Posted by Jill Norcross on October 06, 2009 at 11:58:11:
HOUSING ASSOCIATION OF NONPROFIT DEVELOPERS
Case for Payment of Asset Management Fees from HUD Project Funds To Nonprofit Sponsors / Owners
October 2009
A. Executive Summary:
Over the years, many housing programs initiated by HUD have been modified or eliminated. Today, more and more of the remaining affordable housing originally developed through HUD programs is owned by non-profit organizations, as prior for-profit owners elected to sell their real estate assets.
HUD regulations for the various programs permits owners to use property funds only for direct management – but not for the parallel supervising of managers or asset management functions even though owners have to perform those functions as part of owning and operating the HUD funded properties. In many cases, for profit owners can cover these costs through year-end distributions from surplus cash, but nonprofits cannot. This essentially results in an unfunded mandate for nonprofits to provide asset management services without compensation.
We propose that HUD administratively change its policy to permit nonprofit sponsors / owners to include a modest asset management fee as an operating expense of all HUD-financed properties. Asset management fees are common in non-HUD financed transactions, such as Low Income Housing Tax Credit (LIHTC) projects. There is also recent precedent at HUD, where Public Housing Authorities (PHAs) are now allowed to charge $4.00/per unit per month (PUPM) for asset management fees.
HAND and the organizations signing on to this proposal respectfully request that HUD permit non-profit owners and sponsors to charge HUD-financed properties a reasonable n asset management fee. of $4.00 PUPM not to exceed $10,000 per annum. This would be an “above the line” operating expense.
B. What is Asset Management?
Asset Management: Preserving, maintaining and enhancing the long-term value of an asset through rigorous monitoring and assessment of its operating performance and physical condition, and appropriate intervention in response to those factors.
Asset Management within the context of multi-family housing real estate is a relatively new term. It evolved from the realization by owners of multi-family real estate that their properties required the same level of attention and scrutiny as any other financial asset. The term asset management had, until then, been used primarily to refer to the management of stocks, bonds, and other financial instruments held in an owner’s portfolio. In recent years it has become a recognized housing industry term for the function provided to owners by skilled, experienced housing professionals, who are able to provide a critical link between ownership goals and property management realities. Asset Managers in affordable housing (as well as in market-rate housing), provide the constant oversight and management necessary to assure all regulatory requirements are met, compliance reporting is carried out, the financial condition of each property is robust, and the physical condition of the property is well-maintained. They also provide key insights during the development or redevelopment of housing, act as workout specialists for troubled properties, and develop disposition strategies for assets that are not performing as required.
Typical functions performed by Asset Managers include:
• Review of financial underwriting for new projects, assuring proposed rents, debts, assumptions and expectations are achievable.
• Assess market conditions for new properties, providing objective analysis of the benefits, limitations and opportunities of a given market.
• Provide recommendations on physical features and amenities that will help to market a property successfully.
• Oversee marketing and pre-completion leasing efforts to assure absorption projections are met on schedule.
• Assure eligibility and compliance requirements are met during initial lease-up of new properties.
• Assure property management systems and procedures function appropriately, including eligibility qualification and certification, financial management and reporting, property maintenance and tenant services.
• Conduct physical inspections of properties to evaluate maintenance and capital needs.
• Conduct management reviews of property management companies to evaluate their performance and assure necessary changes are made.
• Review and approve contracts and major expenditures.
• Assure insurance requirements of lenders and owners are met.
• Provide compliance reports to lenders, investors and regulatory bodies.
• Provide detailed reports and analysis to owner on asset performance.
• Develop workout plans for properties that are not performing as required.
• Develop exit strategies for properties that no longer meet the owner’s goals.
C. Necessity of Asset Management Fees for the Nonprofit Owner / Sponsor and Why They Should be Paid from Project Funds
Nonprofit housing organizations continue to preserve the affordable housing stock in America while facing enormous challenges. These hurdles include Not In My Backyard (NIMBY), expiring housing subsidies, multi-layered financing, for-profit investors competing to acquire and convert property to market-rate use, and funding to oversee the long-term management of the property.
Despite the challenges, the nonprofit sponsor / owner has been successful in financing the development and preservation of affordable housing within their communities through construction or renovation. However, there is rarely a dedicated funding stream for long-term asset management services.
In most HUD-assisted properties designated as nonprofit-owned, HUD does not permit the owner to retain and use excess revenues, but instead requires these funds be deposited in a residual receipts account and may be withdrawn and used only with HUD’s permission. Historically, HUD only permits a withdrawal for purposes that benefit the residents and facilitate capital improvements.
Thus, the majority of nonprofit owners of Section 202/811 and Section 8 New Construction / Substantial Rehabilitation properties have no access to residual receipts or dividends to cover asset management expenses. True, there is a patchwork of exceptions. The Section 236 and Section 221(d)(3) BMIR programs have lifted divided restrictions for participating nonprofits. And distributions are available to the subset of owners whose properties have been Marked-up-to-Budget or who receive distribution authorization under LIHPRHA. But by and large, the majority of nonprofit owners need a source to cover the type of asset management costs needed to responsibly operate and manage the assisted housing portfolio.
D. Precedent for Payment of Asset Management Fees from Project Funds:
There are established precedents for payment of asset management fees in other affordable housing programs. Examples include:
• Public housing – PHAs receive $4.00 PUPM in asset management fees from HUD to support non-project functions and may apply up to an additional $6 per unit per month from excess cash flow (which is quite similar to the surplus cash calculation).
• LIHTC properties – Both investor and partnership owner (often managed by a non-profit general partner) earn fees for performing asset management functions and overseeing the property management firm.
1. Asset Management Fees in Public Housing
Over the past five years, HUD has overhauled its system for providing operating subsidy to support public housing. The changes were based on an extensive study conducted by the Harvard University Graduate School of Design, often called the Harvard Cost Study.
The Harvard Cost Study examined available data on FHA insured multifamily mortgages and applied regression analyses to develop a cost model for public housing. Key among the changes are two elements: tracking property costs and income at the property level, then a novelty for the public housing, and using the property income to fund operations of the central office – including asset management functions.
Simplified, HUD provides funding based on a formula “Property Expense Level” based on a property’s location, population, and physical characteristics. To this funding level, HUD layers “add ons” including $4.00 PUPM for Asset Management functions (which are conceptualized quite similarly to the description above). These funds can be used for any PHA costs that are not front line property functions, including asset management.
In addition, if a property meets the criteria to generate “cash flow” the PHA can use an additional $6.00 PUPM of property income as unrestricted (including for asset management).
Public housing is a useful analogy because PHAs, like non-profits, often depend on HUD funded projects for their revenue – if uses of HUD proceeds are limited, both groups are left with no unrestricted funds to support the staff needed to monitor and preserve the assets on a strategic and oversight level. And in fact, the Harvard Cost Study identified PHAs as most similar to non-profit owners of multifamily housing.
Citations:
• 24 CFR part 990,
• Changes in Financial Management and Reporting Requirements, attached to PIH Notice 2006-33, which amended the canceled Financial Management Handbook (the “Asset Management Guidance”). Chapter 8 on Mixed-Finance is probably most helpful.
• Notice http://www.hud.gov/offices/pih/publications/notices/07/pih2007-9.pdf
• Guidebook http://www.hud.gov/offices/pih/publications/notices/07/pih2007-9suppl.pdf
2. Asset Management Fees in Tax Credit Properties
There are often two fees charged with these projects:
• The syndicator, on behalf of the tax credit investor, performs basic asset management function such as an annual file review, property inspection, budget review, and compliance reports. The syndicator or investor is usually paid a basic annual “investor services” fee (typically payable from surplus cash flow) of $5,000 and up. State housing finance authorities also receive a small fee for annual monitoring.
• The general partner of the ownership entity earns a “partnership administration” fee of anywhere from $25,000 and up per year (also typically payable from surplus cash flow) to perform services similar to the syndicator. However, the general partner’s duties include more frequent financial performance review, property inspections, etc.