So where have I been?

The short version is that between a webhosting expiration and a new job, I’ve been busy and delinquent from updating. The Twitter feed is still active, but I’m busy enough (and the reception is poor enough in the new office) that few things are Tweeted.

I’m working REO for a special servicer and have a substantial portfolio of multifamily and mobile home properties, which is about all I can say.

You can catch up on some of the things in between the webhost expiration and the resuscitated MFG at Tumblr.

FIRE: Rebidding successes via AFT

Apartment Finance Today has a blog item highlighting some successful rebidding stories in “Multifamily Firms Rebid Contracts to Cut Costs”.

In a prior post, I’ve discussed the benefit of real estate tax appeals, but I have not spent much time on consultants and contractors. AFT provides a useful corrective with these recommendations:

• Analyze all of your contracts and compare them to current market rates
• Make sure you’ve got the ability to terminate the contract
• Don’t limit your efforts to construction, maintenance, and service-oriented jobs

This is good but somewhat limited advice. Probably because I hate sale retrades and because service providers like painters, landscapers, and others were usually contractors and residents in my affordable portfolio, I’m tend not to hammer contractors too heavily on price. Instead, I ask for more frequent service, better materials, or some other benefit to the property. Maintaining a good client at a current price matters to small businesses because it supports existing revenue projections and allows them to compete on something other than price. (Note: I usually find Seth Godin to be flip and lacking in both reflection and detail. However, even the blind pig finds an acorn, and this is a usefully concise summation of my point.) Maintaining a good contractor should matter to you because moving from price to service reduces the perception of your negotiations as zero sum.

On the other hand, I think consultants (attorneys, engineers, and accountants) probably should be roughed up on price or rebid. I’ve seen some egregious overcharges on standard affordable housing work by a national real estate accounting firm and I’ve had lawyers bill and call for so many expert witnesses that we eventually paid 2x in legal than we did for the settlement.

In the interest of moving the discussion forward, here’s what I’ve negotiated in the past:

• Additional flower planting or upgraded landscaping
• Additional security hours or upgrade in patrol method
• Custom accent wall painting on unit turnover
• Full roof redecking on replacement
• Lot restriping, signage, or snow plows from tow companies

In most cases, your road to financial health is not found via cost reductions, but value additions. Approach negotiations with this in mind, and most contractors will eagerly respond. Those that don’t, you never wanted anyway.

Operations: Sustainable sites lead to simpler life

San Marco, a Walking Oasis in Jacksonville, FL. Every neighborhood has some walkability or simple mobility element.

In the prior post on LEED v3 changes, I touched on the sustainable sites requirement. Essentially LEED is attempting to encourage a bit of smart growth by reducing the number of vehicle trips generated by development (and separately develop in areas with existing infrastructure or minimally disturbed greenfields). For this post, I’m focusing on existing communities that either are not actually or do not consider themselves sustainable sites.

Operationally, you can create a sustainable site by studying your neighborhood, using resources such as Yelp, Urban Spoon, and other location-based web services to help residents find their way. For those exploring social media, culling local event listings provides great fodder for resident-focused Twitter feeds.

Celebrating or publicizing neighborhood based events, services, or vendors enables managers to serve as (apartment) community resources, local economic generators, and pushes the apartment community into the center of a resident’s life, rather than simply a place to sleep. Understanding and sharing information about locally-based resources puts a little more meat to the notion of “Life made simple.”

Focusing on your immediate surroundings improves your local outreach efforts by showing businesses 1) your property is a part of the neighborhood, not just a parcel; 2) better acquaints you with the employers and employees of the neighborhood. Finding potential residents within your local surroundings greatly improves the chances of renewal, and I strongly believe reduces your overall marketing costs.

As an operationally-focused asset manager with a portfolio of over 50 properties nationwide, I consistently found that 35-50% of my new resident prospects came through drive-by. When added to the number of resident referrals, that number was consistently between 40-65% of total applications. Signage, landscaping, and general appearance (all of which affect existing residents as well) is a far stronger indicator of the living environment than a static print ad. Reaching prospects while in the context of searching for a new home and residents while in the context of their daily life is a better use of marketing efforts because it provides something of use to your customers. Very few management companies do this well and with such a low hurdle, any sustained effort is appreciated.

At every property visit, in every conversation with managers and leasing agents, I asked some variation of the following questions, my keys to a ’sustainable site’:
1. Do you know where you are? Do you know how to get here?
2. Who lives here and why?
3. Where do your residents work?
4. What is there to do around here?
5. Where is the nearest park, house of worship, child care center, grocery store, and school?
6. How do you involve the property with the surrounding community?

If you can’t identify your property as part of a larger community and explain that role to a resident, you’re not trying to improve sustainability, you’re not looking beyond your property line, but most damning, you’re not trying to make life simpler for your residents.

News: WBJ summarizes LEED v3

The Washington Business Journal provides a quick summary of changes in the new LEED 3.0 standard.

The standard implements and expands upon a few items I’ve written about before, specifically “sustainable sites” as part of a post, “Where does your life take place?” and “Needs more data”.

From an operational perspective energy tracking and reporting requirement (LEED requires reporting to the USGBC for 3-5 years) is the most important improvement from prior versions. Tracking and analyzing energy usage, comparing to baseline, and looking for additional efficiencies should be the most lasting legacy of this LEED version. While the reporting requirements have invited animated discussions, using energy analysis to improve LEED and all building science provides the path toward cost savings and greater loan proceeds (two items close to any developer’s heart).

I’ll have a short post on additional operational implications shortly.

Operations: MHN discovers (but does not identify) Economic Occupancy

Multi-Housing News recently advised that owners need to be aware of “Trade-Off Between Cash Flow and Occupancies“. In other words, MHN just discovered economic occupancy.

“It is a tradeoff between cash flow and occupancies and owners need to address that,” Brad Dillman, quantitative analyst at PPR, tells MHN. “The decision depends on the specifics of the owners situation, the property itself and if there is a minimum occupancy level that needs to be maintained in the loan contract etc.”

While I know that physical occupancy is what drives most property managers because it many owners want a single variable to evaluate property performance, physical occupancy has limited importance in financial analysis. Much more important is economic occupancy, which, similarly to a hotel’s RevPAR, describes the financial efficiency of the actual revenues as a percentage of the Gross Potential Rent (Formula: Net Rental Income/GPR).

I’m not sure what happened with this piece, but either it doesn’t say what it was supposed to, or it’s introducing us to something that everyone should already. know: when conducting analysis of income properties, Economic Occupancy > Physical Occupancy.

[Note: My operating presumption is that when a property approaches 95% occupancy, rents need to climb. If your property is 100% occupied, rents are too low.]

Operations: Live monitoring of electricity use works

Since Earth Day, I’ve been following Energy Circle’s energy monitoring experiment. With the combined resources of a household electricity monitor and Twitter (plus an assist from some Google-fied graphics) they are nearly 90 days into a fascinating experiment.

With a reasonable passage of time, it was appropriate to provide an update. In this case, Energy Circle advocates that real-time monitoring works (24 hours later doesn’t).

You really should follow through for the full story, but here are the main reasons:

1. Spikes Hurt.
2. Baseload Matters.
3. Our house has a heart beat.
4. Humans screw up.
5. The right tools are critical.
6. Data=Action.
7. Some bulbs really cost you.
8. Efficiency is a family matter.
9. The little shifts count.
10. Real-time leads to a real map of action.

Resources: Novo’s Tax Credit Tuesday

For anyone working with tax credits, the Novogradac podcast “Tax Credit Tuesday” are a useful way to learn about Federal and state initiatives in the tax credit sphere. I’ve always subscribed via iTunes, so I had no idea there was a PDF transcript available.

In this week’s podcast, Novo reports on Rep. Frank’s “TARP for Main Street” proposal, which would direct $1B of dividends from banks that received TARP funding to the Affordable Housing Trust Fund, established last year in the Housing and Economic Recovery Act.

Also covered is a letter from the Affordable Housing Tax Credit Coalition expressing concern about the potential sale of tax credits held by Fannie and Freddie. The AHTCC, providing Congress with a short lesson in supply and demand, is concerned that the sale of tax credits on the secondary market will further depress prices that currently languish between $0.68-0.78 per $1 of tax credit. Instead of selling the credits, AHTCC advocates for the Treasury to accept GSE-held LIHTC as part of the dividend payments owed. Alternatively, AHTCC suggests that credits be sold to LIHTC investors who have been inactive for 10+ years and that the GSEs should immediately reinvest those proceeds back into LIHTC.

Atlanta Housing completing demolition and redevelopment

Last week the NYT noted that the Atlanta Housing Authority was nearly done demolishing its 32 largest communities totaling nearly 15,000 units.

The article presents a quick summary of pro and con positions and mentions a series of articles from Creative Loafing Atlanta, an alternative weekly that has provided more detail on Atlanta’s particular efforts.

Writes the Times:

The elimination of housing projects does not mean the abandonment of public housing. The Atlanta Housing Authority pays for more residents’ housing these days than it did in the 1990s. But they are scattered throughout the city in mixed-income communities and private housing financed with vouchers through the government’s Section 8 program.

Still, critics of the demolitions worry about the toll on residents, who must qualify for vouchers, struggle to find affordable housing and often move to only slightly less impoverished neighborhoods. Especially in a troubled economy, civil rights groups say, uprooting can lead to homelessness if more low-income housing is not made available. Lawsuits have been filed in many other cities, generally without success, that claim that similar relocations violate residents’ civil rights and resegregate the poor.

As always, David Smith, in “End of an Error, Pt. 1″ has both the background on Atlanta and places the demolition in context. In his introductory entry (David’s thoughts ran to 3 parts) he divides housing assistance between place-based (build it and they’ll come) and people-based (pay them and they’ll go).

Atlanta has clearly made the choice to reduce the concentration of poverty by largely eliminating the ownership of housing by the AHA and providing residents with vouchers to assist them in acquiring the housing on their own.

Mentioned in the article is research conducted by Thomas Boston, professor of economics at Georgia Tech. Boston is the author of a case study of mixed-income revitalization in Atlanta. The study (link above to the working paper), was peer reviewed for the Journal of the American Planning Association and studied 2,700 families (1,200 that relocated and 1,400 that did not) from Atlanta public housing communities during a 7 year period and found:

Families who moved from public housing projects to vouchers were 1.5 times more likely to be employed in the long term than were those who remained in projects. Families who moved to mixed-income communities were about 2.1 times more likely to be employed in the long-run than those who remained in projects.

Creative Loafing collected a few of the articles written about the AHA and troubles with the Atlanta affordable housing market. I submitted a few comments in the collector piece, to the extent that well run PHAs were essential to working well with private sector owners. The benefit to an owner of taking voucher holders is that a substantial portion of the rent can be relied upon each month, that lease violations (behavior problems, non-applicant residents, housekeeping standards, etc.) can be enforced by both property management and the voucher-issuing entity. Cooperation, however, requires a PHA that is responsive to residents and owners, provides clear guidelines for enforcement and inspections, and delivers the types of follow-up assistance and counseling needed to bring greater financial stability to voucher holders.

I’ve got some additional thoughts on funding sources in a future post.

Catching up on your conferences

I’ve written previously about using Twitter to attend conferences. In the past week, there have been a couple of conferences of interest to the multifamily industry:

NAA Educational Conference (Twitter hashtag #naaeduconf)

Solutions for Working Families (hashtag #swf2009)

Association of College and University Housing Officers (hashtag #acuhoi).

If the Tweet streams provoke additional questions, a couple of folks have collected their thoughts (or Tweets) and posted them:

NAA Educational Conference

NAA-produced summaries, the ‘best of #NAAEduConf Tweets collected by Ellipse, a summation from Lisa Benson’s panel, Heather Blume’s Notes from NAA, a couple of dailies from The Apartment Finder Blog, and the poorly-lit but always informative Mark Juleen (video link).

Solutions for Working Families
The NHC’s Open House Blog provided most of the daily color, as well as a copy of Sec. Donovan’s remarks, plus a podcast from Nic Retsinas of Harvard’s Joint Housing Center.

ACUHOI

Adventures in Higher Ed summarizes three days of ACUHOI

Why do we need to broaden affordable housing funding sources?

Because you get things like this 44-unit 1992 LIHTC property that loses $25,000 per year with no hard debt.

Housingpolicy.org, an initiative of the Center for Housing Policy is doing yeoman’s work in spurring ongoing conversations amongst professionals in affordable house. At their nascent forums, Ed Kaminski shares his frustration with the deal above, and its inability to make financial sense.

[Pennsylvania's] low rent levels do speed up the intersection of operating expense with operating income. We even avoid hard debt on tax credit deals whenever possible because at some point, costs will exceed income. This is certainly true in hindsite with taxes, utilities, insurance and maintenance all rising at a greater rent than rents.

We are being offered – free of charge – a 17 year old 44 unit tax credit property that losses $25,000 per year. It has no hard debt payments, but soft debt exceeds the appraised value. [We] have come to the conclusion that the only way to preserve this is to find a source that will subsidize operations. We are willing to enter into a 15 year restrictive use agreement in exchange for a 15 year commitment of $25,000 per year.

That is $568 per unit per year ($8520 per unit for 15 years) and a total of $375,000 of subsidy for 15 years. Producing 44 new units will cost $6-8,000,000 or more.

The ability of a State Housing Agency to exchange tax credits for cash does nothing if the money goes simply to the construction of affordable housing and not to its operations. Financial stability, much less sustainability, will not occur until states and more importantly, counties, become more serious about providing and supporting affordable housing.

LIHTC cannot solve this problem.

Direct HUD subsidies, HOPE VI, vouchers, all are powerless to solve the long term danger to affordable housing: incomes (and thereby rents) do not rise in concert with expenses.

Energy Star Fades as Efficiency Rating – WSJ.com

The Wall Street Journal reports that the EPA is upgrading the residential Energy Star ratings, which currently require a home to achieve 15% greater efficiencies than model building-efficiency guidelines.

Perhaps embarrassed by the thought that homes 57% larger than the national average still receive Energy Star designations, the EPA’s actual motivation seems to be driven in part by technology and in part by a desire to reduce the number of Energy Star rated homes built.

Residential energy efficiency is rapidly evolving in the U.S. 10-20% of states have adopted or are studying the adoption of energy codes more stringent than the 2006 IECC, and many significant new requirements were adopted in the 2009 IECC. Furthermore, the current over-supply of housing stock in the marketplace reinforces the need for ENERGY STAR qualified homes to stand out from the competition. EPA is developing new guidelines to help ensure that ENERGY STAR continues to deliver homes that are high-quality and meaningfully more efficient than standard new construction. More rigorous guidelines will strengthen the integrity and value of the ENERGY STAR label, thereby increasing the success of raters’ and builders’ partnerships with ENERGY STAR.
(Source: Energy Star 2011 FAQ)

In the Fact Sheet, issued May 4, 2009, EPA went with the simpler to explain bullet points:

EPA believes that the next generation is an opportunity to:
• Add requirements that ensure a comprehensive approach to building science
• Ensure high‐efficiency equipment and products in qualified homes
• Add new, high‐value on‐site inspections to ensure that ENERGY STAR qualified homes perform to expected
levels
• Limit the carbon footprint of large homes earning the ENERGY STAR

(Source: Energy Star Qualified Homes 2011 Fact Sheet)

The short version of the upgrades are that new requirements focused on both whole building design and minimally intrusive efficiency selections will be incorporated into the guidelines. These include guidance on thermal, air, and moisture flow; an integrated HVAC system; efficient appliances; more efficient water distribution (low flow aerators); and higher efficiency hurdles for larger homes.

EPA estimates that the proposed changes will add about $4300 to the cost of a home, or $23/month in additional mortgage burdens. It estimates monthly energy savings of approximately $37/month. The financial estimates are well summarized in this 20-page PDF.

You can view all of the changes at the EPA’s Energy Star Qualified Homes website. The public comment period ends July 10, 2009.

Operations: Capturing rainwater, reusing graywater

Way out West, water use issues are much more pertinent than they are in the East. Well, maybe. [National view from Drought Impact Reporter.]

Regardless of location, water usage will be reduced through legislation, co-option, construction, or consumer choice.

To help us along, Multifamily Water Systems appears in the May issue of Builder News to provide definitions, discuss existing technology, and identify current and proposed legislation. It’s a strong article that covers a lot of ground.

Where should you look for this reusable water? On your structure, upon undeveloped land, and within the units:

Grand Unifying Theory of Sustainability (pt. 1)

Over the next few weeks, scattered amongst posts on GAO and HUD, the latest upheaval with LIHTC, and hopefully some more tales from the trenches, I’ll be attempting to outline my thoughts on what it will take for building sustainability and sustainable operations to become part of the vernacular. I’m starting with the aspect I’m actually least familiar with, insurance.

Insurance, by popular understanding, hedges against the risk of contingent loss. By varying pricing based on operations, materials, and design, insurance serves as a nudge to encourage lower risk profiles. In theory at least. We’ll leave unresolved questions about whether this risk reduction is always well reasoned or if you really get better pricing through these changes.

So it was unsurprising to read in Ceres’ new report “Risk to Opportunity” that insurers are moving from superficial PR “towards [thinking] more deeply and strategically institutionalized and embedded in the operations of companies.”

Climate change is becoming recognized as an issue of Enterprise Risk Management, spanning underwriting, asset management, and corporate governance.

One of the most constructive developments is more products and services focused on ensuring the quality of the customer’s energy or carbon savings efforts. These include performance insurance for renewable energy systems, coverage for green buildings that don’t deliver promised performance, and products that apply to carbon offset and trading activities. In all cases, loss-prevention takes the form of due-diligence, scrutiny of engineering assumptions, preventive maintenance, commissioning, measurement and verification, and other constructive interventions to help ensure project integrity and success.

Although released in April 2009, the report covers products existing or introduced in 2008. In many ways, the finding that some insurers were moving much faster than others led to the March 2009 action by state insurance commissioners to require that insurers reveal exposures and responses to climate change. How this will be enforced and what the ‘right’ answers are will be revealed when the responses are provided in March 2010.

[Note: The quote above was taken from an interview with study author Evan Mills with Climate and Insurance.org, an arm of industry advocate NAMIC, which does not like (really doesn't like) the new climate exposure mandate. Ceres retorts that "Insurance trade organizations remain relatively disengaged on climate change." Plus ça change, I suppose.]

Why does this matter? Because outside of government and its multiple layers, insurers and financial firms are best positioned to promote the systemic change in the built environment needed to achieve goals like Net Zero Energy, Architecture 2030, or multi-family specific programs like Greener Communities.

Insurers are perfectly placed to make the case for unifying “green” and “disaster-resilient”
practices across many domains (construction, energy, agriculture, land use), yet scant effort has
been exerted in this regard. It will become increasingly incumbent on insurers to demonstrate
the loss-reducing benefits of the green technologies and services that they reward. Loss-prone
infrastructure cannot be truly “sustainable”.

It’s worth recalling this recommendation from “Resilient Coasts”:

“Wise investing will involve asset managers understanding the impacts of climate change on their investments and managing that risk, especially in real estate, infrastructure and other financial instruments. Responsible banks will need to understand the levels of exposure within their investment and lending portfolios by incorporating climate risks into their due diligence.”

Change is coming in a thousand different ways from code changes, insurance, finance, builders, housing agencies, governments, and most importantly, residents. We’ll start addressing the financial world in short order.

Economy: How do you measure stress?

With that multi-layered question, the AP unveils its March 2009 Economic Stress Index, essentially stagflation with a new methodology. The components are highlighted in the related video from University of Pennsylvania Professor Tony Smith, “How do you measure stress? You can talk about experiencing bankruptcy, home foreclosures, and unemployment.”

Operating like a wayback machine, the AP collates statistics from October 2007 and March 2009 measuring unemployment (via BLS), residential and commercial foreclosures (via RealtyTrac), and bankruptcies (via court filings) and presents them unweighted. Foreclosures are likely undercounted, because RealtyTrac does not compile information from counties with under 25,000 residents; without publicly available foreclosure information for these counties, the AP gives these counties zero-weight. These areas are typically central Texas, and non-urban areas of Kansas, Nebraska, North and South Dakota, Wyoming, New Mexico, and Kentucky.

The usual suspects (Las Vegas, Florida, Phoenix, Inland Empire, Rust Belt) are all here, but remember that the graphics show rate of change, not absolute numbers. Thus it was surprising to be reminded that Las Vegas/Clark County had a March 2009 foreclosure rate of 7.81% and an October 2007 foreclosure rate of 3.53%.

Highlights from the AP:

The current recession spread like an epidemic from isolation to ubiquity, marching from sequestered pockets of foreclosure to a nationwide explosion of misery as unemployment overtook foreclosures as the dominant misfortune of this recession.

Places with technology-based economies were recession-proof for a while but aren’t now.

Places with large numbers of government jobs — state capitals, university towns, communities with concentrations of hospitals — remain fairly recession-proof. These are places like Columbia, Mo.; Madison, Wis.; the Raleigh, N.C., area; and Athens, Ga.

State government is not hurting that much — at least, not yet.

The regions we look to for our traditional sources of energy, for our coal and oil — Wyoming, West Virginia and the like — have generally not been hit as hard.

While bankruptcy declarations are happening everywhere, they tend to be higher in the South because of such things as low wages, state laws that give power to creditors and a culture that’s more familiar with the bankruptcy option.

Among counties with 25,000-plus residents, no place has been hit harder than Elkhart County, Ind., and that 15 of the 20 American counties hit hardest by the recession in the past year are in six states — Indiana, Ohio, Michigan, North Carolina, South Carolina and Tennessee.

Although the note for editors says “much of the Great Plains region remains relatively unscathed by the nation’s financial meltdown,” I would recommend they overlay this map with one showing population loss to update their definition of ‘unscathed’.

Review and make appropriate plans. I strongly recommend looking closely at the data and using a comparative approach to benchmark your particular area against neighboring jurisdictions.

Insurers give you more to think about

Hurricane season in the US starts June 1, 2009 the forecast predicts slightly above average activity. Multi-family owners and operators from New England, Mid-South, Gulf Coast, and Southeast must be aware of their risks. I know this from professional experience after Ike damaged my Arkansas and Tennessee portfolios.

Keying off the calendar, Multifamily Executive highlighted a recent report from the Resilient Coast Initiative of the H. John Heinz Center. The report, “Resilient Coasts: A Blueprint for Action” makes these recommendations: