Association 5-5

75 Ways to Determine Property Value, Continued Capitalization, (continued) Example: If an apartment manager could build income by $10 per month on a 250 unit property, $30,000 in additional revenue would be generated ($10x12 months x 250 units = $30,000 annually). If that same manager could reduce property operating expenses by an additional $6,000 annually, the NOI would grow by $36,000 ($30,000 in additional revenue + $6,000 in expense savings). Using the cap rate above (expressed as a decimal), the manager would be responsible for adding $450,000 in the value of the property: $36,000 additional to NOI /.08 = $450,000 in value! Reference: See the Toolbox for the Capitalization/Valuation formulas National Apartment Association 5-6

76 Overview Toolbox In this Toolbox The following documents are provided in this Toolbox. Topic Annual Turnover Percentage Annualizing a Number Average Effective Rent Average Renewal Increase Average Square Feet/Unit Capitalization/Valuation Closing Percentage/Ratio Cost of Advertising Per Lease Cost of Advertising Per Traffic Effective Gross Income (Net Rental Income) Economic Occupancy Percentage Effective Rent Gross Potential Rent (GPR) Hourly Rate on Annual Basis Leasing Exposure Month-to-Month Leased Percentage Net Operating Income (NOI) Operating Expenses Per Unit (Annual) Operating Expense Ratio Price Per Square Footage Prorated Rent Daily Rate Prorated Move-In/Prorate Move-Out Rent Projected Traffic Required to Meet Leasing Goals Renewal Percentage Total Leased Percentage Unit Type/Unit Mix Percentage Vacancy Percentage Variance Percentage Weighted Average Rent Leased and Market Calculating Weighted Average Leased Rent Calculating Weighted Average Market Rent Market Comparison Survey Form Weekly Activity Report Sample Explanation of Weekly Activity Report See Page Toolbox-3 Toolbox-3 Toolbox-4 Toolbox-4 Toolbox-5 Toolbox-5 Toolbox-6 Toolbox-6 Toolbox-6 Toolbox-7 Toolbox-7 Toolbox-8 Toolbox-8 Toolbox-9 Toolbox-10 Toolbox-10 Toolbox-11 Toolbox-11 Toolbox-11 Toolbox-12 Toolbox-12 Toolbox-12 Toolbox-12 Toolbox-13 Toolbox-13 Toolbox-13 Toolbox-14 Toolbox-14 Toolbox-15 Toolbox-15 Toolbox-16 Toolbox-16 Toolbox-17 Toolbox-18 Toolbox-19 Continued on next page 2014 National Apartment Association Toolbox -1

77 Overview, Continued In this Toolbox, (continued) Topic Box Score Report Sample #1 Box Score Report Sample #2 Leasing Activity Report Sample All Units Summary Report Sample Lease Expiration Report Sample Rent Roll Sample #1 Rent Roll Sample #2 Delinquency Report Sample Bank Deposit Summary Report Sample Monthly Income Summary Report Sample Monthly Transaction Summary Report Sample Lost Rent Summary Report Sample Concessions Report Sample Demographics Report Sample Cash Flow Statement (Completed) Cash Flow Statement Template Sample General Ledger Extract Report Sample Chart of Accounts Market Rent Schedule See Page Toolbox-20 Toolbox-21 Toolbox-24 Toolbox-25 Toolbox-26 Toolbox-27 Toolbox-30 Toolbox-33 Toolbox-34 Toolbox-36 Toolbox-37 Toolbox-38 Toolbox-39 Toolbox-41 Toolbox-42 Toolbox-43 Toolbox-44 Toolbox-45 Toolbox National Apartment Association Toolbox-2

78 Annual Turnover Percentage Total number of annual, physical move outs total number of apartments = Annual Turnover Percentage Example Assume you have as total of 360 units and a total of 295 physical move-outs. Calculate the annual turnover as follows: = 82% Turnover Note: The same unit may be occupied by several different residents in one year, thus, increasing your annual turnover percentage. Annualizing a Number (Number time period in months) x 12 = Annualized Number Example Assume you have 52 service requests recorded in January and 36 in February. Calculate an annualized number of service requests for the year as follows: = 88 (88 2) x 12 = 528 Annualized Number 2014 National Apartment Association Toolbox-3

79 Average Effective Rent (Rental Income Concession Rent) Units Occupied = Average Effective Rent Obtain Rental Income and Concession amounts from the Resident Billings section of a Rent Roll Detail. Obtain units occupied from a Unit Analysis section. Example 42 units $495 = $ 20, units $525 = $ 30, units $652 = $ 61, units $605 = $ 52, Total Units Leased = $164,558 $164, = $ = $588 Average Effective Rent Average Renewal Increase Average Effective Rent for Renewals Average Effective Rent on Previous Lease Percentage Increase = Amount of Increase divided by Previous Lease Rent Example The effective rate paid for the Previous Lease = $470. The effective rate paid for the Renewal Lease = $505. Renewal Increase = $505 - $470 = $35 Percentage Increase = $35/$470 = 7.5% 2014 National Apartment Association Toolbox-4

80 Average Square Feet/Unit Square footage of all specific unit types total number of units = average square feet per unit Example Assume you have 62 two-bedroom units with 858 square feet and 27 two-bedroom units with 1242 square feet. Calculate the average square feet as follows: square feet = 53, square feet = 33, ,730 Capitalization/Valuation 86, = 975 Average Square Feet Per Unit Annual net operating income capitalization rate = value or Capitalization Rate x Value = (Annual) Net Operating Income (NOI) R Capitalization rates are determined by the market and quality of the property and generally range from 6 10% Example Assume the annual Net Operating Income is $675,000 and the market capitalization rate is 7%. Calculate the value of the property as follows: I = V $675, = $9,642,857 Value 2014 National Apartment Association Toolbox-5

81 Closing Percentage/Ratio Total number of leases for the week total number of traffic = closing percentage Example Assume you have 16 visitors (traffic) to the property for the week and 4 of these lease. Assume one person was previously shown an apartment. Calculate the closing percentage ration as follows: Cost of Advertising per Lease 4 15 = 27% Closing Ratio Total cost of ad number of leases generated from ad = cost per lease Example Assume you place an ad in the newspaper that costs $5,400 and the ad generates 32 new leases. Calculate the cost per lease as follows: Cost of Advertising per Traffic $5, = $ per lease Total cost of ad total number of traffic generated from ad = cost per traffic Example Assume you place an ad in the newspaper that costs $3,800 and 58 prospective residents respond. Calculate the cost per traffic as follows: $3, = $65.52 per Traffic 2014 National Apartment Association Toolbox-6

82 Effective Gross Income (Net Rental Income) GPR current month vacancy, concessions, bad debt, and non-revenue units = Effective Gross Income Economic Occupancy Percentage To calculate the economic occupancy percentage, divide the effective gross income (EGI) by the gross potential rent (GPR). First determine the effective gross income (net rental income). Example Current Month GPR = $250,000 Less Vacancy, Collection = - $ 52,000 Loss, Concessions, Non-revenue units Effective Gross Income (EGI) = $198,000 $198,000/$250,000 = 79% Economic Occupancy 2014 National Apartment Association Toolbox-7

83 Effective Rent If all leases are signed at scheduled market rent and all concessions awarded via a lease addendum, then the calculation is as follows: Market rent x number of months in lease term less total concession awarded number of months in lease term Example Market Rent = $665 Concession 1 Month Free $665 Gross Potential Rent (GPR) (665 x 12 = $7,980) - $665 = $7,315 $7, = $610 (rounded) Effective Rent To calculate Gross Potential Rent (GPR), combine the sum of all occupied units at current lease contract rates plus all vacant units at scheduled market rents. Example 250 unit community 230 occupied units at average monthly lease rent of $759 = $174, vacant units at average scheduled market rent of $810 = $ 16,200 Gross Potential Rent (GPR) = $190, National Apartment Association Toolbox-8

84 Hourly Rate on Annual Basis Hourly rate x 2080 = annual salary NOTE! There are 2,080 hours in a normal work year. This means working 5 days a week, 8 hours for 52 weeks. Example Assume your hourly rate is $12.50 Calculate your annual salary as follows: Calculate your monthly salary as follows: Example Assume Your Salary is $38,000 $12.50 x 2080 = $26,000. Annual Salary $26, = $2,167. Monthly Salary Your Monthly Salary is $38, = $3,167 per month Your Hourly Rate is $38, = $18.27 per hour Salary 2080 = Hourly Rate 2014 National Apartment Association Toolbox-9

85 Leasing Exposure Total number of vacant units + total number of notice units total number of pre-leased units = total exposure in units Total exposure in units total number of units = exposure percentage Example Assume a 470 unit property with 26 vacants, 18 notices and 9 preleases. You calculate the exposure units as follows: Calculate the exposure percentage as follows: = 35 Exposure in Units = 7.5% Exposure Percentage Month-to-Month Leased Percentage Total number of month-to-month leases total number of apartments = percentage of month-tomonth leases Example Assume you have 6 month-to-month leases and a total of 140 leases. Calculate the percentage of month-to-month leases as follows: = 4.29% Month-to-Month Leases 2014 National Apartment Association Toolbox-10

86 Net Operating Income (NOI) Net Operating Income = Total Income Total Operating Expenses Occupancy Percentage (Physical Occupancy) Total number of (physical) occupied units total number of apartments = occupancy % Example Assume you have a total of 396 units and 308 units are occupied. Calculate the occupancy percentage as follows: = 78% Occupancy NOTE! Vacancy Percentage + Occupancy Percentage = 100% Operating Expenses per Unit (Annual) Total operating expenses total number of units = operating expenses per unit Example Annual Operating Expenses ($825,000) 350 Units = Operating Expenses Per Unit Operating Expense Ratio $ 2,357 per unit per year (rounded) To calculate the operating expense ratio, divide the operating expenses by the Gross Potential Rent. Example Gross Potential Rent = $3,410,700 Operating Expenses = $1,325,743 OE/GPR = 38.9% Operating Expense Ratio 2014 National Apartment Association Toolbox-11

87 Price per Square Footage Total unit rental total square footage = price (rent) per square foot Example Assume the monthly rent on a unit is $525 and the unit has 731 square feet. Calculate the rent per square foot as follows: Pro-rated Rent $ = $.72 per Square Foot To calculate the Pro-rated Move-In/Prorated Move-Out Rent, you must first calculate the daily rate. Most computer software systems use a calendar based pro ration method and round amounts to the nearest dollar. Prorated amounts lower than 50 cents are rounded down, while amounts higher than 50 cents are rounded up. Daily Rate Total rent Number of Days in the Month = Daily Rate Pro-rated Move-In/Pro-rate Move-Out Rent Daily rate x total number of days occupied** = Prorated Move-In or Pro-rated Move-Out Rent **Make sure to count the Move-In/Out day as an occupied day! Example Assume a resident occupies an apartment for 12 days in October and the monthly rent is $690. Calculate the prorated rent as follows: $ = $22 - Daily Rate $22 x 12 = $264 Pro-rated Rent 2014 National Apartment Association Toolbox-12

88 Projected Traffic Required to Meet Leasing Goals Total number of leases needed average closing percentage = projected traffic needed Example Assume you need 14 leases and have an average closing ratio of 28%. Calculate the traffic required to meet your goal as follows: = 50 Prospective Residents needed (traffic) Assume you have projected traffic of 60 and your closing ratio goal is 30% 60 x.3 = Leases Needed To reach your goal, you need 18 leases Renewal Percentage Total number of signed renewal leases total number of expiring leases = renewal percentage Example Assume you have 16 leases expiring and of those 6 people renew. Calculate the renewal percentage as follows: Total Leased Percentage 6 16 = 37.5% Renewal Total number of occupied units + total number of leased not occupied total number of apartments = total leased percentage Example Out of a total of 462 units, assume you have 312 occupied units and 10 units leased but not occupied. Calculate the leased percentage as follows: ( ) 462 = 70% Vacancy 2014 National Apartment Association Toolbox-13

89 Unit Type/Unit Mix Percentage Total number of a specific unit type total number of units = percentage of unit type Example Assume you have 518 units and 340 of them are two bedroom units. Calculate the percentage of unit type as follows: Vacancy Percentage = 66% Two-Bedroom Units Total number of vacant apartments total number of apartments = vacancy percentage Example Assume you have 385 total units and there are 62 vacant units. Calculate the vacancy rate as follows: = 16% Vacancy 2014 National Apartment Association Toolbox-14

90 Variance Percentage (Actual number budgeted number) budgeted number = variance percentage The variance percentage is the calculating of how much you are actually over or under your budgeted figures. If an expense category is over budget, it is a negative variance If an expense category is under budget, it is a positive variance If an income category is over budget, it is a positive variance If an income category is under budget, it is a negative variance Example Assume you collect income of $1,800,000 versus a budgeted income of $2,000,000. Calculate the variance percentage as follows: ($1,800,000 - $2,000,000) $2,000,000 = -10% This (-10%) represents an unfavorable variance Weighted Average Rent Leased and Market Example Assume there are four (4) floor plans and 215 total units. Assume eight (8) vacant apartments (2 A-1, 3 A-2s and 3 Cs). Floorplan # Avg. Leased Avg. Market A-1 40 $420 $450 A-2 75 $525 $580 B 20 $695 $725 C 80 $775 $ National Apartment Association Toolbox-15

91 Calculating Weighted Average Leased Rent Multiply the Average leased rent of a particular floor plan times the number of leased units in that floor plan. 38 x 420 = $ 15, x 525 = $ 37,800 Add the totals together, divide by the total of all 20 x 695 = $ 13,900 leased units 77 x 775 = $ 59, $127,335 $127,335/207 = $615 Calculating Weighted Average Market Rent Multiply the market rate of a particular floor plan times the total number of units in that floor plan. 40 x 450 = $ 18, x 580 = $ 43, x 725 = $ 14, x 820 = $ 65, $141,600 $141,600/215 = $659 Add the totals together, divide by the total of all units 2014 National Apartment Association Toolbox-16

92 Market Comparison Survey Form Address Type/Unit Size Net Rent Security Deposit or Last Month Rent Date Seen Address Type/Unit Size Net Rent Security Deposit or Last Month Rent Date Seen Location Rating Appeal Appearance Age Condition Amenities Parking/ Garage Pets Furnished Appliances Utilities Notes 2014 National Apartment Association Toolbox -17

93 Date: Weekly Activity Report Sample Total New Leases Approved (including transfers) Type Apt MI Date Term Mo. Rent Type Apt MI Date Term Mo. Rent Total Move-Ins Type Apt MI Date Move-Outs (Cancellation) Type Apt MO Date Type Notices Received Term No. Mos. Resident Mo. Rent Mo. Rent Type Apt MO Date Length Occ. Type Type Apt MI Date Term Mo. Rent Type Apt MO Date Reason Non-Revenue Apartments (models (m), storerooms (s), other (o) No. Mos. Resident Mo. Rent Apt Code Type Apt. Code Type Apt Code Total Status By Property Type Number Leased & Occ. Vacant With Lease Vacant W/O Lease Notices P-L New leases this wk. MI MO % Leased Total Total 2014 National Apartment Association Toolbox -18

94 Type Apt. # MI Date Leased By Type Apt. # MI Date Type Apt. # MO Date Explanation of Weekly Activity Report Approved Leases This Week Type of floor plan Apartment leased Date resident is scheduled to move in Initials of employee who leased apartment Move-ins for the Week Type of floor plan Apartment leased Date resident is scheduled to move in Move-outs for the Week Type of floor plan Apartment leased Date the resident moved out Notices of Intent to Vacate (Should include all notices received in the reporting period.) Type Apt. # MO Date Length of Residency Reason Type of floor plan Apartment leased Date the resident moved out Length of time resident occupied apartment Reason why resident is moving 2014 National Apartment Association Toolbox-19

95 Box Score Report Sample # National Apartment Association Toolbox -20

96 Box Score Report Sample #2 Continued on next page 2014 National Apartment Association Toolbox -21

97 Box Score Report Sample #2, Continued Continued on next page 2014 National Apartment Association Toolbox-22

98 Box Score Report Sample #2, Continued 2014 National Apartment Association Toolbox-23

99 Leasing Activity Report Sample 2014 National Apartment Association Toolbox -24

100 All Units Summary Report Sample 2014 National Apartment Association Toolbox -25

101 Lease Expiration Report Sample 2014 National Apartment Association Toolbox -26

102 Rent Roll Sample #1 Continued on next page 2014 National Apartment Association Toolbox -27

103 Rent Roll Sample #1, Continued Continued on next page 2014 National Apartment Association Toolbox-28

104 Rent Roll Sample #1, Continued 2014 National Apartment Association Toolbox-29

105 Rent Roll Sample #2 Continued on next page 2014 National Apartment Association Toolbox -30

106 Rent Roll Sample #2, Continued Continued on next page 2014 National Apartment Association Toolbox-31

107 Rent Roll Sample #2, Continued 2014 National Apartment Association Toolbox-32

108 Delinquency Report Sample Database: MRIWEB Aged Delinquencies Page: 11 RMPROP: Sales Demo Database Date: 1/10/2006 Tallulah Estates Time: 04:47 PM Period: 07/05 Date Charge Code Source Amount Current 1 Month 2 Months 3 Months 4 Months Times Late: RNT RENTAL INCOME -1, , Will, Worldview Total: -1, , Ali, Serhat Occupy: 1/1/2000 Vacate: Last Payment: 6/1/2005 1,195 Times Late: PPR Prepaid Rent Ali, Serhat Total: Abone, Annabelle Occupy: 1/1/2000 Vacate: Last Payment: 6/1/2005 1,199 Times Late: RNT RENTAL INCOME 1, , Abone, Annabelle Total: 1, , Davison, Cheryl Occupy: 5/10/2005 Vacate: Last Payment: 7/1/2005 1,257 (205) Times Late: DG1 DOG<25LBS GAR GARAGE RNT RENTAL INCOME WAD WASHER/DRYER Davison, Cheryl Total: Mranks, Michael Occupy: 1/1/2000 Vacate: Last Payment: 7/1/2005 1,595 Times Late: RNT RENTAL INCOME -1, , National Apartment Association Toolbox -33

109 Bank Deposit Summary Report Sample Continued on next page 2014 National Apartment Association Toolbox -34

110 Bank Deposit Summary Report Sample, Continued 2014 National Apartment Association Toolbox-35

111 Monthly Income Summary Report Sample 2014 National Apartment Association Toolbox -36

112 Monthly Transaction Summary Report Sample 2014 National Apartment Association Toolbox -37

113 Lost Rent Summary Report Sample 2014 National Apartment Association Toolbox -38

114 Concessions Report Sample Continued on next page 2014 National Apartment Association Toolbox -39

115 Concessions Report Sample, Continued 2014 National Apartment Association Toolbox-40

116 Demographics Report Sample 2014 National Apartment Association Toolbox -41

117 Cash Flow Statement (Completed) (Annual Dollars) Gross Potential Rent 4,892,000 Less: Vacancy, Concession & Collection Loss (678,000) Effective Gross Income _4,214,000 Other income 145,000 Gross Operating Income 4,359,000 Operating Expenses: Administrative & Management 183,900 includes mgt. Fees Marketing 101,000 Repairs & Maintenance 164,000 includes make ready costs Personnel 365,000 Utilities 133,000 Taxes & Insurance 779,000 Contract Services 77,900 includes prof. fees Total Operating Expenses 1,803,800 Net Operating Income 2,555,200 Capital Expenditures 475,000 Debt Service 1,278,000 CASH FLOW 802, National Apartment Association Toolbox -42

118 Cash Flow Statement Template (Annual Dollars) Gross Potential Rent Less: Vacancy, Concession & Collection Loss Effective Gross Income Other income Gross Operating Income Operating Expenses: Administrative & Management Marketing Repairs & Maintenance Personnel Utilities Taxes & Insurance Contract Services Total Operating Expenses Net Operating Income Capital Expenditures Debt Service CASH FLOW 2014 National Apartment Association Toolbox-43

119 Sample General Ledger Extract Report 2014 National Apartment Association Toolbox -44

120 Sample Chart of Accounts Sample The illustration below shows a sample two-page chart of accounts. Continued on next page 2014 National Apartment Association Toolbox -45

121 Sample Chart of Accounts, Continued Sample, (continued) 2014 National Apartment Association Toolbox-46

122 NAA Apartments Formulas Number Of Units Unit Type Description No. of Rooms Market Rent Schedule Sq. Ft. 1 x Total Sq. Ft. Market Rent 1 x Gross Pot. Rental Income Current Mo. Rent 9 / 5 10 Current Rent Per SF 9 x 1 11 Total Current Mo. Rent 9 x 1 x Total Annual Rent 40 A NBS-FP ,320 $ ,600 $ , , A FP , , , ,040 8 B NBS-FP , , ,840 46, B NBS-SR-FP , , ,920 95,040 4 B NBS-SR-PV-FP , , ,060 24, B FP , , ,240 74, C NBS-SR-FP- WD , , ,600 79,200 Total , ,800 61, , Average NBS No balcony/storage (-10) FP Fireplace (+15) PV Pool view (+10) SR Sunroom (+15) D Washer/Dryer (+15) 2014 National Apartment Association Toolbox -47

123 Certified Apartment Manager (CAM) SM Activity #1: How the Four Factors Affect Multifamily Investments Instructions Discuss the following questions with your group and write your answers in the space provided. 1. In what ways do the general economic and market conditions effect the safety of an investment in a multifamily housing property? 2. Why is it important to know the owner s investment objectives for the property you manage? 2014 National Apartment Association 1

124 Certified Apartment Manager (CAM) SM Activity #2: Adding Value Case study Your strategy The Tallulah Estates Apartment Community has 218 units. 193 units are occupied at this time, which is an occupancy ratio of about 88%. A Market Comparison Survey shows the competition has occupancy at 95%. There are some leases that will be expiring in the upcoming month, and none of them are preleased. In addition to that, there are about 18 residents who are delinquent on their rent. The total amount of these delinquencies is nearly $20,000! Look at the Property Activity Report on the next two (2) pages to see a summary of the occupancy and leasing activity at the community. Traffic looks low and conversion rates for the leasing consultants looks low as well. What would you do to improve the situation described above? Work with your group and use the class materials to determine your strategy. Continued on next page 2014 National Apartment Association 1

125 Certified Apartment Manager (CAM) SM Activity #2: Adding Value, Continued Property Activity Report Continued on next page 2014 National Apartment Association 2

126 Certified Apartment Manager (CAM) SM Activity #2: Adding Value, Continued Property Activity Report, (continued) 2014 National Apartment Association 3

127 Certified Apartment Manager (CAM) SM Activity #3: Calculating Cash Flow Instructions Using the data for the NAA Apartments below, calculate a new cash flow for this property making the following changes to the existing data: 1) Increase the GPR 3.5% 2) Decrease VAC to 8% 3) Change the Operating Expense ratio to 41% GPR 1,249,325 VAC 112,439 EGI 1,136,886 OI 55,000 GOI 1,19l,886 OE 482,300 NOI 709,586 CE 112,000 DS 424,373 New GPR = $ New Vacancy = $ New Operating Expense = $ Cash flow calculation: Gross Potential Rent Less: Vacancy, Concession & Collection Loss Effective Gross Income Other income Gross Operating Income Total Operating Expenses Net Operating Income Capital Expenditures Debt Service CASH FLOW 2014 National Apartment Association 1

128 Certified Apartment Manager (CAM) SM Activity #4: Review a Budget 2014 National Apartment Association 1

129 Certified Apartment Manager (CAM) SM 2014 National Apartment Association 2

130 Certified Apartment Manager (CAM) SM 2014 National Apartment Association 3

131 Certified Apartment Manager (CAM) SM 2014 National Apartment Association 4

132 Certified Apartment Manager (CAM) SM 2014 National Apartment Association 5

133 Certified Apartment Manager (CAM) SM 2014 National Apartment Association 6

134 Certified Apartment Manager (CAM) SM 2014 National Apartment Association 7

135 NAAEI thanks you for taking the Certified Apartment Manager (CAM) program. Following is a list of items that you may find on the NAA Web site that may not be included in the program text that is to be used for your reference while taking the courses in this program: Supplement/Resource Materials CAM Skill Checks and Answer Key Additional Course Handouts These files may be downloaded from the NAA Web site by visiting: