Gross Potential Rent (GPR)

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All program contents and materials are the property of the National Apartment Association Education Institute, which strictly prohibits reproduction of program contents or materials in any form without the prior written consent. Except as expressly authorized in writing in advance, no video or audio recording of NAAEI programs or SAMPLEphotocopying of “Certified Apartment Manager” materials is permitted. Authorized recording of programs or duplication of materials may be done only by the instructor on site.

ACKNOWLEDGMENTS

SUBJECT MATTER EXPERTS

The NAA Education Institute wishes to thank the following apartment industry professionals for contributing their time and expertise to the rewrite of the Certified Apartment Manager Research, Analysis and Evaluation program:

Lead Subject Matter Expert

Susan E. Weston, CAM CAPS, NAAEI Faculty Licensed Texas Broker Professor, University of North Texas School of Business The Susan Weston Company 2655 Mount View Drive Dallas, TX 75234-6239 972.308.6092 Office 972.415.6299 Cell [email protected] www.susanweston.com

KEY CONTRIBUTORS

• David Jolley, CAMT • Howard L. Campbell, Ph.D. • Fisher & Phillips, LLP • Kimball, Tirey,SAMPLE and St. John, LLP • Sue Weston, CAM, CAPS

Financial Management Table of Contents

Chapter 1: Investments 1-1 Chapter Overview ...... 1-1 Background ...... 1-2 Factors in Investment ...... 1-3 Investment Performance Measurements ...... 1-5 Advantages and Disadvantages of Apartment Investments ...... 1-7 Apartment Ownership ...... 1-8 Mortgage Loans ...... 1-10 Chapter 2: Adding Value to the Investment 2-1 Chapter Overview ...... 2-1 Background ...... 2-2 Rental Income ...... 2-3 Factors that Affect Rental Rates ...... 2-5 Rental Rate Adjustments ...... 2-8 Managing Occupancy ...... 2-15 Expenses ...... 2-22 Chapter 3: Economic Analysis of a Property 3-1 Chapter Overview ...... 3-1 Background ...... 3-2 Financial Statements ...... 3-3 Concepts ...... 3-4 The General Ledger ...... 3-11 Chapter 4: Budgets 4-1 Chapter Overview ...... 4-1 Background ...... 4-2 Types of Budgets ...... 4-3 Budget Development & Management...... 4-5 Chapter 5: Property Valuation 5-1 Chapter Overview ...... 5-1 Background ...... 5-2 Ways to Determine Property Value ...... 5-3 Toolbox Toolbox-1 Overview ...... Toolbox-1 Annual Turnover Percentage ...... Toolbox-3 Annualizing a Number ...... Toolbox-3 Average Effective Rent ...... Toolbox-4 Average Renewal Increase ...... Toolbox-4 Average Square Feet/Unit ...... Toolbox-5 Capitalization/ValuationSAMPLE ...... Toolbox-5 Closing Percentage/Ratio ...... Toolbox-6

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Cost of Advertising Per Lease ...... Toolbox-6 Cost of Advertising Per Traffic ...... Toolbox-6 Effective Gross Income (Net Rental Income) ...... Toolbox-7 Economic Occupancy Percentage ...... Toolbox-7 Effective Rent ...... Toolbox-8 Gross Potential Rent (GPR) ...... Toolbox-8 Hourly Rate on Annual Basis ...... Toolbox-9 Leasing Exposure ...... Toolbox-10 Month-to-Month Leased Percentage ...... Toolbox-10 Net Operating Income (NOI)...... Toolbox-11 Operating Expenses Per Unit (Annual) ...... Toolbox-11 Operating Expense Ratio ...... Toolbox-11 Price Per Square Footage ...... Toolbox-12 Prorated Rent ...... Toolbox-12 Daily Rate ...... Toolbox-12 Prorated Move-In/Prorate Move-Out Rent...... Toolbox-12 Projected Traffic Required to Meet Leasing Goals ...... Toolbox-13 Renewal Percentage ...... Toolbox-13 Total Leased Percentage ...... Toolbox-13 Unit Type/Unit Mix Percentage ...... Toolbox-14 Vacancy Percentage ...... Toolbox-14 Variance Percentage ...... Toolbox-15 Weighted Average Rent – Leased and Market...... Toolbox-15 Calculating Weighted Average Leased Rent ...... Toolbox-16 Calculating Weighted Average Market Rent...... Toolbox-16 Market Comparison Survey Form ...... Toolbox-17 Weekly Activity Report Sample ...... Toolbox-18 Explanation of Weekly Activity Report ...... Toolbox-19 Box Score Report Sample #1 ...... Toolbox-20 Box Score Report Sample #2 ...... Toolbox-21 Leasing Activity Report Sample ...... Toolbox-24 All Units Summary Report Sample ...... Toolbox-25 Lease Expiration Report Sample ...... Toolbox-26 Rent Roll Sample #1 ...... Toolbox-27 Rent Roll Sample #2 ...... Toolbox-30 Delinquency Report Sample ...... Toolbox-33 Bank Deposit Summary Report Sample ...... Toolbox-34 Monthly Income Summary Report Sample ...... Toolbox-36 Monthly Transaction Summary Report Sample ...... Toolbox-37 Lost Rent Summary Report Sample ...... Toolbox-38 Concessions ReportSAMPLE Sample ...... Toolbox-39 Demographics Report Sample ...... Toolbox-41

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Cash Flow Statement (Completed) ...... Toolbox-42 Cash Flow Statement Template ...... Toolbox-43 Sample General Ledger Extract Report ...... Toolbox-44 Sample Chart of Accounts ...... Toolbox-45 Market Rent Schedule ...... Toolbox-47

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Chapter 1 Investments Chapter Overview

In this chapter The table below lists the topics in this chapter.

Topic See Page Background 1-2 Factors in Investment 1-3 Investment Performance Measurements 1-5 Advantages and Disadvantages of Apartment Investments 1-7 Apartment Ownership 1-8 Mortgage Loans 1-10

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Background

CAM As a Certified Apartment Manager (CAM), you are responsible for many responsibilities financial matters including the daily activities of collecting rents, making purchasing decisions, processing invoices and/or paying bills, making bank deposits, etc. On a higher level, you are also responsible for the property as a financial investment. Your knowledge, skills and decisions will directly contribute to the financial success of the property you manage. The value of the property is directly related to its financial performance.

Definition of An investment is the use of funds to earn a profit. investment

Types of There are many types of investments and most of us participate in personal investments investments every day. Personal investments can be as simple as having a savings account to more complex investments such as buying a home or a business.

Investment In a general sense, the objective of an investment is to earn money with objectives money. All investments, whether personal or business, must have specific and measurable objectives. To clarify objectives, investors might ask themselves questions such as:

• Why do I want to obtain some specific amount of money? • How much money will I need and when will I need it? • What economic conditions could alter my investment goals? • Am I willing and able to make the sacrifices that are necessary to ensure that my financial goals are met? • Do I want to be actively involved in managing my investment?

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Factors in Investment

Risk Safety in an investment means minimal risk or loss. An investor must decide how much risk they are willing to take and how much loss they can afford. Any investment, no matter how small, involves risk. Risk is the probability that foreseen or unforeseen events might occur.

Common risks that affect multifamily housing investments include:

• general economic and market conditions • job losses or job growth • political climate • supply/demand • interest rates • neighborhood conditions • population changes • household growth • the interaction of a group of real estate investments in a portfolio, and • the operations of the property itself

Risk is also associated with time. Long-term investments are generally considered riskier because they are subject to the impact of more risks over time. An investor will expect higher returns on a long-term investment because they face risk for a longer period of time and wants to compensate for giving up some safety.

Investments that have low risks, such as savings accounts or money market certificates, are typically associated with low returns. Conversely, when an investor chooses a riskier investment there is an expectation that the returns will be much higher. Low risk equals low return and high risk equals high return.

Income The income factor refers to the expected income from an investment. To some extent, income depends on the amount of risk involved. Conservative investments, such as savings accounts and some bonds and stocks generally provide a predictable amount of interest or dividends each year. Riskier investments are perceived to have the potential of offering high returns. Income from investments may not always be in the form of cash. In some instances an investment may act as a “shelter” against income taxes. SAMPLE Continued on next page

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Growth To an investor, growth potential means their investment will increase in potential value. Investors looking for growth potential will look for opportunities to invest in expanding rather than stable or mature companies, businesses and/or markets. It is important to understand that investing for growth means that present income is given up for potential growth or future income,, and that early returns may be low, as profit is reinvested in the business or property.

Liquidity Liquidity is defined as the ease with which an asset can be converted to cash. An investor must decide how long he or she is willing to have money tied up in an investment. This will influence the type of investment chosen. Stocks may be considered a fairly liquid investment because they are easily sold. Real estate, on the other hand, is much less liquid because it is more difficult to find a buyer for an apartment community than a stock, for example.

Management Certain types of investment are more labor intensive and require more challenges hands-on oversight than others. Apartment real estate is certainly one investment that can pose a variety of management challenges.

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Investment Performance Measurements

Overview Serious and successful investors will not only know their financial objectives and goals but will also know how to measure the performance of their investments. Investment performance is used to guide investment decisions about buying, selling, increasing or decreasing an equity (ownership) position, and is a way to make sure financial goals are met.

Note: Because real estate investments are not considered liquid assets, investors in real estate are generally not as concerned about having ready cash.

Rate of return One significant and frequently used measurement of performance is rate of on investment return on investment. The term “yield” is used interchangeably with the term (ROI) “return” in the industry.

Rate of return may be defined several ways, but for our purposes, it can be simply stated as the percentage of return on each dollar invested. It can be calculated as follows:

Cash Flow/Investment = ROI

Investment means the capital investment or down payment. This is not the same as equity, since equity would include the growth in the value of the asset and the amount of the principal paid off.

Example: If a property generates $10,000 in cash flow to an investor who made a $100,000 down payment on that property, his ROI is $10,000/$100,000 or 10%.

Cash-on-cash This method measures the cash received in each period against the original return cash invested. It can be further separated into before-tax and after-tax returns. The investment is always the same. What changes is the cash flow – more or less – and the amount of the principal paid off to date in monthly payments.

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Capitalization This method measures the net operating income (NOI) against the total cost rate of the investment. The cap rate is determined by dividing NOI by the purchase price. The cap rate is expressed as a decimal or percent.

Reference: See the Toolbox for the Capitalization/Valuation formulas.

Internal Rate This rate measures the outflow and inflow of capital over time. IRR is of Return primarily used when trying to decide which investment to make among (IRR) several choices. Typically, an investment is considered attractive if the IRR is greater than the cost of capital. Rates of return are always calculated on an annual basis using annualized numbers.

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Advantages and Disadvantages of Apartment Investments

Advantages of Some advantages of investing in apartment communities include the apartment following. investments • Receiving periodic cash payments from the cash flow generated by the property. • Potential for investment appreciation (increase in value of the property). • Reduction in income taxes. Ownership of residential income property allows the owner to use depreciation when reporting taxable income. Depreciation deductions reduce the amount of taxable income. • The ability to invest using leveraged funds (borrowed money). Unlike other investments that require 100% of the value in cash, a real estate investment may be leveraged, and in many cases, the cash investment required is only 10%-25% of the full value. Thus, an apartment building worth $100,000 may be owned for as little as a $10,000 cash investment.

Disadvantages Some disadvantages of investing in apartments include the following. of apartment investments • Real estate is one of the least liquid investments or assets. • Many investors will be required to actively participate in management of the property. There are exceptions however, such as corporations, TICs, and REITs. • Owning property involves some high risks such as property damage due to fire or flooding. There is also the risk of loss of income, rents and other revenues due to a property’s location and/or market conditions. While property insurance can help reduce losses from damage to the physical improvements and equipment, it is not possible to insure against losses due to changes in market conditions.

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Apartment Ownership

Forms of The table below describes the ways to own or invest in a property and the ownership advantages and disadvantages of each.

Type Description Advantage Disadvantage Direct One individual owns Formation and There is unlimited Ownership/ and manages the dissolution of business liability and limited Sole property. is easy and has a low ability to borrow. Proprietor cost. Partnership Two or more people Formation of business There is unlimited jointly own and manage is easy and has a low liability and potential property. cost. There is increased difficulty in withdrawing availability of capital investment from and credit and retention partnership of profits. Limited The limited partners Liability is limited to the There is a lack of Liability contribute capital but do amount invested by uniformity in state laws. Partnership not actively manage the each partner Some states have state business. insurance requirements. There is joint and several liability. Limited Most LLCs consist of An LLC, like a limited Taxable in some states. Liability two or more members, liability partnership, is There is a lack of Corporation but many states allow a recognized as a uniformity in states single-member LLC. separate legal entity governing LLCs. from its members. Ordinarily, only the LLC is responsible for the company’s debts. S A corporation that is Shareholders can There are a limited Corporations taxed as if it were a personally claim their number of shareholders partnership – the share of losses incurred providing less flexibility corporation’s income is by the corporation to in income allocation. taxed only as the offset personal income. personal income of the shareholders. This is an effective way to avoid double taxation while retaining the legal benefitsSAMPLE of incorporation.

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Apartment Ownership, Continued

Forms of ownership, (continued)

Type Description Advantage Disadvantage Real Estate Established by federal A REIT must, by law, Investors have no Investment law in 1960. The pay virtually all its control over when a Trusts purpose of a REIT is to taxable income to its company will sell its (REITs). allow small investors to shareholders every holdings or how it will pool their investments in year. manage them. REITs real estate while also are fairly liquid assets diversifying their risks, obtaining professional management and maintaining liquidity. Tenants in A TIC is a form of real This structure allows the Disadvantages include Common estate asset ownership deferment of capital the newness of the (TICs) in which there are two gains tax that would be investment structure or more persons of an owed on a property that and thus liquidity is undivided fractional is sold. unproven. interest in an asset, where ownership Also, provides a way for The TIC sponsor shares are not required someone to be able to controls the hiring of the to be equal and where enjoy ownership in an management agent and ownership interest can institutional type investors have no be inherited. At closing, property with a lesser control over how the each co-owner receives investment. investment will be an individual deed to managed. their undivided TICs have also become percentage interest in a vehicle for investors the entire property. looking for a new “1031” exchange.

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Mortgage Loans

Mortgage loan A mortgage, one of the most common sources of financing real estate definition investments, is a legal instrument that pledges a described property as collateral or security for the repayment of a loan under certain terms and conditions.

Types of The table below describes the types of mortgage loans. mortgage loans

Type Description fixed rate Traditionally, fixed-rate mortgage loans are made for long terms of 20 to 30 years and carry a fixed interest rate. Level payments, meaning the same dollar amount of payment, are made each period for the entire loan term. The payments are applied to the principal and interest owed until the loan is paid in full. This process is referred to as amortization. Commercial mortgage documents typically include an amortization table which details exactly how much interest and how much principal is paid with each mortgage payment. variable rate A variable rate mortgage or Adjustable Rate Mortgage (ARM) is a type of mortgage that has an interest rate that is adjusted periodically based on a financial index. The most common adjustment intervals range from one month to three, five and ten years. balloon A balloon mortgage behaves like a fixed-rate mortgage for a set number of years (usually five, seven or ten) and then must be paid off in full in a single “balloon” payment. Balloon loans are popular today and often used by those expecting to sell or refinance their property within a definite period of time. bullet loan Bullet loans are structured so that interest payments and the loan principal are paid off in one lump sum at a specified time. They may require monthly payments of interest. Bullet loans are frequently used in new construction and substantial rehabilitation situations SAMPLEwhere no income is received for a period of time from the property.

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Mortgage The table below defines mortgage terminology. terminology

Term Definition principal The amount of money borrowed, or the debt not counting interest, left on a loan. interest rate The percentage of an amount of money that is paid for the use of that money for a specified time. amortization The process of retiring a debt or recovering capital investment, typically through scheduled, systematic repayment of the principal. escrow account A trust account set up by the lender into which the borrower must make payments. Escrow accounts are generally used to ensure that property taxes and insurance bills are paid, thus reducing the lender’s risk. Not all mortgages include escrow accounts, but they are frequently used. replacement reserve Some loans require payments to a replacement payment reserve account. This is often the case with HUD insured or assisted properties and state agency financed properties. Lenders on market rate properties are beginning to require such accounts as a means for ensuring that money is available to maintain the property during the term of the loan.

Where Mortgage loans may be obtained from: mortgages are obtained • commercial banks • finance companies • savings and loan institutions • insurance companies • pension funds • mutual funds, and • the federal government through government sponsored enterprises or government chartered corporations, such as the o Federal Home Loan Mortgage Corporation (FHLMC) (Freddie Mac), Federal National Mortgage Association (FNMA) (Fannie Mae) SAMPLE Continued on next page

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Federally- The federal government insures mortgages through the Federal Housing insured Administration (FHA) and the U.S. Department of Agriculture’s Rural Housing mortgages Services programs.

Tax credit State and local government programs offer tax credit financing (Section 42) financing and tax-free bond financing.

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Chapter 2 Adding Value to the Investment Chapter Overview

In this chapter The table below lists the topics in this chapter.

Topic See Page Background 2-2 Rental Income 2-3 Factors that Affect Rental Rates 2-5 Rental Rate Adjustments 2-8 Managing Occupancy 2-15 Expenses 2-22

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Background

Cash flow Cash flow for an apartment investment is the money that remains after all sources of income are collected and all the property operating expenses including capital improvements and debt service are paid.

Reference: See the Toolbox for a sample Cash Flow Statement. Also, see Chapter 3 for information on calculating cash flow.

CAM As a Certified Apartment Manager (CAM), you are responsible for generating responsibility and collecting as much income as possible, controlling expenses and meeting the financial goals of the investment.

Note: As a CAM, your biggest opportunity to make a positive impact on the cash flow is through increasing income. Many expenses are fixed and, even if variable, are only variable to some degree. They occur no matter how high or how low the occupancy on your property might be. Income can grow significantly with aggressive rents and creative other ancillary income sources.

What is Value is determined by the owner and the owner’s objectives for the value? property. A property to be sold will have different criteria for value than one being rehabbed for retention. Generally, value is an increase to the bottom line – more Net Operating Income (NOI), increased revenue, and reduced expenses bring more NOI. Value can also be added as:

• reduced staff turnover and lower personnel costs • reduced resident turnover with better customer service • aggressive demand-driven rental rates set by unit type • resourceful new avenues for added income through resident services, and • better collections of resident charges SAMPLE

Rental Income

Factors that Since the primary source of property income is rent, it is important to affect rental understand the factors that impact rental income – rate, percent occupancy income and collection percent.

• Rate speaks to the market rents. Knowing how to set a competitive rental rate is key to meeting income goals. • Percent occupancy speaks to the physical occupancy. The percent of occupancy must be managed and kept at a level that produces sufficient income to run the business. • Collection percent speaks to the economic occupancy of the property. Rent must be collected from all residents.

Reference: See the Toolbox for the Economic Occupancy Percentage formula.

How these The three factors are interdependent. The correct rental rate will help attract factors work and retain residents, which provides income and affects occupancy. together However, if the rent collection percentage is low, income objectives will not be met. Good management of all three; rental rates, occupancy, and rent collection practices is needed to have income.

Net or Any programs that reduce the market rent amount must be taken into effective rent account when comparing rents. A “net rent” or “effective rent” amount must be identified before comparing your property and competing properties. If you compare only market rents you will not get an accurate understanding of rental rates among your competitors.

Reference: See the Toolbox for the Average Effective Rate and Effective Rent formulas.

Concession Consider the impact of concession or other incentive programs on market and incentive rents. At certain times in some markets it may be necessary to offer rent programs concessions on new leases or renewals. Typically, such practices are approved by supervisory personnel.

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Factors that Keep the following in mind when considering concessions. affect successful • When concessions are offered, they must be offered to all persons concessions seeking apartments that day. • Most companies reflect the market rent in the lease and use a concession addendum to define the terms of the concession. • Some companies require rent to be paid on time to receive the concession. • If the lease is terminated before expiration, some companies require repayments of concessions used to date. For example, one month free rent up front must be reimbursed if the lease term is not fulfilled. • Some companies prepare leases with the rent amount after the concession reflecting what the resident is required to pay. This does not allow tracking of market rent and concession practices as well as market rent leases and concession addendums.

Recordkeeping The community manager must ensure that records are kept that note all concession programs offered during that period. Records must be kept for a minimum of two years. This will provide background information should fair housing issues ever arise.

Impact of This is a most important concept to understand when evaluating rental concessions pricing strategies. Anytime concessions of any term, variation, or amount on effective are provided, the property will collect less rent than if the resident were rent paying current scheduled market rent. It is useful to understand how much less.

Example: If the scheduled market rent is $700 and you are giving one month free, your effective rent is less than $700. In this example, it is $642 (market rent $700 X 12months (lease term) = $8400 - $700 (free month) = $7700/12 = $642.

A larger concession (two months) or a concession spread the term of lease also means effective rent that is less than market rent by varying amounts depending on the size and term of the concession. The financial impact of concession policies should be understood and evaluated before their SAMPLEimplementation. The “effective” rent or the “net” rent is what matters.

Factors that Affect Rental Rates

CAM As a Certified Apartment Manager (CAM), you must be aware of the variety responsibility of events and trends in your area. You will need to know whether your area/region is expanding economically, resulting in higher incomes and greater demand for housing, or experiencing an economic downturn. If you know what is happening in your area (a closing of a major employer, increased growth and competition in neighboring areas, or perhaps a natural disaster) you will be better able to assess the long and short-term economic effects on your property.

Law of supply Supply and demand is an economic concept that generally states that if and demand demand is high and supply is low, higher prices for a commodity or service can be obtained.

The key for using the principles of supply and demand is identifying when imbalances in supply and demand occur. Very simply, if your local area has very few apartment homes to lease but has high demand, there is an imbalance.

To benefit from, or use the principles of supply and demand, you can raise the rental rate because people will be willing to pay a higher rent. Conversely, if there are too many apartment homes available to lease, but demand is low, there is an imbalance as well. We have excess supply. Rents may have to be set at competitive rates to attract residents.

Economic Local economic market conditions also affect rental rates. Areas that are conditions expanding attract businesses and people to fill jobs. The most important factors impacting economic conditions for apartment housing are:

• population growth • household formation, and • job creation

When the local economy grows, rental rates may be increased. Areas that are experiencing a downturn, such as a loss of a major employer, may have to reduce rental rates. When interest rates are lowered, many renters take advantage of lower interest rates to become homeowners which can have a directSAMPLE impact on rental rates.

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Housing New construction of apartment units that offer better amenities and new trends apartment homes with in-unit washers and dryers, a swimming pool, parking, etc., can also impact current rates. New construction of single-family homes will also increase competition, and older apartment communities may be forced to adjust their rental rates to maintain existing residents and attract new ones. Conversion of rental homes to condominiums will also change the balance between supply and demand for rental homes.

Competitors’ Consider the types or styles of apartments, rental rates, and amenities, such offerings as carports, garages, in-unit washers and dryers, health clubs, Jacuzzi tubs, swimming pools and spas, etc, that your competition is offering.

Estimate how much you think the various amenities add to the base rent of a unit. Is a fireplace or washer/dryers worth $10, $20, $50 or more in rent? Can any amenities be added to your site? For some amenities, you can charge premiums – especially if no one else has them. Other times, you may not be able to charge extra rent because your competitors also have features such as washers and dryers in the apartment.

Property Consider various features of your property that are appropriate for charging features premiums (an additional amount) on the rent. For example, residences facing a pond or woods rather than the highway can be leased at slightly higher rates. Perhaps you would charge more for residences on the second floor. Rental premiums such as views, fireplaces, and floor levels are typically part of the rental income.

HUD and HUD government- Rental rates for properties renting under HUD and other government- assisted assisted housing programs are subject to the regulations set by the federal housing and/or state government involved. Essentially, such programs are income programs restricted and rent limited; that is residents must be income eligible and, if they are, the rent charged to them will be limited to what is allowed by the governmental program financing or assisting the property.

Annually, HUD establishes “fair market rents” in areas around the country thatSAMPLE set rent levels for program participants. Program requirements are usually established within the mortgage and funding documents that are required for participation in government assisted housing.

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HUD and Government Assisted Housing government- Government assisted housing programs are designed to serve low and assisted moderate income groups based on income levels. Such housing providers housing tend to serve a mix of the income levels, as defined in the following table. programs, (continued) Income Level Definition low income below 80% of area median income very low income below 50% of area median income extremely low income income below 30% of area median income

Affordable housing tax credit programs (Section 42) are administered at the state government level and are designed to serve a moderate income level renter. In return for tax credits, the developer agrees to build and rent units for moderate income renters. Income eligibility and rent limit restrictions also apply to this program.

References: • See the topic “Rental Rate Adjustments” later in this chapter for information on changing rental rates in HUD and government-assisted housing. • See also the Fair Housing Participant Guide for additional information.

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Rental Rate Adjustments

Factors to It is important to remember that price is not the only factor that dictates consider occupancy. Lowering the rent will not always gain occupancy nor will raising before the rent necessarily lose occupancy. There are many more factors to analyze lowering the before reverting to lowering the rent. Rent reductions should only be an rent action of the last resort and only after a sound analysis of the current conditions in the market and at the community evaluating people, product, promotion, and price.

The rental Changing the rental rates is like a balancing act or art form. Sometimes it is rate and wise to remember that the goal is not 100% occupancy, but rather to vacancy maximize income. Physical occupancy simply means the apartment is balance occupied.

If you have priced the unit too low, you are leaving money on the table while the unit is occupied. If you price the unit too high, you may incur additional vacancies. Similarly, as you increase market rents and pass increases on to renewing residents, care must be taken.

Rental rates When deciding how much to change rents, there are some calculations you and the should use that will give you some insight into the big picture and the effects bottom line on the bottom line or potential net income of your property.

Assume the market value of an apartment home is $800 and you raise the rent 10% to $880. If the unit remains vacant for 15 days because it is overpriced, you’ve lost $400 (1/2 of the $800 you could have charged.) How many months would it take at the higher rate to make up the loss from the 15-day vacancy?

The answer: $400/$80 = 5 months.

If you are considering lowering rental rates, you need to know how the new rent schedule will impact potential income and prepare for its effects. Alternatively, a vacant apartment produces no income and costs money when it remains vacant (e.g. utilities).

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Rental rates If market value is $800 and you price a unit at 10% below market value and the ($720), it may not be vacant very long. But, you would lose $80 a month at bottom line, the lower rate, and for a twelve-month lease, you could lose $960. (continued) Another approach would be to not lower the rental rate. If you leased the apartment home in 30 days, income lost would be one month’s rent of $800 or a gain of $160 annually than if you had used the $720 rental rate outlined above.

Factors to Before adjusting the rent, it is a must to analyze the traditional 4 Ps: consider before • people adjusting the • product rent • promotion, and • price

Factor Questions to ask People • Is the staff well trained with the right skills? • Are the right people in every position? • Are we cutting rents to compensate for poor performers? • Is staff appearance professional? • Are the best people working high traffic times (the weekend) and are they asking for the sale? • Do they exude energy and enthusiasm? • Is excellence demanded from my employees or are they allowed to just get by? • Is the property being managed effectively and efficiently? • Do my residents receive prompt service? • Is the asset being managed with the owner’s investment goals in mind? • Are vendors providing what is required in their service contracts?

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Factors to consider before adjusting the rent, (continued)

Factor Questions to ask Product • Does the property (product) have outstanding curb appeal? • Does it look and feel well maintained or is there deferred maintenance apparent? • Is preventive maintenance performed in a timely manner? • How do the amenities, the models, and the leasing office “show”? • Is the tour route clean and inviting? • When was the model last refreshed and preventive maintenance work done? • Is the model route walked every day before business opens? • What does the parking area look like? • Is signage fresh? • Are there abandoned or disabled vehicles? • Do current residents get the service they expect?

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Rental Rate Adjustments, Continued

Factors to consider before adjusting the rent, (continued)

Factor Questions to ask Promotion • Is the property using the best, most cost effective marketing sources with advertising that is creative and eye-catching? • Are the right prospective clients being reached? • What are the main traffic sources and are they providing the quantity and quality of potential residents? • Are you measuring the cost per traffic and the cost per lease of your advertising sources? • Are you responsive in a timely manner to Internet inquires? • Is “outreach” being done a regular basis? Price • Are your rents competitive in the marketplace? • What is your availability in total and among various floor plans? • Do we have correct pricing based on total availability and the types of floor plans available? • Is there sound lease renewal pricing? • Is pricing based on incomplete or inadequate market knowledge? • Are we quick to lower rents and slow to take advantage of improvements in the marketplace? • Do rents simply stimulate traffic instead of getting in front of the right potential residents?

How much to Before setting the new rates, consider the current inflation rate. You should increase? raise the rates to the highest amount the market will bear without jeopardizing occupancy.

Reference: See the topic “Factors that Affect Rental Rates” in this chapter for additional information. See the Toolbox for the Average Renewal Increase formula.

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Perform a Before changing a rent schedule, you will need to conduct a market survey of market competing properties. The Market Comparison Survey Form is a good tool analysis first for educating yourself about your competition. It allows you to look at the all the competition at one time.

Reference: See the Toolbox for a sample Market Comparison Survey Form. See the Marketing Participant Guide and the Community Analysis Participant Guide for additional guidance.

Automated Automated revenue management is new to the housing industry. These revenue systems rely on data and market forecasting tools to systematically produce management pricing models for apartment communities. The systems use data-driven systems pricing to derive the best price for individual apartment units based on current and forecasted market conditions. In the past, the site manager often set prices based on neighborhood competitors combined with traffic analysis and notices to vacate and to identify demand without the benefit of automated systems.

When to Rent should be increased as the market allows. Regular intervals are not increase the always possible. Your experience and historical information from reports will rent indicate the appropriate time. Typically, spring is the season of highest traffic. This may vary from market to market, or within markets (e.g. student apartments). Also, consider how much time has passed since the last increase.

Note: Where possible, it is better to increase rents so that any resulting move-outs occur at the beginning of the peak-leasing season so that there is ample traffic to fill vacancies.

Consider increasing rent:

• on any floor plan that remains 95 percent or more occupied or that are full even when the community’s turnover ratio averages below 55 percent • when rents fall below levels indicated by a comparative rent analysis • anytime a community is full, and SAMPLE• upon owner request

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When to Note: Some communities have a dual increase policy. The renewal increase the increases are one rate and market increase rates are some percentage rent, higher than the renewal rate. When the renewal collected average is close to (continued) the market average then it’s time to increase both rates.

Consider Methods for increasing rent current Companies have widely varying policies on passing on market rate increases residents to current residents. The market influences much of the policies at the time of the increase. Whatever the decision, do not fail to consider current residents and their continued residency as you consider the increase.

Rent increases on existing residents may be accomplished in the following ways.

• Increase the rent as leases expire. • Increase the rent selectively on expired leases in addition to new expirations each month by determining a quantifiable, nondiscriminatory standard such as years of residence or number of previous renewals. • Increase the rent across the board for all residents, if the lease, laws and conditions permit. This is the least common method.

Recommended renewal rates Some may recommend that rental rates for existing residents (renewal rates) be set slightly below the new market rates. Psychologically, this discount is an advantage for existing residents and may make the increase easier to accept. Check with your supervisor for direction in this regard.

If your lease requires 30 days notice of rent increase, it is recommended that notification of increase be sent to residents 60 days prior to the effective rent increase date. This will give them time to look around and decide not to move, or give you more time to prepare for a move-out. If only 30 days notice is given, residents may feel forced to make an immediate decision, give notice and subsequently move.

How many Market rents should be increased on each unit type, unless you have a units to problem or difficult-to-lease unit. If vacancies are substantial in this unit type, increase youSAMPLE may want to consider a very small increase or no increase.

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HUD and Changes in rental rates may require certain forms and documentation be government- submitted and approved before rents can be changed. assisted housing References: programs • See the topic “Factors that Affect Rental Rates” earlier in this chapter for information on changing rates in HUD and government-assisted housing. • See also the Fair Housing Participant Guide for additional information.

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Managing Occupancy

Occupancy Many companies require various occupancy reports at regular intervals. reports Reports may be gathered daily or weekly and are used to monitor and anticipate occupancy at your property. A typical occupancy report will include the current leases, number of new leases, move-ins and move-outs and vacancies. Many property management software programs create these reports automatically based on the daily input of data by the site office staff. For example, if a notice to vacate is received at the site, it is posted on the computer and is added to the list of available units to lease and deducted from the leased percentage of units on site.

Occupancy reporting is typically accompanied by traffic and sales reporting as well. Daily, weekly, monthly, year to date (YTD), and annual data is available on most software programs. It allows measurement of leasing performance such as closing ratios for individual leasing professionals and the property as a whole. Gross sales and net sales (sales minus cancels and rejects) are also part of these reports. Occupancy is not possible without leasing and move-ins.

Reference: See the Toolbox for the following: • Sample Weekly Activity Report • Explanation of Weekly Activity Report • Box Score Report #1 • Box Score Report #2 • Leasing Activity Report • All Units Summary Report • Lease Expiration Report • Closing Percentage Ratio formula • Leasing Exposure formula, and • Month-to-Month Leased Percentage formula.

Rent roll A rent roll provides a comprehensive record of occupancy and collection activity. It is important to maintain an accurate rent roll as it is a source document for other reports.

A rent roll may be produced at any given time to reflect the collections and occupancy at that moment in time. The rent roll can be used to compare rent potential with money lost from vacancy, concessions and collection losses. If youSAMPLE are not meeting income targets, your owner will not achieve the goal set for return on investment. Such results will likely impact your personal performance evaluation as well.

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Rent roll, Rent rolls come in a variety of formats from the manual rent roll completed (continued) once a month to software programs that allow real time rent rolls to be printed within minutes.

What should Rent rolls should include: be included on a rent roll • unit number • unit type • unit description • resident name(s) • status of resident • square footage in the unit • market rent rate • actual rent rate • move-in date • other recurring monthly charges • lease term • lease expiration date • notice (if applicable) • intended move-out date • amount of deposit(s) • any balance due • date of last rent increase, and • amount of last rent increase

Reference: See the Toolbox for samples of Rent Rolls.

Collection Evaluation summary The property’s collection practices may be evaluated by interpreting several analysis reports available on the property level. These include the rent roll, delinquency reports, and bank deposit summaries.

Companies may gather this information daily or weekly, depending upon their cash management system. If site information is tied directly to the company’s computer system, real time collection analysis can occur. Whether the amounts are real time or not, they are used to reflect income versusSAMPLE budget and, sometimes income as compared to the previous month and/or the previous year to date (YTD).

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Collection What you can track summary The beginning balance indicates the total amount of rent billed at the analysis, property for all residents at the beginning of the period. Throughout the (continued) month as rent is collected, delinquencies reviewed, and bank deposits are made, you can track:

• this month’s collections compared to last month’s (are they increasing or decreasing?) • this month’s collections compared to what was billed (how are you doing on collecting the rent?), and • this month’s collections compared to this month’s budget (will you achieve the income projected? Is there a “negative” or “positive” variance?).

Each company has specific bookkeeping operation requirements, whether the records are kept manually or through a computer program using a software application. Generally, every system allows analysis of collection efforts.

Delinquency The delinquency report lists residents who are in arrears and the amount report each resident owes. The report may also require notation on the action taken to collect outstanding rents. It is common practice to prepare a delinquency report on several occasions throughout the month to coincide with specific late dates and statutory or company policies regarding eviction filing dates.

Generally the delinquency report is used as a tool to document who owes rent and other fees and when and how they have been contacted and what the results of those contacts have been. Companies will vary their approach here because of either computer programs or manual posting of delinquent accounts. Most delinquency reporting provides an aging of rent receivables to help focus collection procedures. Generally, delinquency status updates are given to the property supervisor for monitoring.

Occupancy As with any business, forecasting future operations is an important trend management skill. In the apartment management business, forecasting occupancy is a critical part of managing financial performance. For example, whenSAMPLE asked, a community manager might say their property is “95% occupied and trending at 90%. The physical occupancy is 95% and the leased occupancy is 90%.”

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Occupancy The future percentage of leased units indicates the occupancy trend and acts trend, as a guide for management decisions concerning marketing strategies and (continued) potential expenses. Most automated programs report “intent to vacate notices” at the time given and thus reflect potential future occupancy. The following equation is used to calculate the potential occupancy rate for an upcoming period.

Percent Leased = (Current Units Occupied + Vacant and Leased – Notice to Vacate and Not Preleased+ Notice to Vacate and Preleased) / Total Number of Units

Example: A community of 270 units has 245 units occupied, 5 units are vacant, but leased and 4 units with vacate notices in the next 30 days and not preleased. The leased percentage is (245 +5 - 4) = 246/270 = .911 or 91.1%

In addition to knowing the percent of occupancy, it is important to know what types of units are vacant. The calculation is also applicable for analyzing leasing trends for specific unit types. Remember, you are watching for trends.

Lease Another way to manage occupancy is to control lease expiration dates so expiration that all or most of the leases do not expire at the same time. This means you management will have to have some flexibility in creating lease terms. Not every lease must be six or twelve months. You should consider things like seasonal differences and location. For example, for a property located in Michigan, a lease that ends in December is far less desirable than a lease that ends in May.

Many companies are aggressively managing lease renewals by using:

• Staggered monthly expiration dates. Generally expirations are aligned with traffic counts i.e., allow more leases to expire in months with typically higher traffic (in the summer months for example) so that potentially vacating units can be reoccupied more quickly. A secondary benefit of such strategy is the resident is allowed more flexibility in lease terms. There may be a choice of months that are better for your property in terms of more traffic. SAMPLE Continued on next page

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Lease • Staggered expiration dates. Also flexible is the day of the month on expiration which the lease expires. By allowing the lease to expire on various days management, throughout the month, turnover activity isn’t restricted and jammed into (continued) the first and last days of the month. Similarly, lease termination dates early in the week allow the maintenance staff to spread out their make- ready duties more evenly. Some companies have leases begin on Mondays, for example, to avoid administrative demands on weekends. This procedure allows greater leasing focus on the peak traffic days of Saturday and Sunday. • Variable pricing. Rents may be adjusted based on the lease term selected. For example, a resident insists on a six-month lease when you are attempting to move the expiration date to an eight-month term when you would have more traffic to cover the potential move-out. If the resident will not change their mind, you could offer them an eight-month renewal at one rental rate and the six-month renewal at a higher rate. Obviously this practice works much better in firmer markets than soft. It is very similar to short term lease provisions where a higher premium is paid for the flexibility of a shorter lease.

Note: Carefully follow state laws and any applicable regulatory requirements regarding lease terms. Some states legislate minimum and maximum allowable lease terms and some government assisted properties are not allowed to offer less than a 12 month lease.

Turnover ratio How it is determined Turnover ratio is the total number of move-outs for a given period divided by the total apartment units.

Example: A 246-unit property with nine (9) move outs in December has a turnover rate of 4% in December.

9/246 = .0366 or 4%

If this property had a 4% turnover each month the total would be 48% in a year.

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Turnover Turnover is generally measured as an annual percentage. Using one month ratio, to annualize your turnover may skew the number. Your property could have (continued) experienced an especially low or high number of move-outs in a given month that would not accurately reflect the whole year’s move-outs. Historical data including same month in prior year(s) or annual turnover for 3-5 year periods can also be useful for budgeting and occupancy management.

Example: Consider a 260-unit property that has move-outs through the year as shown in the following table.

Month Move outs January 5 February 2 March 6 April 9 May 15 June 15 July 14 August 17 September 16 October 6 November 9 December 7

A total of 121 units moved out or a turnover ratio of 47%. Notice the range of move-outs from 2 to 17 in any one month.

Reference: See the Toolbox for the Annual Turnover Percentage formula.

What it is used for The turnover ratio is frequently used to assess occupancy and potential operating expenses. When a community’s turnover ratio is in excess of the average for the industry, it is important to determine the reason(s). High turnover rates are costly, and as a CAM, you are accountable for knowing why your turnover rate may exceed the average for your market and what steps you can take to reduce the ratio.

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Turnover Per the 2013 Survey of Operating Income and Expenses in Rental Apartment ratio, Properties published by NAA using 2012 reported data, the national average (continued) for turnover in individually metered, garden, market rate apartments was 54%. Turnover ratios vary by region of the country and also differ depending on building type, for example, garden style apartments versus high rise. Turnover rates will also be impacted by various economic factors.

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Expenses

CAM In addition to maximizing income, you will also be responsible for controlling responsibility costs on your property. Several types of expenses are incurred when managing an apartment community. In addition to day-to-day expenditures, you will also have to manage the costs associated with preventive maintenance programs and identify, plan, and implement capital improvement programs.

As a Certified Apartment Manager (CAM), you are responsible for the expenses incurred in operating the business. The budget is a guideline for anticipated expenses and you should be very familiar with it. Some expenses will be fixed; variable expenses should be carefully managed.

Fixed Fixed expenses include items that do not vary with the occupancy level of the expenses property. Fixed expenses include the following.

• Property taxes are usually based on the assessed value of a property and may include other charges such as the local tax rate (millage rate) and fees for services such as storm water control and solid waste disposal. Tax bills should be carefully reviewed so that all charges are understood. This function is often done at the corporate level and is not typically a community manager responsibility. Many areas reassess properties on a scheduled basis or when the property is sold, which may result in a change to the property taxes. Real estate and personal property are not taxed in the same way as income. • Insurance payments are made for a variety of coverages. Types of insurance include liability, casualty, automobile and workers’ compensation. The loss history of the property will affect the premiums charged. Reference: See the Risk Management Participant Guide for additional information. • Depreciation: Depreciation is not an expense in the sense that there is a cash outlay. It is a deduction from income that is allowed for tax purposes to cover the costs of normal wear and tear on buildings, equipment, furniture and fixtures. Land is not subject to depreciation.

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Variable Variable expenses are controllable and vary as conditions change. Many expenses variable expenses are associated with occupancy. Variable expense examples include:

• utilities • maintenance contracts • landscaping • turnover costs • marketing (advertising and promotion) • management fees • recurring repairs and maintenance • administrative costs, and • payroll and benefits.

Variable expenses are often computed on a per square foot basis, per unit basis and/or as a percentage of total expenses. Some companies refer to variable expenses as “controllable” expenses (within the ability of the community to control) as contrasted with “non-controllable” expenses such as property taxes and insurance.

Reference: See the Toolbox for the Cost of Advertising Per Lease formula and Cost of Advertising Per Traffic formula.

Capital Capital Expenses (CE) refer to items like appliances, HVAC equipment, and Expenses costs for large improvements such as replacing roofs or adding a swimming (CE) pool. Capital expenses are treated differently than fixed or variable expenses on income statements.

Capital expenses are for component items that have a “useful economic life.” While the definitions for many of these items are covered by accepted accounting rules and IRS regulations, different companies use different depreciation schedules and capitalize different items. The entire cost of a component is not deducted from income in one year. Instead, the cost is depreciated for the term of its life. Companies will use different depreciation schedules based on the age of a property or when it was acquired. Therefore, capital expenses are not included when calculating NOI. However, some companies may measure NOI after capital expenses to determineSAMPLE income available for debt service.

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Capital Example: New appliances were purchased for $10,000. If appliances have a Expenses life expectancy of 10 years, $1,000 would be depreciated each year for 10 (CE), years. A tax advisor will have information about how long common capital (continued) expenses can be depreciated.

On some operating statements, capital expenditures are noted as “extraordinary expenses” or “non-recurring expenses”, generally denoting large items of cost that do not normally reflect daily operating expenses – for example, carpets and appliances. They are not formally depreciated, but simply relocated and combined so true daily operating expenses can be more easily identified.

Replacement Other expenses include money that is set aside for anticipated future reserve expenses, such as repaving parking lots or re-roofing buildings. This account expenditure is referred to as replacement reserves. This account is a like a special savings account into which money is deposited on a monthly, quarterly or annual basis so that future funds are available for large capital projects. Some lenders may require that a replacement reserve account be maintained, and may require certain minimum payments. This type of account is more common with HUD assisted properties.

Debt Service Debt Service (the loan or mortgage payment) is another expense. Debt (DS) Service is a separate expense that is not considered an operating expense and is not included when calculating net operating income (NOI).

Reference: See the subtopic “Debt Service (DS)” in the topic “Concepts” in Chapter 3 for additional information.

Cost-benefit Before spending any money, it is wise to make a specific analysis of the analysis potential costs and the benefits to be derived from those costs. This process is called cost-benefit analysis. The most important thing to remember about a cost-benefit analysis is to look at both the potential expense and the potential income for every alternative.

Example: You are thinking about increasing the print advertising at your community.SAMPLE You have compared options such as the newspaper, flyers, community newsletters, etc. for rates, frequency, and distribution to get the best exposure.

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Cost-benefit The most difficult part of the analysis is estimating the potential income to be analysis, generated from increased advertising. In this case, we would have to track (continued) the advertising expense and compare it to the increases in rental income. For example, if monthly advertising costs were $2,000 and monthly rental income increased by $2,500, the advertising campaign would be considered a success.

Cost-benefit analysis can also be used in analyzing whether to use in-house staff or contractors on particular large or special projects. Another comparison may be for the cost of training versus the result in a more qualified and motivated employee. Often, properties will compare the cost of in house labor doing unit turns (painting, carpet shampoo, and cleaning) compared to hiring outside contractors.

Cost-benefit analysis does not always need to be a financial or cost comparison. In truth, it could be cost versus time, more revenue, better people, etc.

Reference: See the Toolbox for the Cost of Advertising Per Lease formula and the Cost of Advertising Per Traffic formula.

Budget A budget control log is a tool designed to help a manager operate within the control log projected budget. It contains information about the status of each account on a regular basis for each accounting period, usually by month. Expenditures for each account should be recorded in compliance with the company’s accounting practices either when it is incurred or when it is paid. This will determine whether an expense is posted when it is incurred or when it is to be paid. When used properly, the manager doesn’t have to guess about what monies are available to spend for each account.

Most companies use the budget control log to help avoid “financial statement shock” at the end of the month, when unexpected expenses “appear.” The log helps eliminate those surprises by anticipating expenses. Generally, community managers post their known monthly expenses (landscaping, pest control, etc.) and then continue through the month noting expenses as they occur.

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Budget A budget control log should include the account name, account number and control log, annual budgeted amount, perhaps depicted in monthly amounts. Each (continued) month purchase orders and payments are entered in the appropriate columns and a balance is created. Generally invoices for PO’s issued are marked off on the budget sheet as they are received. Again, the property manager must follow the company’s rules for posting the expense – when incurred or when paid?

Example: An order for miscellaneous maintenance parts for $250 may be placed in late April. Should it be recorded in the April budget sheet when ordered or the May budget sheet when it will be invoiced and paid?

It is important to note that the budget control log will seldom match the financial statement on a month-by-month basis. This is not the intent of the log. Rather, it is a record or tool to track expenses as they are occurring and compare them immediately to the budgeted amounts.

Invoices All invoices should be verified for quantities ordered, prices, receipt of all items and correct billing. The packing slip and purchase order number should be verified before approving payment. When being billed for services, you need to confirm that the service was actually rendered.

If an invoice has a billing error, if the quantities shipped do not match the quantities ordered or if damaged goods were received, contact the vendor in writing and by phone. Describe the discrepancy in detail and ask for a credit to your account or credit memo. Write a file memo that includes all the details and adjustments agreed to by the vendor. Send a copy of this memo to the vendor and your accounting department.

Purchase Some vendors offer discounts from 2 to 5% to customers who pay promptly discounts for goods or services purchased. Frequently, the discount terms are written on the invoice. A well-managed community will want to pay all invoices within the discount period to maximize its funds.

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Check After approving an invoice for payment, many companies must then request/ complete a check request pay voucher. This is the method by which a check payment is generated and the expense is recorded on the chart of accounts and thus voucher appears in the reporting period on the financial statement. A voucher is basically a transmittal form into the company’s financial records. The manager or corporate accounting office often completes this voucher. This procedure can be done manually or electronically if a company is using a software application that permits invoice processing on line.

A check request should include the requestor’s name, payee, date due, invoice amount, vendor number, vendor’s invoice number, account number, description of goods or service and authorized signature. The check request is either sent by mail or transmitted electronically to the accounts payable department where the check is written, signed and mailed.

In addition to the chart of accounts and vendor list, a file for each vendor company should be maintained. The file should contain copies of invoices, purchase orders, check request and all accompanying paperwork. This file will provide a means to quickly resolve any questions or differences concerning payments.

Reference: See Chapter 4: Budgets for additional information.

Petty cash Frequently, management companies have a petty cash fund to handle minor fund expenses such as purchasing stamps, gas or incidental office supplies. The fund may consist of a small amount of cash or a checking account. The manager and supervisor generally complete a signature card for the account. The amount of the fund is usually based on the size of the property, staff availability and other factors.

As purchases are made with the petty cash funds, vouchers with the amount, purpose, date, and account number are completed to maintain a record of the expense. Receipts should be attached to a voucher when possible. Generally once a month or when the fund reaches some threshold amount, the manager must process a petty cash reimbursement request. This form simply summarized the vouchers, amounts and expense codes. The receipts and vouchers are attached or placed in an envelope. Frequently a check request or voucher must also be submitted before the fund is replenished.SAMPLE

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Petty cash Company policy usually dictates how much money is kept in petty cash, what fund, types of expenditures can be made using petty cash funds, and how often it (continued) is replenished.

Resident Today most companies use computerized rent history reports. A resident file records is maintained in the database and various reporting programs allow you to access information such as:

• names of all residents • names of occupants • move-in date • deposit amounts (security, pet, amenity, key card) • lease rental rate • other recurring charges (electricity, water, garage, parking, etc.) • history of rent increases, and • balances and payment history

Resident It is a general industry practice to require a security deposit from a resident at security the time of move-in. Frequently an amount equal to one month’s rent or a deposit fixed dollar amount is collected. The general purpose of the security deposit is to assure the resident will pay the rent when it is due, keep the apartment in good condition and generally fulfill the lease obligations. Almost every single state has very specific rules about deposits, including what you call them, when you can collect them, when you need to return them, what charges can be applied against them, what, if any, interest is earned on the security deposit, and what kind of reporting needs to be made. It is your obligation as the manager to know your state’s laws and requirements regarding the handling of security deposits.

At move-out, a report generally must be made explaining the disposition of the security deposit and the application of delinquent rent if any. Deductions made from the security deposit should be itemized and an explanation should be mailed to the former resident with a check attached for any refund that may be due including interest, if any, as prescribed by law. The letter may be a demand for payment if the prior resident owes rent, fees, or damages in excess of the deposit. SAMPLE Continued on next page

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Resident Deposit amounts may be governed by state law or regulatory requirements, security but are very much impacted by what the market will allow. In soft markets, deposit, deposits are often reduced or waived to encourage leasing. Firm markets (continued) bring higher deposits. Different qualifying situations dictated by the community’s resident selection criteria (accept or accept with conditions processing) may require higher or lower deposits (if allowed by law).

Reference: See the Management of Residential Issues Participant Guide for additional information.

One of the newest alternatives to paying large security deposits is the use of a bonded or insured deposit. Several industry service providers offer programs that allow applicants to pay small “premiums” and the company will guarantee the full deposit at move-out if the owner needs it for repairs or other lease performance issues.

Collection of Most companies aggressively pursue collection of accounts from previous former residents with balances owed to the property. The method of pursuing resident collection varies from phone calls and follow-up made from the property or accounts the corporate office (in house) to third party collection firms, and reports to credit bureaus. Collection efforts are heavily regulated by both state and federal laws, including proper registration of the past due account and supporting documentation for the file. Companies who collect accounts on behalf of the owner usually negotiate the final amount paid and receive a percentage of the amount owed by the former resident as their fee.

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Chapter 3 Economic Analysis of a Property Chapter Overview

In this chapter The table below lists the topics in this chapter.

Topic See Page Background 3-2 Financial Statements 3-3 Concepts 3-4 The General Ledger 3-11

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Background

Purpose of an The purpose of an economic analysis of a property is to be able to answer economic two important questions that managers and investors usually ask. analysis • How well has the property performed over a given period of time? • Where does the property stand at a given point in time?

Reporting All financial operations of a property are reported to owners in a variety of financial statements on a monthly, quarterly and/or annual basis.

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Financial Statements

Balance sheet The balance sheet is a representation of the financial status of a property at a moment in time. It is composed of the following two counterbalancing sections.

• Assets are economic resources that benefit an investment. Assets would include real and personal property, and cash or bonds. • Liabilities are the economic obligations to non-owners.

Owner’s equity is the third term applied to a balance sheet. Owner’s equity is the excess of the assets after deducting all liabilities. The owner’s equity varies as assets and liabilities change.

The balance sheet is not an operating statement. It is not a tool that is used for management on a daily basis since it shows no activity – it is a “window” into the property’s financial position at a given point in time.

The income The income statement measures performance for a span of time – a month, statement quarter or longer. All revenues and expenses are recorded and represent, compared to the budget, increases or decreases in the owner’s claim. At the end of a given period, these items are summarized in the form of an income statement. The purpose of an income statement is to inform managers and owners of the operations of the property in order to make comparisons, set goals and exercise better control.

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Concepts

Accrual and There are two methods used to report financial status. The accounting cash basis method used affects the reporting of net operating income. accounting • Accrual basis accounting records all income and expenses in the period they were earned or incurred regardless of when they are actually received or paid. • Cash basis accounting records all income and expenses when they are actually received or paid.

When relating net operating income to a specific time period, it makes sense to offset expenses against revenues in the same period. Using the accrual method gives a more realistic picture of net operating income in the period. The cash method may give a distorted picture of profitability.

Accounting or Many people confuse accounting with bookkeeping but there are important bookkeeping differences.

• Accounting deals with the entire system for providing financial information – from the design of the systems through its operation to interpretation of the data obtained. • Bookkeeping is the routine, day-to-day recordkeeping that is a necessary part of accounting.

Cash flow Cash flow refers to cash flow from operations. It is often referred to as the operating statement. Cash flow is used to summarize financial activities to assess property performance.

Cash flow is the amount of money left after all sources of income are collected and operating expenses, capital expenses including replacement reserve payments if required, and debt service have been paid. Positive cash flow refers to a positive amount of money remaining; a negative cash flow means expenses have exceeded income and the owner must put money into the operation of the property.

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Cash flow, For property operations, the focus is more likely to be on NOI performance (continued) rather than cash flow since managers generally have limited ability to control capital expenses and debt service. Often, capital improvement programs are planned and implemented by senior level personnel. In addition, debt service is a function of the property’s loan documents and financing terms and not the responsibility of the community manager.

Gross Gross potential rent is the current rent actually charged at 100% occupancy. Potential Rent It combines the sum of occupied units at current lease rates plus vacant units (GPR) at market rates.

GPR is frequently used as the 100% possible income figure. All other income and expenses are measured and evaluated as a percent of GPR.

Reference: See the Toolbox for the Gross Potential Rent (GPR) formula.

Market rent Market rent is the total annual income that would be received if 100% of all units were occupied and paying market rents.

Loss to lease Loss to lease is the variance between market rent and GPR. Market rent that is lost due to lease rents under contract at rates lower than the market rate creates a “loss.”

Many companies include loss to lease as a separate line item on the operating statement and measure it against market rent. If lease rents are close to market rents and loss to lease is minimized, aggressive managers feel market rents may need to be increased.

Example: A property with an annual market rent of $1,375,025 and a loss to lease of $125,700 would be said to have a loss to lease of 9.1%

125,700/1,375,025 = .0914165 or 9.1%

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Concepts, Continued

Vacancy, VAC includes the total value of rent loss from vacant units, concessions concession, given, collection losses as a result of writing off bad debt, and the total and collection amount of rent loss from any non-revenue units. Non-revenue units would loss (VAC) include the unit(s) used for office space, models, or employee rent free units.

An amount equal to no more than 2% of Gross Potential Rent (GPR) is a generally accepted standard for uncollectible/bad debt loss. However, you should consult your supervisor or owner to learn what percent has been determined acceptable for your property. Total vacancy, concession, and collection loss can often run higher than 10% of the Gross Potential Rent.

Note: Some companies treat vacancy as an expense item, so it may appear below the revenue line on the operating statement. Concessions may also be treated in one of two ways on a financial statement-deducted from income- or shown as an expense item below the revenue line on the operating statement.

Reference: See the Toolbox for the calculation of the physical Vacancy Percentage formula without concession loss and collection loss.

Effective Effective gross income is the amount of GPR less vacancy, concession and Gross Income collection loss (VAC). Effective gross income may also be called net rental (EGI) income or total rental income. It represents all of the rent and only the rent income at the property. Below is the formula for calculating the effective gross income.

GPR – VAC = EGI

Reference: See the Toolbox for the Effective Gross Income formula.

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Concepts, Continued

Other Income Other income is any money collected for items other than rent. Don’t think (OI) it’s a small amount! It is total collections from laundry, vending, cable, deposit forfeitures, parking, amenity charges, late fees, pet fees, application fees, administrative fees, and lease premium fees. There are more potential examples and each company determines its fee policies and other income classifications. It can measure up to 10% of your total property income.

NAA’s 2010 Income and Expense Report showed this number nationally as 7.2% of GPR for all individually metered market rate garden properties. For garden apartment communities, individually metered, per unit other income collected was $753 per unit.

Gross Gross Operating Income (GOI) is the sum of the Effective Gross Income Operating (EGI) and other income (OI). Stated in another manner, it is simply total Income (GOI) revenue. The GOI is the total amount of money the property has to use for paying expenses. Below is the formula for calculating the GOI.

EGI + OI = GOI

Operating Operating Expenses (OE) include all expenses, fixed and variable, that are Expenses incurred in the course of managing the property. Operating expenses are (OE) categorized differently by different companies, but capital expenses and/or replacement reserve payments (if required) are not typically considered operating costs.

Typical expense categories, according to NAA’s Annual Income and Expense Survey, are salary and personnel costs, insurance, taxes, utilities, management fees, administrative, marketing, contract services, and repair and maintenance.

Reference: See the Toolbox for the Hourly Rate on Annual Basis formula for payroll purposes and the Operating Expenses Per Unit formula.

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Concepts, Continued

Net Operating Net Operating Income is GOI or total revenue less OE. By applying a Income (NOI) Capitalization rate (cap rate) to the property’s NOI, you can determine the value of the property using the income approach to value. This is done typically without capital expenditures included.

The formula for calculating the NOI is below.

GOI - OE = NOI

Reference: See Chapters 1 and 5 for additional information. See the Toolbox for the Net Operating Income (NOI) formula.

Operating The operating expense ratio (also known as expense-to-income ratio) is a expense ratio tool to measure how well a manager is managing the community and controlling expenses.

It calculates the percentage of the GPR that is being used to pay operating expenses. The ratio depends on the age (older properties usually have higher operating expenses), the location of a property, type of property (high rise, garden apartments) and what expenses are included.

Concessions may be classified as an expense rather than a deduction to rental income. Resident utility reimbursements are sometimes counted as other income or may be offsets to utility expenses like gas, electric, and water.

Note: The operating expense ratio is not used to calculate cash flow.

The formula for calculating the operating expense ratio is below.

OE/GPR = operating expense ratio

The NAA 2010 Income and Expense survey shows a national average operating expense ratio of 40.2%.

Reference: See the Toolbox for the Operating Expense Ratio formula.

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Concepts, Continued

Capital These include non-recurring capital expenditures such as appliance Expenses replacement, renovations, major roofing, structural additions, and other items (CE) intended to add to the life of property and its fixtures.

Debt Service Debt Service (DS) refers to the mortgage or loan payment (total of principal (DS) and interest) if a loan or mortgage was used to buy or build the property.

Most fixed rate loans have a constant amount due monthly. However, repayment of a loan or mortgage will depend on how the loan/mortgage was originally structured.

Reference: See the subtopic “Debt service” in the topic “Expenses” in Chapter 2 for additional information.

Break-even The break-even occupancy ratio calculates the occupancy level needed to occupancy produce enough income to pay the operating expenses and debt service of a ratio property. The break-even point may also be expressed per square foot.

(OE + DS)/GOI = break-even occupancy ratio

Break-even It is useful to know the rent per square foot for a property when considering rent per setting rents and controlling expenses with the intent of finding ways to square foot increase ROI.

(OE + DS)/total square feet = break-even rent per square foot

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Concepts, Continued

Cash flow Use the following equation to calculate the cash flow. calculation GPR–VAC = EGI+OI = GOI–OE = NOI–CE/RRA–DS

Notes:

• To calculate per unit income and expense, divide the total income or total expense by the total number of units. • For per square foot calculations, divide the total income or total expense by the total square footage of all the apartment units on the property. • The figure used for square footage is computed in several different ways. Be sure you know exactly what areas are to be included when calculating square footage. Some companies may include such things as outdoor patios, while others may not. Generally square footage is measured as net rentable, air conditioned space.

Example: The following is the data for the NAA apartments.

GPR 1,249,325 VAC 112,439 EGI 1,136,886 OI 55,000 GOI 1,19l,886 OE 482,300 NOI 709,586 CE 112,000 DS 424,373

The cash flow is:

1,249,325-112,439=1,136,886+55,000=1,191,886-482,300=709,586- 112,000-424,373= $173,213 SAMPLE

The General Ledger

Definition The general ledger is a group of accounts that support the major financial statements. The sub-accounts or ledgers are assigned names or numbers and provide details of the activities that occurred. The sub-accounts are often referred to as the Chart of Accounts. You will also need to know the account numbers established by your owner to properly record transactions.

Reference: See the Toolbox for a sample of a General Ledger Extract Report.

Chart of Each operating company uses a chart of accounts that establishes account accounts codes for each income and expense item and defines what should be posted to each account. This is how accounts are organized into recognizable groups. For example, accounts used for Marketing and Promotion expenses may include smaller sub accounts such as advertising, off site marketing, flags and banners, apartment guides, and Internet advertising sources. By structuring a framework to identify these income and expense categories, a management company can identify the source of its cash position by account.

Managers are frequently required to “code” invoices before they are paid so that the expense can be properly reflected in the financial statement. Rental income and other income is generally assigned chart of accounts codes as well, although it is generally coded through the rent roll software system.

Reference: See the Toolbox for a sample Chart of Accounts.

Financial or To produce financial statements (balance sheet, income statement, or year- operating end statement) a cut-off date is determined and only those transactions statements recorded prior to that date are reflected on the statement.

An income statement or operating income statement compares the accounting month activity to budget and reports a variance between budget and actual. It may also include a year-to-date listing of actual and budget activity and the variances as well of actual to budget.

As a manager, it is important for you to know the cut-off date and make sure all transactions are reported in a timely manner. This is particularly important whenSAMPLE your owner has several properties or a portfolio of properties, and the financial activities are combined to produce one financial statement from the home office.

Reference: See the Toolbox for the Variance Percentage formula.

Chapter 4 Budgets Chapter Overview

In this chapter The table below lists the topics in this chapter.

Topic See Page Background 4-2 Types of Budgets 4-3 Budget Development & Management 4-5

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Background

Definition A budget is an itemized summary of estimated income and expenses for a given period of time.

CAM Managers and owners use budgets to plan and monitor financial activities responsibilities and track a property’s performance. You may be responsible for creating a budget for the property you manage. You will also be responsible for explaining the variance (differences) between actual income and expenses compared to budget. Your understanding and insight concerning variances will help you manage and add value to a property.

Purpose of a A budget is one part of a business or operating plan. Estimates of expected budget income and expenses are made to determine what occupancy levels and other sources of income will be needed to cover expenses and provide a return on investment. It is important to understand that every type of budget must be based on the owner’s property performance and investment goals

Budgets are also used to monitor a property’s performance. By regularly comparing actual income and expenses to the budget, income shortfalls and expense overruns can be identified and corrective measures implemented.

Lastly, budgets may be used to evaluate the performance of personnel. As you have learned, a manager is responsible for collecting income, controlling expenses and meeting financial goals set by the owner. Your ability to discharge those responsibilities will have a direct impact on how your performance is judged by the owner.

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Types of Budgets

Overview There are several types of budgets, but only three (3) types will be discussed here:

• lease-up • modernization/retrofit, and • stabilized

A key element of any budget is the way the budget will be funded. Funding can come from several sources including current operating income and loans. Knowing where and when the money is coming will influence how expenses are planned.

Budget during When a property is first constructed, a budget is created to guide activities lease-up during lease up.

• Special attention will be paid to those activities and costs required to attract residents, get leases signed and generate income. • Projecting expenses during lease-up will be less precise than those for a stabilized property because there is no property history to which you can refer. • Information for projecting expenses will depend on you and your supervisor’s previous experience with other properties, and local, regional or industry standards. • Budgets should not be adjusted. Forecasts and re-forecasts may have to be adjusted on a monthly or quarterly basis as you learn more about actual income and expenses, and make decisions about operations across the year. • During lease-up, it is especially important to understand and note the circumstances and events that occur and affect the budget so that you can explain the variances and recommend appropriate courses of action.

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Types of Budgets, Continued

Budget for Properties that are being modernized or undergoing retrofitting require modernization specialized budgets. This type of modernization budget: or retrofit • will reflect larger allocations for capital expenses and labor than a stabilized property • must be more flexible if much of the work is dependent upon subcontractors’ schedules and vendors’ supplies • may include periods of no rental income for part or all of a building while major renovations take place, and • may be prepared separately from the operating budget of a property and may be as short as a few months or cover more than one year

Operating Once a property is fully leased and operating under normal conditions, the budget for a budgeting process is a little more routine. stabilized property An operating budget reflects varying expenses from month to month. For example, utility expenses for heating and cooling would be higher in the winter and summer months. Expenses for snow removal would only be posted for winter months, etc.

SAMPLE

Budget Development & Management

Process The table below describes the budget development process.

Note: You may be required to develop a budget alone or with your supervisor.

Stage Description 1 Make sure that you understand the owner’s investment goals for the property, and determine the long and short-term actions necessary for the result. A single owner will likely have different investment goals than a corporation, a REIT, or a mid-sized owner 2 Gather information. There are numerous sources of information for developing a budget:

• the operating history for the property • the previous budget including notes • other properties (in the portfolio) of like size, age, condition, and geography (same city) • other owners or supervisors • current service contracts • National Apartment Association historical data • Institute of Real Estate Management historical data • vendors and contractors for expected labor and material costs • insurance agents • utility companies • taxing authority office, and • industry income and expense surveys 3 Assign numerical values to each budget category. Companies who use budgeting software or proprietary computerized programs will frequently “pre-populate” expense fields with what are known to be “locked in” and recurring expenses. This ensures these costs are covered and gives a truer picture of the available anticipated cash for variable expenses. Additionally, formulas are generally added to the spreadsheet

Note: Be sure to include a narrative about your assumptions including why and when so the projections can be supported.

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Budget Development & Management, Continued

Tips on The following tips will help you develop budget data. developing budget data

Tip Description Use round numbers. Rounding numbers allows for reasonable variation. Some accounting department like to stay with 10s, 50s or even 100s for rounding. Use current figures. Review the operating history of the property and prior year’s budget, but consider current economic trends and the age of the property to forecast expenses.

Correctly analyze those expenses not likely to be needed in the current budget year because they were completed in a prior year. It is also necessary to anticipate those future expenses that have not been part of a previous budget.

Consider occupancy trends and pricing strategies to determine anticipated income. You will live by the budget you create. Simply adding a percentage increase across the board is not a well thought out strategy. You need to be able to justify every number.

If revisions are necessary, it will be easier and more accurate to change a few specific projections instead of reducing every category by a flat percentage rate.

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Budget Development & Management, Continued

Tips on developing budget data, (continued)

Tip Description Prepare early. Begin preparing budget projections several months before they are due. This allows time to think about the business, conduct research and consult with contractors and vendors.

Some managers keep a “budget file” and as items come up that need to be included, the manager can note them and drop them in the file. When it is time to begin budget preparation, the budget file will serve as a valuable resource for covering all of the items that need to be in your budget.

If you are planning a major repair or installment in the coming year, you will have time to request multiple bids and weigh the expense against expected revenue. Seek Input. Ask your staff to help develop realistic projections. Your staff is an excellent source of information, and can help provide details and document financial assumptions. This is especially true of the Service Manager or Maintenance Supervisor. When people feel a sense of ownership in a project, they will more likely hold themselves accountable.

Provide them with previous financial reports, a detailed list of major contracts and anticipated major expenses. Organize the information – perhaps in a binder with a tab for each revenue and expense item – so that it is readily available throughout the budget process.

When the new budget is approved, insert a new budget sheet for each account with the beginning balance. Update the information each month. SAMPLEYou now have a tool the entire staff can use.

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Budget Development & Management, Continued

Extrapolation The budgeting process often uses extrapolation to forecast figures. To extrapolate is to estimate a number by extending known information. Information that is known for a few months can be extrapolated to a full year, just as information known for square footage can be extrapolated for an entire property.

Before you forecast a number, be sure the historical records don’t contain any extremely high or low numbers due to extenuating circumstances. This might cause you to forecast too high or too low.

Examples: Examples of expenses that should not be used to extrapolate budget projections include:

• excessive plumbing breaks which caused unduly high plumbing expenditures, but have since been repaired, and • uninsured losses that impacted the expenses

Annualization Annualizing a number means generally the same thing as extrapolating.

Example: The electricity bill has been $300 for January, February and March. To annualize the electricity expense for the year, you would multiply 300 by 12 months for a total annual expense of $3,600.

If the electricity includes the heat, this should not be done. In this case, historical data for prior year same months should be used. Occupancy projections in the budget will also impact utility costs. When units are occupied residents are likely paying the charges, not the property.

Reference: See the Toolbox for the Annualizing a Number formula.

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Budget Development & Management, Continued

CAM As a CAM, you are responsible for the following. responsibilities Managing the budget. Once the budget is developed, the manager lives with it every day using a Budget Control Log and operating reports to ensure that meeting the budget is as attainable as possible. Since budgets are composed of estimates, there will always be differences or variances between the budgeted numbers and the actual income and expense numbers. As a manager, you are responsible for comparing the budget with actual numbers and identifying and explaining the variances. Most often this occurs in monthly reporting to the regional or corporate office or directly through the owner’s reports.

Analyzing variances. It is not enough to report that rental income is down because vacancy is up. You should be able to explain why actual vacancy is greater than projected in the budget. For example, move-outs due to job losses because of layoffs will impact vacancy. Both positive and negative variances need analysis and explanation.

Events in your local market or region affect people’s ability to rent an apartment home. Ask the following types of questions when looking for reasons for a budget variance.

• Have there been job layoffs? • Is a new or established competitor attracting people? If so, why? • Do they have lower rental rates or offer more amenities? • Did they run a successful advertising campaign? • Have you been able to raise rents compared to budget? If so, why? • Are your budget variances a timing issue or likely to be permanent; that is, for example, are your utility bills late in being received, was the cable revenue payment not received in the month budgeted, etc.

Some variances will be less complicated to analyze, for example, a major expense was incurred to make an emergency repair. The expense was a one-time event but will nevertheless affect the budget. If the emergency used three months of a budgeted expense, you will need to find ways to reduce future expenses, perhaps in other categories, to make up for the SAMPLEloss.

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Budget Development & Management, Continued

CAM Explaining variances. responsibilities, Variances should be explained using the terms favorable or unfavorable (continued) rather than words like up and down or good and bad. Increased expenses versus budget are negative variances (unfavorable). Increased income versus budget are positive variances (favorable). In addition to knowing the amount of the change between the budgeted number and the actual number, you should also be prepared to discuss the percent of change.

Recommending action. Next, determine what, if any, action should be taken and when you should implement the plan. Should you increase advertising? Should you lower rents? Should you plan to incorporate a new service or amenity that will help attract residents?

Analyzing the While it is important to understand and manage variances, it is equally as numbers important to have a good understanding of normal income and expenses for the property. You should know what items account for the largest expenditures. You should note any steady increases or decreases in an expense, and determine the reasons for the trend. A trend can be a clue to an unresolved problem. On the other hand, the trend may result from sound management decisions you made and could be used to your benefit during performance reviews.

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Chapter 5 Property Valuation Chapter Overview

In this chapter The table below lists the topics in this chapter.

Topic See Page Background 5-2 Ways to Determine Property Value 5-3

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Background

Definition Property valuation is the process of determining the value of a property. Knowing the value of a property is helpful for making management decisions and analyzing and interpreting financial data.

Purposes of Owners and managers will want to know the value of a property when valuation making major financial decisions. Major financial decisions include, but are not limited to:

• offering a price when buying a property • asking an acceptable price when selling a property • establishing a basis for real property exchanges • reorganizing or merging ownership of multiple properties • determining the terms of a sale price for a proposed transaction • estimating the value for obtaining mortgage loans • establishing the market value for condemnation proceedings • estimating market value for tax purposes • setting rent schedules and lease provisions • deciding the feasibility of construction or renovation programs • facilitating mergers, and • estimating liquidation value for forced sale or auction proceedings

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Ways to Determine Property Value

Overview The approach selected to value a property depends on the information available to estimate a value and the reason why a value needs to be known.

Cost The cost approach estimates the current cost of reproducing or replacing the approach improvements (building), minus the loss in value from depreciation due to age, condition or obsolescence, plus land value. This approach analyzes the cost of the “bricks and sticks” to rebuild the property. There are two types of costs: direct and indirect. Direct costs are costs for labor and material. Indirect costs include administrative expenses, finance fees, taxes and interest and insurance.

The cost approach requires that land and improvements be valued separately, so it is a useful approach for insurance purposes and accounting purposes when depreciation must be estimated for income taxes.

The cost approach is important when there is no market activity, and a sales approach cannot be used to value a property. It is typically not the approach used to value multifamily income-producing property.

Sales The sales comparison approach is most useful when there are several comparison similar properties in the local market that have been recently sold or are approach currently for sale. The fundamental principle of this approach is that the market value of a property is directly related to the prices of comparable, competitive properties. It is an approach identical to the market comparable studies that are done to find out about rental pricing of similar properties in your neighborhood – except that it is to compare sales prices, not rental rates.

Appraisers will compare properties and focus on similarities and differences among properties and transactions that affect value. These may include:

• differences in property rights • buyer and seller motivation • financing terms • market conditions at the time of sale • size and location SAMPLE• physical features, and • economic characteristics such as management, resident mix, rent concessions, lease terms, lease expiration dates, and so on

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Ways to Determine Property Value, Continued

Income Income producing property is often purchased as an investment. From an capitalization investor’s point of view, earning power is the major element affecting value. approach Typically, investors believe that higher earnings translate into higher value. The value of the income that the property nets is the basis for the value of the property. The more net operating income, the higher the value.

The income capitalization approach uses methods, techniques and mathematical procedures to analyze a property’s ability to generate income and convert future earnings to present day dollars (present value). In an apartment property, the income stream has a value based on what income is evident now and what value would be had in future income. It is a process that takes income and converts it to value.

The table below shows several other key attributes that appraisers consider when determining value.

Attribute Description supply and demand If demand for a particular property type is high, prices tend to increase. However, an appraiser will also analyze supply in terms of existing properties that are unsold or vacant and properties being constructed, converted or planned. substitution The principle of substitution holds that value can be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time. highest and best The use that maximizes an investment property’s use value is the highest and best use. Highest and best use of an improvement must be legally permissible, physically possible, financially feasible and produce maximum returns. external influences Location, convenience of transportation, police protection, municipal regulations, the conditions of street lighting and the proximity to shopping and restaurants can have positive and negative effects on value.

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Ways to Determine Property Value, Continued

Capitalization Capitalization is a method of income capitalization. It uses an overall capitalization rate (rate of return on investment), and one year’s estimated income. The capitalization rate (often referred to as the cap rate) reflects the investor’s desired rate of return for the investment. The cap rate is variable like an interest rate. However, it does not distinguish between the return on and the return of capital.

The estimated income used for calculation often depends on the reason for the valuation, and is generally one of the following:

• Gross Potential Rent (GPR) • Effective Gross Income (EGI) • Net Operating Income (NOI) • equity income • mortgage income • land income, and • building income

The calculation for value using NOI as an example is:

Value = NOI / Overall capitalization rate

Example: If an apartment property is selling for $1,000,000 and has an NOI of $80,000, net of vacancy loss and operating expenses, it would have a cap rate of 8%. The investor would recover 8% of his or her investment each year. If a similar property is selling at an 8% cap rate and has an NOI of $87,500, the value would be $1,093,750 (more value!).

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Ways to Determine Property Value, Continued

Capitalization, Example: If an apartment manager could build income by $10 per month on (continued) a 250 unit property, $30,000 in additional revenue would be generated ($10x12 months x 250 units = $30,000 annually). If that same manager could reduce property operating expenses by an additional $6,000 annually, the NOI would grow by $36,000 ($30,000 in additional revenue + $6,000 in expense savings). Using the cap rate above (expressed as a decimal), the manager would be responsible for adding $450,000 in the value of the property:

$36,000 additional to NOI /.08 = $450,000 in value!

Reference: See the Toolbox for the Capitalization/Valuation formulas.

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Toolbox Overview

In this The following documents are provided in this Toolbox . Toolbox

Topic See Page Annual Turnover Percentage Toolbox-3 Annualizing a Number Toolbox-3 Average Effective Rent Toolbox-4 Average Renewal Increase Toolbox-4 Average Square Feet/Unit Toolbox-5 Capitalization/Valuation Toolbox-5 Closing Percentage/Ratio Toolbox-6 Cost of Advertising Per Lease Toolbox-6 Cost of Advertising Per Traffic Toolbox-6 Effective Gross Income (Net Rental Income) Toolbox-7 Economic Occupancy Percentage Toolbox-7 Effective Rent Toolbox-8 Gross Potential Rent (GPR) Toolbox-8 Hourly Rate on Annual Basis Toolbox-9 Leasing Exposure Toolbox-10 Month-to-Month Leased Percentage Toolbox-10 Net Operating Income (NOI) Toolbox-11 Operating Expenses Per Unit (Annual) Toolbox-11 Operating Expense Ratio Toolbox-11 Price Per Square Footage Toolbox-12 Prorated Rent Toolbox-12 Daily Rate Toolbox-12 Prorated Move-In/Prorate Move-Out Rent Toolbox-12 Projected Traffic Required to Meet Leasing Goals Toolbox-13 Renewal Percentage Toolbox-13 Total Leased Percentage Toolbox-13 Unit Type/Unit Mix Percentage Toolbox-14 Vacancy Percentage Toolbox-14 Variance Percentage Toolbox-15 Weighted Average Rent – Leased and Market Toolbox-15 Calculating Weighted Average Leased Rent Toolbox-16 SAMPLECalculating Weighted Average Market Rent Toolbox-16 Market Comparison Survey Form Toolbox-17 Weekly Activity Report Sample Toolbox-18 Explanation of Weekly Activity Report Toolbox-19

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Overview, Continued

In this Toolbox, (continued)

Topic See Page Box Score Report Sample #1 Toolbox-20 Box Score Report Sample #2 Toolbox-21 Leasing Activity Report Sample Toolbox-24 All Units Summary Report Sample Toolbox-25 Lease Expiration Report Sample Toolbox-26 Rent Roll Sample #1 Toolbox-27 Rent Roll Sample #2 Toolbox-30 Delinquency Report Sample Toolbox-33 Bank Deposit Summary Report Sample Toolbox-34 Monthly Income Summary Report Sample Toolbox-36 Monthly Transaction Summary Report Sample Toolbox-37 Lost Rent Summary Report Sample Toolbox-38 Concessions Report Sample Toolbox-39 Demographics Report Sample Toolbox-41 Cash Flow Statement (Completed) Toolbox-42 Cash Flow Statement Template Toolbox-43 Sample General Ledger Extract Report Toolbox-44 Sample Chart of Accounts Toolbox-45 Market Rent Schedule Toolbox-47

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Annual Turnover Percentage

Total number of annual, physical move outs ÷ total number of apartments = Annual Turnover Percentage

Example Assume you have as total of 360 units and a total of 295 physical move-outs.

Calculate the annual turnover as follows:

295 ÷ 360 = 82% Turnover

Note: The same unit may be occupied by several different residents in one year, thus, increasing your annual turnover percentage.

Annualizing a Number

(Number ÷ time period in months) x 12 = Annualized Number

Example Assume you have 52 service requests recorded in January and 36 in February.

Calculate an annualized number of service requests for the year as follows:

52 + 36 = 88

(88 ÷ 2) x 12 = 528 Annualized Number

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Average Effective Rent

(Rental Income – Concession Rent) ÷ Units Occupied = Average Effective Rent

Obtain Rental Income and Concession amounts from the Resident Billings section of a Rent Roll Detail. Obtain units occupied from a Unit Analysis section.

Example

42 units leased @ $495 = $ 20,790 58 units leased @ $525 = $ 30,450 94 units leased @ $652 = $ 61,288 86 units leased @ $605 = $ 52,030 280 Total Units Leased = $164,558

$164,558 ÷ 280 = $587.71 = $588 Average Effective Rent

Average Renewal Increase

Average Effective Rent for Renewals – Average Effective Rent on Previous Lease Percentage Increase = Amount of Increase divided by Previous Lease Rent

Example

The effective rate paid for the Previous Lease = $470. The effective rate paid for the Renewal Lease = $505.

Renewal Increase = $505 - $470 = $35 Percentage Increase = $35/$470 = 7.5%

SAMPLE

Average Square Feet/Unit

Square footage of all specific unit types ÷ total number of units = average square feet per unit

Example

Assume you have 62 two-bedroom units with 858 square feet and 27 two-bedroom units with 1242 square feet.

Calculate the average square feet as follows:

62 Units @ 858 square feet = 53,196 27 Units @ 1242 square feet = 33,534 89 86,730

86,730 ÷89 = 975 Average Square Feet Per Unit

Capitalization/Valuation

Annual net operating income ÷ capitalization rate = value or Capitalization Rate x Value = (Annual) Net Operating Income (NOI)

I = V R

Capitalization rates are determined by the market and quality of the property and generally range from 6–10%

Example

Assume the annual Net Operating Income is $675,000 and the market capitalization rate is 7%.

Calculate the value of the property as follows:

$675,000 ÷ .07 = $9,642,857 Value

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Closing Percentage/Ratio

Total number of leases for the week ÷ total number of traffic = closing percentage

Example

Assume you have 16 visitors (traffic) to the property for the week and 4 of these lease. Assume one person was previously shown an apartment.

Calculate the closing percentage ration as follows:

4 ÷ 15 = 27% Closing Ratio

Cost of Advertising per Lease

Total cost of ad ÷ number of leases generated from ad = cost per lease

Example

Assume you place an ad in the newspaper that costs $5,400 and the ad generates 32 new leases.

Calculate the cost per lease as follows:

$5,400 ÷ 32 = $168.75 per lease

Cost of Advertising per Traffic

Total cost of ad ÷ total number of traffic generated from ad = cost per traffic

Example

Assume you place an ad in the newspaper that costs $3,800 and 58 prospective residents respond.

Calculate the cost per traffic as follows:

$3,800 ÷ 58 = $65.52 per Traffic SAMPLE

Effective Gross Income (Net Rental Income)

GPR – current month vacancy, concessions, bad debt, and non-revenue units = Effective Gross Income

Economic Occupancy Percentage

To calculate the economic occupancy percentage, divide the effective gross income (EGI) by the gross potential rent (GPR). First determine the effective gross income (net rental income).

Example

Current Month GPR = $250,000 Less Vacancy, Collection = - $ 52,000 Loss, Concessions, Non-revenue units

Effective Gross Income (EGI) = $198,000

$198,000/$250,000 = 79% Economic Occupancy

SAMPLE

Effective Rent

If all leases are signed at scheduled market rent and all concessions awarded via a lease addendum, then the calculation is as follows:

Market rent x number of months in lease term less total concession awarded ÷ number of months in lease term

Example

Market Rent = $665 Concession – 1 Month Free $665

(665 x 12 = $7,980) - $665 = $7,315

$7,315 ÷ 12 = $610 (rounded) Effective Rent

Gross Potential Rent (GPR)

To calculate Gross Potential Rent (GPR), combine the sum of all occupied units at current lease contract rates plus all vacant units at scheduled market rents.

Example

250 unit community

230 occupied units at average monthly lease rent of $759 = $174,570 20 vacant units at average scheduled market rent of $810 = $ 16,200

Gross Potential Rent (GPR) = $190,770

SAMPLE

Hourly Rate on Annual Basis

Hourly rate x 2080 = annual salary

NOTE! There are 2,080 hours in a normal work year. This means working 5 days a week, 8 hours for 52 weeks.

Example

Assume your hourly rate is $12.50

Calculate your annual “salary” as follows:

$12.50 x 2080 = $26,000. Annual “Salary”

Calculate your monthly “salary” as follows:

$26,000 ÷ 12 = $2,167. Monthly “Salary”

Example

Assume Your Salary is $38,000

Your Monthly Salary is $38,000 ÷ 12 = $3,167 per month

Your “Hourly” Rate is $38,000 ÷ 2080 = $18.27 per hour

Salary ÷ 2080 = Hourly Rate

SAMPLE

Leasing Exposure

Total number of vacant units + total number of notice units – total number of pre-leased units = total exposure in units

Total exposure in units ÷ total number of units = exposure percentage

Example

Assume a 470 unit property with 26 vacants, 18 notices and 9 preleases.

You calculate the exposure units as follows:

26 + 18 – 9 = 35 Exposure in Units

Calculate the exposure percentage as follows:

35 ÷ 470 = 7.5% Exposure Percentage

Month-to-Month Leased Percentage Total number of month-to-month leases ÷ total number of apartments = percentage of month-to- month leases

Example

Assume you have 6 month-to-month leases and a total of 140 leases.

Calculate the percentage of month-to-month leases as follows:

6 ÷ 140 = 4.29% Month-to-Month Leases

SAMPLE

Net Operating Income (NOI)

Net Operating Income = Total Income – Total Operating Expenses

Occupancy Percentage (Physical Occupancy)

Total number of (physical) occupied units ÷ total number of apartments = occupancy %

Example

Assume you have a total of 396 units and 308 units are occupied.

Calculate the occupancy percentage as follows:

308 ÷ 396 = 78% Occupancy

NOTE! Vacancy Percentage + Occupancy Percentage = 100%

Operating Expenses per Unit (Annual)

Total operating expenses ÷ total number of units = operating expenses per unit

Example

Annual Operating Expenses ($825,000)÷ 350 Units =

Operating Expenses Per Unit $ 2,357 per unit per year (rounded)

Operating Expense Ratio

To calculate the operating expense ratio, divide the operating expenses by the Gross Potential Rent.

Example

Gross Potential Rent = $3,410,700 Operating Expenses = $1,325,743 SAMPLE OE/GPR = 38.9% Operating Expense Ratio

Price per Square Footage

Total unit rental ÷ total square footage = price (rent) per square foot

Example

Assume the monthly rent on a unit is $525 and the unit has 731 square feet.

Calculate the rent per square foot as follows:

$525 ÷ 731 = $.72 per Square Foot

Pro-rated Rent

To calculate the Pro-rated Move-In/Prorated Move-Out Rent, you must first calculate the daily rate. Most computer software systems use a calendar based pro ration method and round amounts to the nearest dollar. Prorated amounts lower than 50 cents are rounded down, while amounts higher than 50 cents are rounded up.

Daily Rate

Total rent ÷ Number of Days in the Month = Daily Rate

Pro-rated Move-In/Pro-rate Move-Out Rent

Daily rate x total number of days occupied** = Prorated Move-In or Pro-rated Move-Out Rent

**Make sure to count the Move-In/Out day as an occupied day!

Example Assume a resident occupies an apartment for 12 days in October and the monthly rent is $690.

Calculate the prorated rent as follows:

$690 ÷ 31 = $22 - Daily Rate

$22 x 12 = $264 –Pro-rated Rent SAMPLE

Projected Traffic Required to Meet Leasing Goals

Total number of leases needed ÷ average closing percentage = projected traffic needed

Example

Assume you need 14 leases and have an average closing ratio of 28%. Calculate the traffic required to meet your goal as follows:

14 ÷ .28 = 50 Prospective Residents needed (traffic)

Assume you have projected traffic of 60 and your closing ratio goal is 30%

60 x .3 = Leases Needed

To reach your goal, you need 18 leases

Renewal Percentage

Total number of signed renewal leases ÷ total number of expiring leases = renewal percentage

Example Assume you have 16 leases expiring and of those 6 people renew.

Calculate the renewal percentage as follows:

6 ÷ 16 = 37.5% Renewal

Total Leased Percentage

Total number of occupied units + total number of leased not occupied ÷ total number of apartments = total leased percentage

Example

Out of a total of 462 units, assume you have 312 occupied units and 10 units leased but not occupied.

Calculate the leased percentage as follows:

SAMPLE(312 + 10) ÷ 462 = 70% Vacancy

Unit Type/Unit Mix Percentage

Total number of a specific unit type ÷ total number of units = percentage of unit type

Example Assume you have 518 units and 340 of them are two bedroom units.

Calculate the percentage of unit type as follows:

340 ÷ 518 = 66% Two-Bedroom Units

Vacancy Percentage

Total number of vacant apartments ÷ total number of apartments = vacancy percentage

Example

Assume you have 385 total units and there are 62 vacant units.

Calculate the vacancy rate as follows:

62 ÷ 385 = 16% Vacancy

SAMPLE

Variance Percentage

(Actual number – budgeted number) ÷ budgeted number = variance percentage

The variance percentage is the calculating of how much you are actually over or under your budgeted figures.

If an expense category is over budget, it is a negative variance If an expense category is under budget, it is a positive variance If an income category is over budget, it is a positive variance If an income category is under budget, it is a negative variance

Example

Assume you collect income of $1,800,000 versus a budgeted income of $2,000,000.

Calculate the variance percentage as follows:

($1,800,000 - $2,000,000) ÷ $2,000,000 = -10%

This (-10%) represents an unfavorable variance

Weighted Average Rent – Leased and Market

Example

Assume there are four (4) floor plans and 215 total units. Assume eight (8) vacant apartments (2 A-1, 3 A-2s and 3 Cs).

Floorplan # Avg. Leased Avg. Market A-1 40 $420 $450 A-2 75 $525 $580 B 20 $695 $725 C 80 $775 $820

SAMPLE

Calculating Weighted Average Leased Rent

Multiply the Average leased rent of a particular floor plan times the number of leased units in that floor plan.

38 x 420 = $ 15,960 72 x 525 = $ 37,800 Add the totals together, divide by the total of all 20 x 695 = $ 13,900 leased units 77 x 775 = $ 59,675 207 $127,335 $127,335/207 = $615

Calculating Weighted Average Market Rent

Multiply the market rate of a particular floor plan times the total number of units in that floor plan.

40 x 450 = $ 18,000 75 x 580 = $ 43,500 20 x 725 = $ 14,500 80 x 820 = $ 65,600 215 $141,600

$141,600/215 = $659 Add the totals together, divide by the total of all units

SAMPLE

Market Comparison Survey Form

Location Appeal Age Amenities Parking/ Pets Furnished Appliances Utilities Notes Rating Appearance Condition Garage Address

Type/Unit

Size

Net Rent

Security Deposit or Last Month Rent

Date Seen Address

Type/Unit

Size

Net Rent

Security Deposit or Last Month Rent

Date Seen SAMPLE

Total New Leases Approved (including transfers)

Type Apt Term Mo. Type Apt MI Date Term Mo. Total MI Rent Rent Date

Move-Ins

Type Apt MI Term Mo. Type Apt MI Date Term Mo. Total Date Rent Rent

Move-Outs (Cancellation)

Type Apt MO No. Mos. Mo. Type Apt MO No. Mos. Mo. Total Date Resident Rent Date Resident Rent

Notices Received

Type Apt MO Date Length Reason Occ.

Non-Revenue Apartments (models (m), storerooms (s), other (o)

Apt Code Type Apt. Code Type Apt Code Total Type

Status By PropertySAMPLE Type Vacant Vacant New Leased With W/O Notices leases Type Number & Occ. Lease Lease P-L this MI MO % wk. Leased

Explanation of Weekly Activity Report

Approved Leases This Week

Type Type of floor plan Apt. # Apartment leased MI Date Date resident is scheduled to move in Leased By Initials of employee who leased apartment

Move-ins for the Week

Type Type of floor plan Apt. # Apartment leased MI Date Date resident is scheduled to move in

Move-outs for the Week

Type Type of floor plan Apt. # Apartment leased MO Date Date the resident moved out

Notices of Intent to Vacate (Should include all notices received in the reporting period.)

Type Type of floor plan Apt. # Apartment leased MO Date Date the resident moved out Length of Residency Length of time resident occupied apartment Reason Reason why resident is moving SAMPLE

SAMPLE

Box Score Report Sample #2

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SAMPLE

Delinquency Report Sample

Database: MRIWEB Aged Delinquencies Page: 11 RMPROP: 29144 Sales Demo Database Date: 1/10/2006 Tallulah Estates Time: 04:47 PM Period: 07/05

Date Charge Code Source Amount Current 1 Month 2 Months 3 Months 4 Months

Times Late:

RNT RENTAL INCOME -1,335.00 0.00 0.00 0.00 0.00 -1,335.00 Will, Worldview Total: -1,335.00 0.00 0.00 0.00 0.00 -1,335.00 29144-459-106-1 Ali, Serhat Occupy: 1/1/2000 Vacate: Last Payment: 6/1/2005 1,195 Times Late:

PPR Prepaid Rent -5.00 -5.00 0.00 0.00 0.00 0.00 Ali, Serhat Total: -5.00 -5.00 0.00 0.00 0.00 0.00 29144-465-101-1 Abone, Annabelle Occupy: 1/1/2000 Vacate: Last Payment: 6/1/2005 1,199 Times Late:

RNT RENTAL INCOME 1,199.00 1,199.00 0.00 0.00 0.00 0.00 Abone, Annabelle Total: 1,199.00 1,199.00 0.00 0.00 0.00 0.00 29144-465-102-2 Davison, Cheryl Occupy: 5/10/2005 Vacate: Last Payment: 7/1/2005 1,257 (205) 582-0558 Times Late:

DG1 DOG<25LBS -14.52 0.00 -14.52 0.00 0.00 0.00 GAR GARAGE -29.03 0.00 -29.03 0.00 0.00 0.00 RNT RENTAL INCOME -161.36 0.00 -161.36 0.00 0.00 0.00 WAD WASHER/DRYER -10.16 0.00 -10.16 0.00 0.00 0.00 Davison, Cheryl Total: -215.07 0.00 -215.07 0.00 0.00 0.00 29144-465-103-1 Mranks, Michael Occupy: 1/1/2000 Vacate: Last Payment: 7/1/2005 1,595 Times Late:

RNT RENTAL INCOME -1,595.00 0.00 0.00 0.00 0.00 -1,595.00 SAMPLE

Bank Deposit Summary Report Sample

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Bank Deposit Summary Report Sample, Continued

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Monthly Income Summary Report Sample

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Lost Rent Summary Report Sample

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Concessions Report Sample

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Concessions Report Sample, Continued

SAMPLE

Demographics Report Sample

SAMPLE

Cash Flow Statement (Completed) (Annual Dollars)

Gross Potential Rent 4,892,000 Less: Vacancy, Concession & Collection Loss (678,000)

Effective Gross Income _4,214,000

Other income 145,000

Gross Operating Income 4,359,000

Operating Expenses: Administrative & Management 183,900 includes mgt. Fees Marketing 101,000 Repairs & Maintenance 164,000 includes make ready costs Personnel 365,000 Utilities 133,000 Taxes & Insurance 779,000 Contract Services 77,900 includes prof. fees Total Operating Expenses 1,803,800

Net Operating Income 2,555,200

Capital Expenditures 475,000

Debt Service 1,278,000

CASH FLOW 802,200

SAMPLE

Cash Flow Statement Template (Annual Dollars)

Gross Potential Rent ______Less: Vacancy, Concession & Collection Loss ______

Effective Gross Income ______

Other income ______

Gross Operating Income ______

Operating Expenses: Administrative & Management ______Marketing ______Repairs & Maintenance ______Personnel ______Utilities ______Taxes & Insurance ______Contract Services ______Total Operating Expenses ______

Net Operating Income ______

Capital Expenditures ______

Debt Service ______

CASH FLOW ______SAMPLE

Sample General Ledger Extract Report

SAMPLE

Sample Chart of Accounts

Sample The illustration below shows a sample two-page chart of accounts.

SAMPLEContinued on next page

Sample Chart of Accounts, Continued

Sample, (continued)

SAMPLE

Market Rent Schedule NAA Apartments

Formulas 1 x 5 1 x 7 9 / 5 9 x 1 9 x 1 x 12 1 2 3 4 5 6 7 8 9 10 11 12

Gross Current Total Total Number No. of Total Market Pot. Current Rent Current Annual Of Units Unit Type Description Rooms Sq. Ft. Sq. Ft. Rent Rental Mo. Rent Per SF Mo. Rent Rent Income

40 A203 1-1-NBS-FP 3.5 658 26,320 $395 189,600 $385 0.585 15,400 184,800

48 A203 1-1-FP 3.5 696 33,408 415 239,040 415 0.596 19,920 239,040

8 B205 1-1.5-NBS-FP 4.5 859 6,872 490 47,040 480 0.559 3,840 46,080

16 B205 2-2-NBS-SR-FP 4.5 896 14,336 505 96,960 495 0.552 7,920 95,040

4 B302 2-2-NBS-SR-PV-FP 4.5 896 3,584 525 25,200 515 0.575 2,060 24,720

12 B302 2-2-FP 4.5 955 11,460 530 76,320 520 0.545 6,240 74,880

12 C300 3-2-NBS-SR-FP- 5.5 1054 12,648 560 80,640 550 0.522 6,600 79,200 WD

Total 554 108,628 754,800 61,980 743,760

140 Average 3.96 775.91 449.29 442.71 .0571 442.71

NBS – No balcony/storage (-10) FP – Fireplace (+15) PV – Pool view (+10) SR – Sunroom (+15) D – Washer/Dryer (+15) SAMPLE

Activity #1: How the Four Factors Affect Multifamily Investments

Instructions Discuss the following questions with your group and write your answers in the space provided.

1. In what ways do the general economic and market conditions effect the safety of an investment in a multifamily housing property?

2. Why is it important to know the owner’s investment objectives for the property you manage?

SAMPLE

Activity #2: Adding Value

Case study The Tallulah Estates Apartment Community has 218 units. 193 units are occupied at this time, which is an occupancy ratio of about 88%. A Market Comparison Survey shows the competition has occupancy at 95%. There are some leases that will be expiring in the upcoming month, and none of them are preleased. In addition to that, there are about 18 residents who are delinquent on their rent. The total amount of these delinquencies is nearly $20,000!

Look at the Property Activity Report on the next two (2) pages to see a summary of the occupancy and leasing activity at the community. Traffic looks low and conversion rates for the leasing consultants looks low as well.

Your strategy What would you do to improve the situation described above? Work with your group and use the class materials to determine your strategy.

SAMPLEContinued on next page

Activity #2: Adding Value, Continued

Property Activity Report

SAMPLE

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Activity #2: Adding Value, Continued

Property Activity Report, (continued)

SAMPLE

Activity #3: Calculating Cash Flow

Instructions Using the data for the NAA Apartments below, calculate a new cash flow for this property making the following changes to the existing data:

1) Increase the GPR 3.5% 2) Decrease VAC to 8% 3) Change the Operating Expense ratio to 41%

GPR 1,249,325 VAC 112,439 EGI 1,136,886 OI 55,000 GOI 1,19l,886 OE 482,300 NOI 709,586 CE 112,000 DS 424,373

New GPR = $______

New Vacancy = $______

New Operating Expense = $______

Cash flow calculation:

Gross Potential Rent ______Less: Vacancy, Concession & Collection Loss ______

Effective Gross Income ______

Other income ______

Gross Operating Income ______

Total Operating Expenses ______

Net Operating Income ______

CapitalSAMPLE Expenditures ______

Debt Service ______

CASH FLOW ______

Activity #4: Review a Budget

SAMPLE

NAAEI thanks you for taking the Certified Apartment Manager (CAM) program.

Following is a list of items that you may find on the NAA Web site that may not be included in the program text that is to be used for your reference while taking the courses in this program:

• Supplement/Resource Materials • CAM Skill Checks and Answer Key • Additional Course Handouts

These files may be downloaded from the NAA Web site by visiting:

www.naahq.org/education/CandidatesOnly

SAMPLE

SAMPLE SAMPLE 4300 W B., S 400 A , VA 22203 703/518-6141 F 703/248-8370 [email protected] www.naahq.org