December 2014 Brewster Board of Selectmen and Town Administrators Office 2198 Main St Brewster, MA

Transcription

1 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod December 2014 Brewster Board of Selectmen and Town Administrators Office 2198 Main St Brewster, MA

2 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod Summary INTRODUCTION: This study grew out of comments made, at a meeting with, Gregory Bialecki, Secretary of the Massachusetts Department of Housing and Community Development and regional housing professionals, held in April 2014 at the Barnstable Town Hall, in Hyannis. The goal of the meeting was to encourage multi-family housing construction and to explore why, despite the demand, more units were not available. Meeting participants agreed that due to the importance of preserving the historic and community character of the regions, Cape Cod towns have been more accepting of small scale multifamily housing as opposed to larger developments. Small scale multi-family housing presents a challenge to professional managers. The indication from local owners, managers and developers of affordable housing at the meeting was that, despite the clear need, there is no incentive to create or expand affordable rental units, because owners could not manage properties cost-effectively. When pressed as to why, it became apparent that there were no simple answers. Thanks to funding from the Cape Cod Commission through the District Local Technical Assistance Grant Program, the Town of Brewster proposed conducting a professional study of management challenges and impediments that might produce more tangible answers for housing officials and policy leaders. This study was funded to conduct research and analysis into findings and recommendations related to identifying and overcoming impediments to the effective management of small scale affordable rental housing in the eight towns of Lower Cape Cod. 1 The Town of Brewster selected Lower Cape Community Development Corporation (CDP) and its subcontractor VIVA Consulting, LLC to conduct the study in the fall of STUDY METHODOLOGY: Four organizations participated in the study: the Brewster Housing Authority, Community Housing Resource, Inc. (CHR), Community Development Partnership (CDP) and The Community Builders, Inc. Two of the participants, one for-profit and one nonprofit own/manage portfolios limited to the Lower Cape with less than 70 residential units each. One organization is a large regional nonprofit managing over 11,000 units in 14 states. One organization is a state public housing authority whose Executive Director also manages a housing authority on the Upper Cape. These organizations made available, to the extent they existed, pro forma documents and two years of recent financial statements for nine properties located in Brewster, Harwich, Wellfleet and Provincetown. They also completed a detailed survey on a variety of property performance indicators such as target populations, turnover rates, and waiting lists as well as staffing patterns, challenges and successful strategies in managing these properties. Lastly, the study participants, Brewster s Assistant Town Administrator, as well as guests from Massachusetts Housing Partnership (MHP) and the Harwich Ecumenical Council for the Homeless (HECH) participated in a detailed review of the research and 1 The eight towns of Lower Cape Cod are Brewster, Harwich, Chatham, Orleans, Eastham, Wellfleet, Truro and Provincetown. 2 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod 2

3 analysis on October 29, These participants also engaged in a facilitated discussion to summarize the findings. These observations are also included in this Summary. 2 Portfolio Profile The nine properties in the study contain a total of 164 units with a range of 2 to 50 units and an average size of 18. They are located in small towns (average population of 6,903) whose average poverty rate is 9.4% compared to a national rate over 14%. Eight of the properties have unrestricted occupancy (often called family) and one is exclusively for the elderly/handicapped (age 60 or older or disabled). Occupancy is quite mixed among retirees, the disabled, young families, and single unrelated working adults. The properties are not that old: eight were built in the last 13 years and two were built 28 years ago with upcoming but not immediate capital needs. All properties report waiting lists, but turnover rates are low (the average in this sample is 17%) which helps moderate operating costs. Most properties have a variety of equity and funding programs including low income housing tax credits (LIHTC), affordable housing trust fund (AHTF), Massachusetts Housing Partnership (MHP), HOME, MassHousing and USDA. Key Results: Overall operating results are positive While pro forma operating budgets routinely underestimated actual operating expenses, effective income also outpaced pro forma estimates. This resulted in most properties out performing the pro forma net operating income (NOI). Overall operating expenses compared favorably to MassHousing properties in southeastern Massachusetts and Cape Cod. Debt on the properties is typical for affordable housing rental properties. Small size challenges operating costs primarily in administrative and, perhaps, insurance costs. Below average poverty rates, few significant capital needs, reasonable staffing level, total number of occupants on the low rather than the high end of the allowable occupants scale; and the average age of occupants more middle-aged than young help keep current operating costs in line. Revenues Effective income was 27% higher than estimated in the seven properties with pro formas. The major factors that contributed to this included: average occupancy of 98% in the study sample, average collection rates of 98%, low turnover (move out rates), strong rental markets to keep pace with pro forma market projections (this does not often occur in weak markets), one time energy grants/ credits and or other resident services grants. The most significant revenue increases came from participants pursuing and achieving one time utility/energy and/or other grants that can not be expected to repeat. But the modest rent increases in the pro formas should stay on track if the current strong market conditions continue that influence high occupancy, high rent collection and low turnovers. 2 The full report is available in hard copy format in the Town Administrators Office at the Brewster Town Hall (2198 Main St.), through the Town s web site ( and from The Community Development Partnership 3 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod 3

4 Operating Expenses Total operating expenses were 42% higher than originally estimated in the seven properties with pro formas. At the same time, the average operating expenses for these seven properties compared favorably to (within 1%) to the average operating costs of properties in MassHousing s southeastern Massachusetts and Cape Cod region. Table 1: Total Operating Costs Per unit per year Total Operating Expenses 7 properties; 112 units 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-8,003 7,942 5,637 Pro forma OpEx 2013 Actual OpEX ,786 MassHousing Comp MassHousing Comp 2012 inflated 2% for 2013 While the overall operating costs align with the comparables, there is considerable variability among the respondents and within categories. This is attributed in part to the financial reporting conventions used as well as differences in practices. The following table demonstrates that while the study participants were below the average in the areas of maintenance, utilities, real estate taxes and replacement reserve deposits, they were significantly above the averages in the areas of insurance and administrative costs. Lower than average maintenance costs were attributable to low turnovers and the age of the properties. Low replacement reserve deposits were also attributed to the relatively young age of the properties. All but one property experienced very favorable real estate tax expenses compared to the MassHousing sample. This was attributed in part to the towns support of affordable housing. Utilities are sufficiently variable in terms of what costs are borne by residents vs the property that more study would be needed to ascertain the explanation. Above average administrative costs were influenced by the the influence of economies of scales. Accounting, reporting, audit and other administrative costs are similar rather the property is 20 units or 50, but on a per unit basis the smaller property pays 2.5 times as much for the same work. The insurance costs were the most puzzling and ranged from $185 per unit per year to $1,110. They averaged $616 per unit per year compared to the MassHousing sample of $348 per unit per year. Table 2: Individual Operating Expenses Operating Expense Item Management Fee Within 5% of Comparables X More than 5% BELOW the comparables More than 5% ABOVE the comparables 4 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod 4

5 Administration Maintenance Utilities Insurance Real Estate Taxes Replacement Reserve Deposits X X X X XX XX Debt Service Seven of the study properties have debt. The debt is between 33% and 35% of effective income in five of the properties and at 19% in one. The seventh property reported on its first year of operations where the permanent debt had only commenced in the last part of that year and was thus not meaningful for comparison purposes although its pro forma estimate is 21%. These are typical debt obligations in affordable housing. Reserves Reserve balances (some properties have both operating and replacement reserves, others just have replacement reserves) are generally modest given the ages of the properites and variable. For the seven properties with reserves, the average of both operating and replacement reserves is $5,000 per unit and the range is $1,895 to $8,494 per unit. Where can the operating expenses be reduced if the one-time revenue sources dry up? Study participants identified the following areas for focus to achieve greater operating savings: Insurance Utilities o Solar panels o Weatherization o LEAN program for system replacments o Lock-in rates o Propane gas users should ask for discounts based on volume; one participant received a 30% discount Bidding contractors more often Managing vendors proactively by asking for discounts Participate with the Cape Housing Authority Executive Directors in their monthly meetings when topics include collaborative purchasing Investigate Barnstable County bulk purchasing Investigate best practices amont participants; meet more regularly Other systemic impediments to success Study participants identified these additional challenges to effectively managing their properties: Small properties can benefit from economies of scale, particularly in administrative functions Reporting to multiple funding sources takes 25% to 35% of the administrative time allocated to a property taking time away from property and resident matters The absence of a housing court on the Cape results in higher legal costs with judges unfamiliar with effective housing court practices 5 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod 5

6 Strategies to mitigate cost to operate affordable housing Study participants identified these strategies to mitigate operating costs: Use mediation to avoid costly evictions Become more intentional in finding ways to coordinate/partner around resident services Lobby with CHAPA or another industry intermediary to advocate for more common reporting systems/forms Continue to be oppportunistic in seeking revenue boosts such as project based vouchers Recommendations The following recommendations were offered by both the study participants and the researchers: Negotiate fees and services with vendors more often Maximize nonprofit status in procuring goods and services Seek properties with little or no debt Pursue comprehensive best practices training in financial statements, analysis, reporting and benchmarking for portfolios o More consistent, rigorous financial management likely to provide opportunity for greater performance Take advantage of MHP s offer to coordinate/train/convene Lower Cape managers for mutual interest/benefit/advocacy Collaborate more as a Lower Cape group around maintenance o Share skilled staff o Bulk purchasing o High cost/high volume contracts such as landscaping and trash removal Partner with Cape Cod Community College for administrative and technical interns Develop a more intentional reserve strategy to address future property needs While not a part of this study, participants should develop more planned asset management strategies for their properties and measure their performance against these goals 6 Identifying and Overcoming Impediments to Successfully Managing Small, Affordable Housing Properties on Lower Cape Cod 6

7 IDENTIFYING AND OVERCOMING IMPEDIMENTS TO SUCCESSFULLY MANAGING SMALL, AFFORDABLE HOUSING PROPERTIES ON LOWER CAPE COD December 15,

8 8 Background The Cape Cod Commission awarded the Town of Brewster a state District Local Assistance grant to identify impediments and mitigating strategies to effectively manage small scale affordable rental housing in the eight towns of Lower Cape Cod. * * * * * * * = Lower Cape Cod * * 8

9 9 Background The Town of Brewster selected Lower Cape Community Development Corporation (CDP) and its subcontractor VIVA Consulting (VIVA) to conduct the study in the fall of

10 10 Main Questions How well have the study properties performed against their original projections? What have been some success factors? What have been the greatest impediments to achieving successful property performance? What strategies have the owners and/or managers adopted to mitigate the challenges to manage these properties? What are some best practices and industry norms against which to measure current performance? What recommendations do study participants have to overcome current obstacles in future affordable rental projects? 10

11 11 Methodology Four organizations participated in the study: Brewster Housing Authority Community Housing Resource, Inc. (CHR) Community Development Partnership (CDP) The Community Builders Nine properties are represented in the study 4 in Provincetown 2 in Harwich 2 in Brewster 1 in Wellfleet 11

12 12 Methodology Participants presented, to the extent available, the following information for each property: Pro forma operating budget Financial statements for the most recent fiscal years including operating statements and balance sheets A completed survey on target populations unit sizes annual turnover rate waiting lists how long it takes to fill a vacancy staffing patterns what management activities are performed at the property, at a central office or by a subcontractor challenges of managing small, affordable housing properties on the Lower Cape 12

13 13 Methodology VIVA analyzed and presented the results All properties except two had pro forma budgets so it was possible to compare actual to pro forma performance expectations on seven properties. All respondents were contacted multiple times to affirm and/or clarify their data. Participants reviewed and commented This study was shared with all participants on October 29, 2014 for additional comment prior to preparing a final Executive Summary. 13

14 14 Some Basics: Key Determinant of Cost #1: Location, Location, Location What It Is Census tract in which the project is located. What It Tells Us Operating costs are influenced by their location in the country, state, city, neighborhood. The higher the rate of poverty in the census tract, the higher the operating costs relative to nearby neighborhoods. Poorer neighborhoods tend to have higher rates of vandalism, crime, turnover all of which contribute to higher operating costs. 14

15 15 Some Basics: Key Determinant of Cost #2: Age of the Property What It Is Date project was built/ first occupied, OR Date project was fully renovated What It Tells Us The older the property and its systems, the more it costs to maintain. Thus operating costs are often higher in older projects. 15

16 Some Basics: Key Determinant of Cost #3: Average Bedroom Size (Unit Density) 16 What It Is Formula: Total Number of BRs Total Number of Units What It Tells Us Higher the average bedroom size, higher the anticipated operating expenses Average BR size over 1.5 = family property Some SROs with low average BR size may be costly to operate Often very difficult/costly to operate properties with bedroom density over

17 17 Some Basics: Average Property Size Matters Economies of scale are difficult to achieve in small properties: 100 vs. 20 unit property Example 1 1 unit vacant in a 100 unit property = 1% vacancy rate. 1 unit vacant in a 20 unit property = 5% vacancy rate. Example 2 Audit cost per property = $10, units = $ 100 pupy 20 units = $500 pupy Self-managers of small properties seldom earn enough in fees to cover their central office cost. Why? Property management does its work by the project but gets paid by the unit. Example: 100 units x $400 pupy mgmt fee = $40, units x $400 pupy mgmt fee = $8,000 17

18 18 Mixed Participant Profile All four participants provided relatively complete information. Two participants, one forprofit and one not-forprofit, manage portfolios limited to the Lower Cape with less than 70 residential units each. One is a large regional nonprofit managing over 11,000 units in 14 states. One is a state public housing authority whose Executive Director also manages a housing authority on the Upper Cape. The two housing authorities manage a total of 156 residential units. 18

19 Portfolio Profile: Small properties in small towns with below Town Population in 2010 average poverty rates % of population below poverty line 2009** Properties in study Units in study Average property size (units) Brewster 9, % Harwich 12, % Wellfleet 2, % Provincetown 2, %* TOTALS 27, % * = 2012 ** 14.3% of US population lived in poverty in 2009 per the U.S. Census 19

20 20 Portfolio Profile: Mixed occupancy; large units, recently built Nine properties 8 family; 1 elderly 164 units Average number of BRS per unit: 1.76 Seven built in last 13 years; two built 28 years ago. Variety of equity and funding programs: LIHTC, HOME, AHTF, MHP, MassHousing, USDA 20

21 21 Organizational Design: Number of units assigned to administrative and maintenance site staff are reasonable Site Positions Study Properties Average Study Properties High Study Properties Low Industry Range Admin to 100 Maint to

22 22 Using Comparables: Operating Expenses 22

23 23 MassHousing Comparables: SE MA and Cape Operating Expense: Per unit per year (pupy) FY2012 audits ELDERLY FY2012 audits UNRESTRICTED FY2012 audits MIXED Management Fee Administrative Payroll Administrative Other Maintenance Payroll 736 1,008 1,211 Maintenance Other 1,046 1,280 1,125 Utilities 1,102 1, Insurance Real Estate Taxes Resident Services 2, Replacement Reserve ,051 TOTAL EXPENSES 9,393 7,786 8,191 23

24 24 MassHousing Comparables Groupings Elderly: Restricted to elderly tenants (that may also include disabled individuals) Unrestricted: No occupancy restrictions Mixed: Some units are restricted to elderly tenants; some are not Grouping for study Because all but one of the properties in the study are specifically identified as elderly, the comparables from the Unrestricted grouping were used in the study. The 2012 comps were inflated by 2% to compare to the 2013 results of the study properties. 24

25 MassHousing Comparables: SE MA and Cape inflated by 2% to compare to study 2013 expenses 25 Operating Expense: Per unit per year (pupy) FY2012 audits UNRESTRICTED FY2012 audits UNRESTRICTED Inflated 2% Management Fee Administrative Payroll Administrative Other Maintenance Payroll 1,008 1,028 Maintenance Other 1,280 1,306 Utilities 1,465 1,494 Insurance Real Estate Taxes Resident Services Replacement Reserve TOTAL EXPENSES 7,

26 26 FINANCIAL PERFORMANCE: THE BIG PICTURE 26

27 Pro formas routinely underestimate actual operating expenses 2013 Total Per Unit Per Year Operating Costs Property Actual Pro forma estimate Mass Housing Comparables 2012 inflated 2% 27

28 while effective income also outpaces pro forma estimates Total Per Unit Per Year Effective Income Property Actual 2013 Pro forma estimate

29 resulting in most properties out performing the pro forma NOI estimate Total Net Operting Income (NOI) Property Actual 2013 Pro forma estimate

30 30 REVENUE 30

31 What factors contributed to the increases in Average occupancy of study sample is 98% Average collection rate is 98% Turnover rates are low creating stability Strong rental markets to keep pace with pro forma rent increase projections Energy grants/credits Other service grants effective income? Pe unit per year effective income 14, , , , , , , , Pro forma Effective Income Total Effective Income: 7 non public housing properties, 112 units Pro forma Effective Income 2013 Actual Effective Income , Actual Effective Income

32 Can the effective income increases be expected to continue? 32 Not at current levels The most significant increases in effective income were in one time utility/energy and/or other grants. But modest rent increases should stay on track with pro forma projections. Contributing factors include: Low turnovers High occupancy High rent collections 32

33 33 OPERATING EXPENSES 33

34 Per Unit Operating Expenses: Administrative Expense Item MassHousing FY2012 inflated 2% SE & Cape Study Results: FY 2013 average Study Participants Range Units/Propert ies recorded in expense item Mgmt Fee /7 Admin Payroll , /7 Admin Other , /9 TOTAL ADMIN 2,021 2,286 1,798 3, /9 34

35 Total Administrative Costs Higher than Comps Overall, but with Significant Variability 2013 Per Unit Administrative Costs Per Unit Per Year Costs Study Properties 1-9: MassHousing Comps - 10 Management Fee Administrative Payroll Administrative Other 35

36 Per Unit Operating Expenses: Maintenance Expense Item MassHousing FY2012 inflated 2% SE & Cape Study Results: FY 2013 average Study Participants Range Units/Propert ies recorded in expense item Maint Payroll /3 Other Maint /9 TOTAL MAINT /9 36

37 37 Total Maintenance Costs are Below Comps; Maintenance Payroll Costs, when identified, are identical Per Unit Maintenance Costs 2500 Per Unit Per Year Costs Study Properties 1-9: MassHousing Comps - 10 Maintenance Payroll Maintenance Other 37

38 Per Unit Operating Expenses: Utilities Expense Item MassHousing FY2012 inflated 2% SE & Cape Study Results: FY 2013 average Study Participants Range Units/Propert ies recorded in expense item Utilities /9 38

39 Utility costs are quite variable; need more study 2013 Per Unit Utility Costs Per Unit per Year Utilities Study Sample Utilities - Mass Housing Comps 39

40 Per Unit Operating Expenses: Insurance and Real Estate Taxes Expense Item MassHousing FY2012 inflated 2% SE & Cape Study Results: FY 2013 average Study Participants Range Units/Propert ies recorded in expense item Insurance /9 Real Estate Taxes /5 40

41 41 Insurance costs greatly exceed comps 2013 Per Unit Insurance Costs Per Unit Per Year Costs Insurance - Study Sample Insurance - MassHousing Comps 41

42 Real estate tax expenses are way below comps 2013 Per Unit Real Estate Tax Costs Per Unit Per Year Costs Real Estate Taxes - Study Sample Real Estate Taxes - MassHousing Comps 42

43 Per Unit Operating Expenses: Replacement Reserve Deposits Expense Item MassHousing FY2012 inflated 2% SE & Cape Study Results: FY 2013 average Study Participants Range Units/Propert ies recorded in expense item Replacement Reserve Deposits /7 43

44 Do annual reserve deposits align with anticipated capital needs? Per Unit Replacement Reserve Deposits 2641 Per Unit Per Year Costs Replacement Reserve Deposits - Study Sample Replacement Reserve Deposits - MassHousing Comps 44

45 Operating expenses of study s mixed-finance 9,000 properties trend with comparables Total Operating Expenses: 7 mixed finance properties, 112 units 45 8,000 8,003 7,786 7,942 7,000 6,000 5,637 5,000 4,000 3,000 2,000 1,000 - Pro forma OpEx 2013 Actual OpEX 2013 MassHousing Comp 2012 MassHousing Comp inflated 2% for 2013 Pro forma OpEx 2013 Actual OpEX 2013 MassHousing Comp 2012 MassHousing Comp inflated 2% for

46 Where can the operating expenses be reduced if the extra income sources dry up? Study participants offered the following: Insurance Utilities Solar panels Weatherization LEAN program for system replacements Lock-in rates Propane gas users should ask for discount based on their volume one participant received a 30% discount 46 Bidding contractors more often Managing vendors proactively ask for discounts Participate with Cape Housing Authority Directors in their monthly meetings when topics include collaborative purchasing Investigate Barnstable County bulk purchasing Investigate best practices among participants: meet more regularly 46

47 47 Debt Service 47

48 48 Debt Service Obligations are Typical Debt Service as % of Effective Income 7 4%* *First year of ops; normalized years estimated at 21% 6 33% Non public housing properties % 33% 35% 2 35% 1 34% 0% 5% 10% 15% 20% 25% 30% 35% 40% Debt Service as % of Effective Income 48

49 49 Reserve Balances 49

50 Reserve balances are variable and modest for property ages 2013 Reserve Balances Non public housing properties Replacement Reserve Balance Operating Reserve Balance Average Total Reserves 50

51 51 Other Performance Indicators 51

52 Occupancy and collection rates are excellent; low turnover rates contribute to higher turn and make ready times Indicator Occupancy Rate Collection Rate Turnover Rate Average Turn Time - days Average Make Ready Time - days Study Average Study Range Best Practice 98% 92% - 100% >95% 98% 90% - 100% >97% 17% 0% - 50% Varies 34 days 15 to 60 days 14 days 5 to 30 days 52 < 14 days < 7 days 52

53 53 Success Factors Identified by Participants High occupancy High collections Pursued one-time revenue enhancements Reasonable staffing levels Low turnover Age of properties Strong rental market Average bedroom density but primarily one person per bedroom; not many children Average age of unrestricted residents approximates 50 Residents are generally well educated 53

54 54 Impediments Identified by Participants Re-advertising for periodic vacancies costly if not managed well No housing court on the Cape results in higher legal costs with judges unfamiliar with effective housing court practices Small properties can not benefit from economies of scale Reporting to multiple funding sources takes 25% to 35% of an FTE; takes time away from property and resident matters 54

55 55 Participant Strategies to Mitigate Costs Use mediation to avoid costly evictions Become more intentional if finding ways to coordinate/partner around resident services e.g. Homeless Prevention Lobby with CHAPA or another industry intermediary to advocate for more common reporting Continue to be opportunistic in seeking revenue boosts such as project based vouchers 55

56 56 Recommendations - Participants Negotiate fees and services with vendors more Maximize nonprofit status in procuring goods and services Seek properties with little or no debt Take advantage of MHP offer to coordinate/train/convene Lower Cape managers for mutual interest/benefit/advocacy Collaborate more as a group around property maintenance Share skilled staff Bulk purchasing High cost/high volume contracts such as landscaping and trash removal Partner with Cape Cod Community College for administrative and technical interns 56

57 57 Recommendations Study Researcher Participants should pursue comprehensive best practices training in financial statements, analysis, reporting, benchmarking for their portfolios More consistent, rigorous financial management would provide an opportunity for even greater performance Develop a more intentional reserve strategy to address future property needs While not a part of this study, participants should develop more intentional asset management (owner) strategies for their properties and measure performance against these goals. 57