A Landlord’s Dilemma: Managing costs

Joe Gillach at Green by Design posts about the cost choices owners make with big capital purchases. In this case Joe ran through the competing interests of landlords and renters when contemplating the purchase of 240 washers and dryers.

This is a familiar problem and one of the reasons Multifamily Guide was started: a decided lack of clarity on cost analysis for the multifamily industry. When you are operating at the edges of financial stability because of debt service ratios <1.15 or with a non-profit owner, the incremental costs of your sustainable decisions make a substantial difference. To take Joe's scenario, you'll probably replace 6-7 washers and dryers during a year with a difference between the standard and Energy Star prices of $210 apiece. It doesn't sound like much, but $1470/year ($5.88/unit at his property) makes a difference.

Green By Design » A Landlord’s Dilemma: The Short View vs. The Long, Green View

TIRE: Resident non-amenities

In a prior life, I was a condo developer in Manhattan. We focused on properties with an architectural heritage (that deal fell through, btw) that offered more than a very nice amenity package to residents.

When I moved to DC, it was quite obvious that developers were a little behind the times in the floorplans, finishes, and amenity packages being offered. After working in non-condo related capacities for two of the more serious developers in the area, I can say their projects would be mid-grade in Manhattan at best. Even where developers tried to offer the world, the presentation and design just didn’t quite get there.

And yet.

No one in DC or NYC believes me when I try to describe my potential neighbors at the Club at Quincy. Located across from the Central Library and Quincy Park in Arlington, Virginia and within 2 blocks of 2 Metro stations this 12-story, 125 unit property is currently on hold with an unknown start date. Rife with design challenges and difficult negotiations with the longtime owners, the project has gone through several developers and a couple of rounds of ‘proffers’ to Arlington County. The most egregious was a 75-seat black box theater that the County requested before it would release permits. I live a block away and my needs run toward good retail, not an experimental theater.

But no one, absolutely no one, thought the existing owner would stay and request to have their business integrated into the ground floor. That wouldn’t normally be a problem except that the current landowner is the Arlington Funeral Home.

And they aren’t leaving.

As the Post sets it up:

On the second floor, they’ll have a fitness center, a private theater with tiered seating, a “newsroom” with current periodicals and a catering kitchen for social gatherings.
Just above the mezzanine level of the 12-story tower to be erected in the bustling Rosslyn-Ballston corridor, residents will be able to lounge on a landscaped deck, swim in a large pool, relax in an outdoor spa or admire a decorative fountain.
On the first floor, they can make arrangements to bury their loved ones.

Which explains this.

This Is Real Estate

Trammell Crow Residential settles ERC suit

Multifamily Executive has the latest update on the discussions between Trammell Crow Residential and the Equal Rights Center. MFG mentioned this in an earlier post.

The DC-based Equal Rights Center, which focuses on Fair Housing and ADA compliance, sued Trammell Crow Residential in June 2008. In a September 2008 article in MFE, prior recipients of ERC actions were criticized for quickly settling. “From an industry perspective, the Archstone folks didn’t raise any of the legal or factual issues or put up a fight. They entered into a settlement that many of the companies in the industry said they would never do.”

Trammell Crow Residential agreed to fund a 10-year, $1.5mm program with ERC to aid multifamily developers with compliance issues. Additionally, Trammell will rehab 4,500 units by improving accessibility.

(Via Multifamily Executive.)

Car sharing and affordable housing

Twoaday and I had a brief exchange about car sharing programs and their increasing popularity with developers.

Here in Northern Virginia although many things can be developed ‘by right’ (according to the existing code), there is usually some type of give and take with the governing jurisdiction. Euphemistically called ‘proffers’, these shakedowns became egregious during the recent boom. The amount of roadway, public area, artwork, or just incomprehensible nonsense requested of developers really got out of hand. I recall one mayor in Loudoun County commenting that a town of it’s stature really deserved a statement-setting fountain. No prizes for what ‘public feature’ was placed prominently in every subsequent rendering.

Nonetheless, car sharing seems to be one of the proffers that is popular with both governments and developers. Because the shared car must usually be in a visible location, developers do not always have to provide an expensive underground space. They can stripe a surface spot for a few hundred dollars instead of the $20-35,000 an underground space would cost (depending on site work and blasting requirements). Car sharing also provides a developer with a way to negotiate a lower traffic count and reduced roadwork since shared cars by definition reduce the number of vehicles owned by residents. It also provides a nice blurb for the glossy brochure. Governments like car sharing because it provides a car to those who might not need one regularly or might not even be able to afford one, all at no cost to themselves.

HUD today released two studies about saving or coordinating transport near housing. It doesn’t really address carsharing, but it gets to an important point for low and moderate income renters: how do you get to work?

PD&R Periodicals: ResearchWorks – Volume 5 Number 10

I’ve written before about Energy Efficient Mortgages. The folks I spoke with at HUD felt the product was not particularly successful for reasons such as lender acceptance, difficulty of estimating savings, and general disinterest.

Now comes HUD ResearchWorks to highlight a renewed push via the Housing and Economic Recovery Act of 2008. In addition to the usual ‘tasking of HUD’ laundry list, HERA 2008 increases the approved cost of the energy efficiency upgrades to 5% of the property value from the previous cap of $8000.

I am hoping to catch up with some more HUD folks either at NBM or at December’s EcoBuild and provide additional information.

Case Study: Green, Affordable Living in Orlando – Affordable Housing, Green Building – EcoHome Magazine

EcoHome Magazine linked to this article about a sustainable, affordable home in Orlando. Promoted as part of Green Works Orlando, the 2BR, 1,100 sf Craftsman-style home replaced a 1925 Craftsman-style home “that city leaders determined would be more costly to rehab than to rebuild. ”

Ahem.

Credit: City of Orlando via EcoHome Magazine

The sustainable elements included double-insulated windows, Hardieplank and spray-foam insulation among $15,000 of sustainable upgrades. The final sales price for the project was $120,000. Assuming the $15,000 estimate is accurate, the property would have to generate monthly utility savings of $94 in order to offset the higher mortgage payment with financing of 95% LTV for 30 years at a fixed rate of 6.875%. I’m dubious, but not nearly as dubious as Green Decoder, a TN-based homebuilder who comments “Payback would be about 15 years, twice the amount of time a typical homeowner will live in a residence.”

Why utility costs matter

The smart folks at GalleyEco Capital were kind enough to highlight the prior post about real estate tax appeals. Inspired by their use of the phrase “everyday financial strategies”, it occurred to me that I haven’t written much about the messages I deliver to my management companies each and every month (and twice during budgets).

If you look at the typical income statement or pro forma, revenues represent your optimistic forecasts, admin and marketing represent your ‘we can do it for that’ hopefulness, and payroll, insurance, taxes, and utilities become your ‘fixed costs’ that no one touches.

In many respects, payroll is fixed. While I’m a believer in the 1 FT position per 100 units rule of thumb, that’s not always feasible. Both LIHTC and market rate have their own reasons for falling below that ratio. So when savings are realized, it is usually because of a personnel change or a change in ownership philosophy. There is not usually a way to show year over year reductions in payroll cost.

Insurance can vary a little bit by changing the total coverage, the deductible, placing it in a pool, taking it out of a pool, or shopping it around. Additional savings are feasible in exchange for capital improvements (trip hazards, lighting upgrades, fencing, e.g.) but those are not ongoing savings.

Taxes were covered in an earlier post, but are certainly the most ‘fixed’ of the fixed costs. Furthermore, in the current environment, with budgets beyond repair and everyone clamoring for holding the line against service cutbacks, expecting a major reduction in taxes is not a sure thing.

Which brings me to utilities and why this site spends so much time on efficiency and sustainability. Efficient utility use is the one area where we can reduce material costs, improve the resident experience, cut down on routine maintenance, and achieve important community goals.

There are plenty of easy tasks that can have a measurable effect on At a property in Texas we installed solar shades on the western exposures of the clubhouse. During the summer it resulted in a 5F reduction in temperatures, reducing the use of our air conditioners and the house electric meter. At a 400-unit property with dark interior courtyards, the service team spent one afternoon a week replacing light bulbs. By converting to CFL we not only reduced the workload, we reduced consumption by 80% (2×75w bulbs replaced by 2×15w CFL). Most successfully, we completed a 330-unit plumbing upgrade in 6 weeks for $90,000. Initial results suggest that we reduced water consumption by 50%, hot water energy consumption by 60%, and monthly water bills by $9500. This allowed us to push through refinements to the RUBS.

The 2009 budgets have revealed scheduled utility increases of 8-30%. Squaring away the small, easy tasks can mitigate or reduce these increases, reduce the amount of work required by the service teams, and reduce the wear and tear on the asset.

Reducing utility costs are the easiest way to reduce your ‘fixed’ costs and highly recommended for projects during the long winter months.

Field guide to weatherstripping

Not long ago I could not have identified more than two types of weatherstripping if you placed me on aisle 16 of Home Depot and gave me an hour to study.

Fortunately, before my trip today, I was able to brush up with the DOE’s helpful guide to weatherstripping. This afternoon I replaced my door sweeps, installed some tubular rubber door stripping, and inspected the silicone around my windows. Even without an infra-red visualizer I’ve noticed a difference.

I also bought two programmable thermostats for installation next weekend. More tales from the home improvement world to come.

Whither LIHTC

Although the articles don’t leap out at you, Affordable Housing Finance is providing some nice summaries of this week’s action at AHF Live in Chicago.

One industry roundtable, Where Does the LIHTC Industry Go? identified some significant challenges to the LIHTC program and the business models of affordable developers, syndicators, and financiers. The hard truth was highlighted by Kansas City’s Lee Harris of Cohen-Esry, “We’ve got equity for many developments that is simply not available. Where equity is available, pricing is down 20 cents or more.”

So how did we get here? The shortest answer is that for the past several years, the early LIHTC (Low Income Housing Tax Credit) non-financial investors disappeared and the GSEs and financial firms came to dominate the $10b market. In addition to the monetary benefits of the tax credits, the commercial banks could meet CRA (Community Reinvestment Act) needs and ‘green’ their portfolios by throwing a few ducats at Enterprise’s Green Community Programs (a laudable goal) and at those developers who anticipated the direction of the larger market. So long as the Fed enforced CRA and profits required tax credits, the industry hummed.

Some of you may have read recently that’s no longer the case.

Losses on other operations will be carried forward to offset profits (if any) over the next two years. With the early Fall panic in the banking industry, the Fed basically waived CRA requirements for urgent acquisitions. That may be temporary, but the carry-forward losses for 2007-09 will keep the commercial banks out of the market until 2010-11 at the earliest.

My firm essentially stepped away from the syndication business back in 1Q 2008. We had been one of the largest syndicators and debt originators of affordable housing in the country, but between stress placed on warehouse lines (where we stuck projects before selling them to the fund investors), wildly changing construction costs, and the inability to finance marginal deals with tighter credit standards, we are done for a while. I think we’ll limp through 2009 doing agency debt deals, but the equity side is not very busy right now. I don’t think they’ll ramp up again until 2010-11 at the earliest.

So the lack of demand for our product (tax credits) means that there is no supply for developers. Builder magazine highlighted the pain in the SFH market, but I promise it extends to multi-family developers as well. Unfortunately, since LIHTC funds an outsize portion of the affordable housing in the US, this means that there will be very, very few deals completed over the next several years. The shadow market of failed condo projects, REO homes, and aging market rate properties may take up some of the slack, but we are facing several years when no new affordable product is created or rehabilitated.

Which gets us back to the initial question: Whither LIHTC?

I don’t know yet. We are facing several bad years and the collapse of stalwart investors means that the entire program may need to be rethought. I’ll leave that for another post.

For those interested in the history of LIHTC or the Green Community Program, Enterprise provides an excellent summary. The NYT also has a nice summary of the challenges faced by Jonathan Rose even in the oddball NYC market.

FIRE: Assessors and real estate taxes

Like most owners, I am sure that I pay way too much in real estate taxes. I know that I pay too much to consultants who write a few letters, make a few calls, and magically come back with a reduction and a healthy fee.

For those who think I’m overly cynical, I will mention that I spent my formative real estate years in Manhattan. Everyone knew, but didn’t say, that if you paid a certain consultant an obscene amount of money, he would make sure former coworkers in the assessor’s office adjusted the valuation of your asset to an outrageous but 50% less obscene number. Summary or Full History.

To cite another example, Indiana and its disastrous real estate assessment process has provided significant wealth to suppliers of heartburn medication. For those unaware, malfeasance was discovered in the assessment offices a few years ago. Multiple scandals and a budget meltdown later, every property in Indiana was reassessed, usually by a third party assessor. They did not come close to getting the job done. To cite one within my own portfolio, a 160-unit property in Indianapolis assessed at X in 2005, but valued at 2X (118% increase) in 2006 based on replacement cost. Income stagnated during that period so an income valuation or sales comparable methods would have revealed no increase in value. The third party assessor simply ran an estimated cost of replacement for the property and used that as the final value.

Anyway, into these newly straitened times comes NREI with a helpful checklist of how to make sure you’re not wrong-footed by an assessor. The title should indicate which way they come down on the issue:
“How Assessors Can Veer Off Course”. The takeaway line is well worth writing down: “In a declining market, taxpayers must challenge property tax assessment based on contract rents. Unless your assessment is based on market rents, a tax appeal should be the next step.”

Appraisals (and assessments) typically look at replacement cost, income valuation, and comparable sales. It is my general misfortune that my LIHTC properties frequently suffer from either the replacement cost valuation or some mis-interpretation of the other two methods for a ‘taxable value’. Because the assessors generally fail to account for maximum rents or Extended Use Agreements, they value properties by comparisons to conventional assets. Conventional assets can pass through tax increases to residents (or cut services) in ways that LIHTC properties cannot. This failure to understand that LIHTC rents are statutorily capped means that LIHTC properties are not comparable to market rate properties. I have had counties reply that because I chose to develop affordable housing, I should accept the tax assessment as delivered and be grateful. Usually this happens on the same day that some county board member bemoans the lack of housing for teachers and firefighters. I’m looking at you, Fairfax County, Virginia.

This is all a long way of saying that you should retain someone to appeal your tax assessments on a regular basis. Pay a regular retainer rather than a % of savings wherever possible. The larger issue must be addressed by affordable housing groups at the state and national level: it is not unreasonable to expect a proportionate and equitable real estate tax assessment when providing a public service such as affordable housing.

Know what you have

Buildings.com has a good entry in Mychele Lord’s multi-part series on sustainable issues in real estate, “It’s a Bigger Deal than You Think, Part 3: Operations”. One of the recommendations I found thought provoking was her admonition to plan before purchasing.

“Start thinking about waste disposal at acquisition. When negotiating purchasing contracts, address end-of-life recycling.”

This is useful not only for everyday items, but also for the waste-generating items like appliances, paints, and carpets. The tremendous number of carpets — we annually replace about 20% in my LIHTC portfolio — generate a stunning amount of waste. There are a couple of ways to recycle carpets, but so far, the network is very patchwork. You can learn more at CARE.

Confidence in Apartment Sales, Credit, Even Occupancies Declines, NMHC Reports

NMHC just posted their quarterly survey of apartment market conditions. Of the 70 respondents, 43 (61%) felt that conditions were looser (higher vacancy, lower rent growth) than three months ago. An additional 20 (29%) felt that conditions were unchanged. The number of respondents who felt conditions were worse (looser) jumped from 35% to 61% from the prior quarter and from 26% from the same period in 2007. Nearly 60% acknowledged that current credit conditions had a material impact on current and planned business activities.

Equity and debt availability (or its perception thereof) was at the lowest confidence in over 10 years. Unable to read this in table form, I threw together this quick graph for further analysis. Looking at the history of the survey (50 is neutral) sentiment for debt and market tightness moved inversely until October 2006 when everything fell of a cliff.

The survey measures investor sentiment so it imperfectly reflects debt and equity availability. The Q2 MBA survey of commercial and multifamily originations has more quantifiable data. In that survey, commercial and multifamily originations were down 63% over Q2 2007 and fell to their lowest level since Q1 2004.

Quarterly reports from Q3 2004 onward.

Echoing this falloff was an item I saw in MBA Newslink on October 30th providing this summary of an RBC report:

“Fannie Mae and Freddie Mac continue to finance 80 percent to 90 percent of multifamily transactions across different regions of the country, supplemented mostly by local and regional banks, RBC reported.”

I’ll guess that any non-conforming deals simply cannot be done at any reasonable LTV these days. I’m still looking or the RBC report but please send it along if you have a link.

HT: Multifamily Executive

Green Matrix

Ratcliff Architecture of Emeryville, CA and Alameda County (via Build Green Now/Stopwaste.org) jointly sponsor Green Matrix, a well-designed and researched website for sustainable decision making throughout the design and construction process.

After selecting an area of interest from the eponymous matrix, the site then serves up a summary of the concept with direct links to other resources. Many of the links can be found on stopwaste.org but others lead to IFMA (International Facilities Maintenance Association), USGBC, and other industrial resources.