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.

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.

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:

Operations: Questioning assumptions (marketing, pricing, everything else)

I started on Twitter in November 2008 and each day find a few new topics for thought and discussion.

Sometimes the posts themselves are provocative, and sometimes they lead to a provocative post. [For those who don't click through, Mark Juleen of JC Hart announces that 1Q traffic was the same or higher year on year despite dropping all print ads; Lisa Trosien asks why we don't use more negative amenity pricing.]

Mark’s experience with non-print advertising echoes the experiences summarized earlier. I won’t rehash the post, merely to recommend that with costs under such scrutiny and a change in outreach methods underway, these types of experiences should be studied and tried.

Lisa’s post about negative amenity pricing prods us to think more thoroughly about product and pricing.

Our starting rent for a floor plan type should be a ‘basic apartment’. [The] base price should be set from our most standard types. Then, when we should look at our inventory and find the ones with detrimental items, such as horrible views, smaller spaces, undesirable locations, etc., we should subtract rent from those unit types.

An added benefit seems to me that it moves you away from a ‘bait and switch’ perception. If you base your pricing off the least attractive unit, you are almost compelling a prospect to spend more to get what they actually want and generating a certain amount of resentment for your trouble. Pricing in the middle (and entering at a higher base rate) allows the prospect to make the choice of purchasing as much apartment as they actually want. This also gives us a chance to listen more closely to the prospect and help match the prospect with the appropriate unit.

Although this is well-trod ground, pricing transparency links cost to benefits by creating a more quantitative ‘value proposition’. Per HBS’s Working Knowledge series:

Some companies view price bundling as a necessary tool to promote initial sales: If they eliminate price bundling, they could eliminate the sale. However, organizations could psychologically unbundle those offerings to promote consumption. One way of doing this would be to highlight the prices of individual items in the bundle after the payment has been made.

Using this unbundling as a guideline, you might want to create your own value propositions. Lower the price for distance from parking, older appliances, or lower ceilings. In this market, everything has a price (to owners and residents) and you might be surprised to learn what you don’t have to spend.

As an example from the archives, on one of my properties, the leasing agents complained about the difficulty of renting ‘basement apartments’ which were typically on the back of the building and darker than others because there were only windows on one facade. The basement apartments could more accurately be called ‘ground floor’ apartments, ideal for pet owners or shift workers who want a quieter unit. In addition to repositioning the units, we also reconfigured the landscaping, providing for more shade and using river rocks to create a constricted area for our four-legged residents. For those renters, no discount on these ‘undesirable units’ was required. Not only did we make more on those units by targeting a certain renter profile, we also improved the psychology of the leasing agents by highlighting the benefits of every floor plan. Please note that pet owners and shift workers are not a protected class for Fair Housing purposes.

[Additional info on pricing psychology from NYT and of course, Wikipedia.]

Operations: Why Women Matter (via Greater Greater Washington)

One of the reasons I became involved in real estate was the recognition that eventually, everything ties into real estate. Demographics, politics, economics, culture, (building) science, nearly everything can be brought back in a Grand Unified Theory to real estate. For liberal arts majors such as myself, this is immensely satisfying.

So I’m linking today to a February post at Greater Greater Washington, a blog that covers urban planning and development news in the DC Metro area. “ Sex and the City: why women and families matter ” is an urban planning-focused article that provides an example of the type of piece that should provoke additional discussion.

• How does your property encourage people to arrange their lives around your community and live where their life takes place?

• Can you name child care centers, religious congregations, grocery stores with the best pre-made meals, or other aides to a more convenient lifestyle?

• What can you do differently to make life more convenient?

• Can you identify and market your community in a way that reinforces this “convenience lifestyle”?

Look at what your residents need, look at what you know, and get to know more of what they need.

Operations: Can’t Someone Else Do It? (or, where am I?)

In the days before handheld and car based GPS, asset managers were either good map readers or took no detours between their office/airport and the property inspection.

Invariably there was a failure and after 10, 15, or 30 minutes we’d call the property. The phone call always started with “Where are you?” followed by “Where am I?” All to often the reply was a laugh before hearing, “I don’t live here” or “Let me ask someone”.

I had one of those experiences again last week, so I’m re-linking to a January post on this subject.

To take it a step further, I want to highlight some other ways that owners and managers are letting someone else do it, particularly in the area of marketing communities. J. C. Hart of Indianapolis recently ran a contest for residents called “Live the Life”. Run as a way for residents to share what and why they liked living at a Hart property, the resulting videos were posted on YouTube. The contest resulted in 44 entries and generated over 30,000 views.

Urbane Apartments in Royal Oak, Michigan recently created the “Urbane Lobby” as a social network for their residents. Together with the “Urbane Blog” residents contribute blog posts, highlight local businesses, and build the type of community that most advocates of ’social media’ can only dream of. Taking things even further, the owner of Urbane Apartments, Eric Brown, has found this model to be so successful that he eschews typical multi-family advertising such as printed guidebooks and uses Twitter and other social media avenues for part of his outreach. Leasing materials are provided on a flash drive, tours are self-directed, and units are improved, not rehabbed.

In my own portfolio, we’ve provided open space and materials for garden plots, worked with local religious centers for relationship counseling (which helped reduce delinquency from 8% to 1.5% in 4 months), arranged classes with the local Home Depot, and recruited local health agencies for on-site blood pressure monitoring, nutritional advice, and children’s dental care.

Even in straitened times, many towns and cities have a wealth of untapped resources. From saving money to creating a better environment for residents, it makes imminent sense to let someone else do it.

Rent Green: Where does your life take place?

Out on the Intertubes, there’s a wealth of information about living a sustainable lifestyle. Here at MFG, we’ll try to identify those that are particularly relevant to apartment living.

First and foremost, choose a place to live that is located conveniently for your lifestyle. This means looking at where you work, entertain, and play. So look at a map and start figuring out where your life takes place. If you live in or want to live in a less car-dependent area, be sure to check Walk Score, a great resource for helping to determine how much of your life can be lived without a car.

[Note to owners/managers: Your marketing and leasing efforts should emphasize these benefits. Get to know and love Yelp, Outside.in, and other sites that help define your community. If you don't know what is going on around your property, it's impossible to convey that to your residents. If you can't name three things going on in the next three days, how are you going to convince a prospective resident that you live in a convenient location, that you have an active resident base, or that you're any better than the commodity down the street?]

Once you’ve chosen an area to live in, it’s time to start narrowing down the product types. We’ll get to that in the next entry.

Rent Green: How to be a Green Renter (Series starter)

Note: For those who aren’t using it yet, Twitter is an exceptional tool for exchanging information on operations, marketing, building, and sustainability. I think this will become a series, but the following short post was inspired by @Sallan_Found who asked for information on how to be a green renter.

Many of the improvements that homeowners can make can be easily made by renters. While you obviously can’t do anything structural (e.g. no new windows or a green roof), you should also carefully read your lease for proscribed activities. This might preclude changes to shower heads, replacing washer-type faucets with cartridge faucets, indoor composting, excessive caulking, or replacing appliances, there are many other things you can do to improve your sustainability profile.

Easy things to do are living near transit, shortening shower times, washing clothes with cold water only, and replacing light bulbs (not fixtures!) with CFL bulbs.
If you live in a home, it might be possible to
1. install a programmable thermostat
2. replace aerators (reduce GPM from 2.0 to 0.5)
3. flush with less water (other upgrades here).

If you live in an apartment, the following are easily done:
1. Air dry laundry (does not require outdoor drying)
2. Keep curtains and shades open to heat your rooms.
3. Remove window-mount AC units during the winter.
4. Speak to your landlord about installing ceiling fans.
5. Running dishwashers when fully loaded.
6. Set your fridge to 38-40F (4C) and the freezer to 0-5 (-15C).
7. Don’t use plug-in air fresheners. Open windows, sprinkle (then vacuum) baking soda, burn a beeswax candle, use oils + water spritzer, or a potpourri sachet.

We’ll have more ideas in coming weeks and always welcome suggestions.

(HT: The Green Your… blog)

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?

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.

Support your local property manager

Working with an in-house management firm gives an asset manager a healthy appreciation for property managers and their daily obligations. Consider this partial list of weekly duties for a property manager with a stabilized property:

1. Schedule move ins
2. Ensure units are made ready
3. Schedule and supervise contractors
4. Weekly reports to supervisors and ownership
5. Supervise maintenance and leasing teams (typically 2-8 personnel) plus contractors (landscaping, security, utility)
6. Review and approve all invoices and leases
7. Manage resident satisfaction
8. Review and re-price units on a weekly basis
9. Recommend changes in leasing or marketing profile
10. Operate a multi-million dollar enterprise

In short, property managers supervise a small team, reprice and reposition their product on a regular basis, plan for capital expenditures, oversee sales to potential residents and outreach to neighboring businesses, provide entertainment and service to hundreds of residents, work with law enforcement, collect and dispense tens of thousands of dollars each week, and complete a thousand other jobs unknown to the owner.

Some management companies grant more or less responsibilities to managers than this list. Some want them to focus solely on leasing and resident satisfaction while others rely on the property manager as the mayor of a small town. Certainly that was the role I expected a manager at a 700-unit property in Georgia to fill. Managers respond to different challenges; some excel at lease-up properties but become so bored by stabilized properties that they let too much slide while others efficiently manage stabilized properties but overreact at the first sign of crime or occupancy slippage. Although most property managers have an AA or BA, they frequently start off as a leasing agent and work their way up, requiring an immense amount of training and on the job learning.

For all these tasks they are paid very little. Excluding benefits and bonuses, I think the highest paid manager in my portfolio makes about $59,000 for a 640-unit property and the lowest paid full-time manager is paid about $22,000 for a 170-unit property.

One of my midwest properties has turned into a tremendous time suck. It was poorly run for about 15 years by a local firm that gave it no time at all. We’ve uncovered astonishing failures of leasing, maintenance, and operations that would sound libelous if fully recounted. The arrogance and obliviousness of the prior management firm left us with 2 years of work to corret. This year it was my distinct ‘pleasure’ to introduce the manager to the joys of yoga. In that spirit, I recommend this article about the stresses of property mangement from The Cooperator: Stop, Drop and Breathe.

Title HT: Mr. James Garner