CAM 2019 - Financial Management

During the rent collection process, what things should you consider before occupancy?

The screening process, Rent collection policy, the inclusion of the policy in the lease and/or orientation materials

Net Operating Income (NOI)

The total new revenue that remains after all operating expenses are deducted from total income. FORMULA EGI - OE = NOI

Vacancy, Concession & Collection Loss (VAC)

The total value of rent loss from vacant units, concessions, collection losses, and non-revenue units.

When would you develop Rehab or Renovation budget?

When a property is being rehabbed or undergoing retrofitting/modernization.

When do we use the Sales Comparison Approach?

When several similar properties in the local market recently sold or are for sale

Why is the Sales Comparison Approach useful?

When there are several similar properties in the local market recently sold or currently for sale

When is the Cost Approach Used?

When there is no market activity, and sales approach cannot be used. Note: typically not used on multifamily income producing properties

Substitution

Value is set by the price that would be paid to acquire a similar substitute within a reasonable amount of time.

If you have increased the NOI (Net Operating Income) by $24,000 and the cap rate is 6%, how much value are you adding to the property?

$400,000

What are the steps to the budget developments process?

- Identify goals - Gather information -Assign numerical values

What are the 3 tips to developing budgets covered today?

-Be prepared -use historical numbers -Seek input

How do you analyze variances?

-Compare budge to actual numbers -look at events on the property or in your submarket or region

When is income capitalization approach used?

-It is used when a property is purchased as an investment. -Typically, investors believe high earning translate into higher value.

What are Debt Services?

-Loan or mortgage payments - Oftentimes the RR payment as well as real estate taxes and insurance premiums are paid as part of the Debt Service -Includes RR.

What attributes affect the value of a property?

-Supply and Demand -Highest and Best Use -External Influences

What are the attributes effecting value?

-Supply and Demand -Substitution -Highest and Best Use -External Influences

Why would you want to create a buffer for rent collection?

-To help remain on good terms with residents -To ensure timely and complete payments

What are some characteristics of Variable Expenses?

-Vary as conditions change -Many are associated with occupancy

What are 3 tips to develop a budget?

1. Be prepared 2. Use historical numbers 3. Seek input

What are the 3 Property Valuation Approaches?

1. Cost Approach 2. Sales Comparison Approach 3. Income Capitalization Approach

What are 3 types of budgets

1. Lease up budget 2. Rehab/renovation budget 3. Operating budget

What are the rent collection rules

1. Select the right resident 2. Establish clear rent collection policy in writing 3. Collect all rent and other charges that are due 4. Make rent payment as easy and convenient as possible 5. Create a buffer between you and your residents 6. Make penalties 7. Use legal means if necessary

If a down payment is $200,000 and the cash flow generated is $20,000, what is the Cash-on-Cash Return?

10%

Break Even Occupancy Ratio

Calculates the occupancy level needed to earn enough to pay the operating expenses and debt service FORMULA (OE + DS + RR) / EGI

Break Even Rent Per Square Foot

Calculates the rent per square foot needed to pay the operating expenses and debt service. Helps identify necessary rents needed to cover all prop expenses (including debt service). FORMULA (OE + DS + RR) / Total SqFt

What is a rate of return used to measure a property's value based on its NOI?

Capitalization rate

What measures the amount of cash earned against original cash invested?

Cash on cash return Formula: annual cash income / total cash invested = cash on cash return

A form you complete to initiate the payment process is what?

Check request payment voucher

A CAMs responsibility is to analyzing variances- what does analyzing variances mean?

Compare the budget to the actual numbers so you can identify and explain variances. FORMULA (Actual Number - Budgeted number_ / Budgeted number = variance percentage

What is the Sales Comparison Approach?

Compares sale prices of similar properties in the area Identifies market value of property directly related to the prices of comparable competitive properties

Discounts and incentives used to increase occupancy or address resident issues

Concession and discounts

What is Variable Expenses?

Controllable expenses that vary as conditions change including utilities, maintenance, landscaping, marketing, payroll, ECT. Many are associated with occupancy. Variable expenses are often computed per square foot, per unit and/or as a percentage of total expenses.

What is Capital Expense (CE)?

Costs for large improvements like appliance, HVAC equipment, roofing, ECT.

What are Capital Expenses?

Costs for large improvements that have an economic useful life beyond 1 year

Highest and Best Use

Highest and best use refers to the use that maximizes an investment property's value. This use must be legally permissible, physically possible, financially feasible and produce maximum returns.

Supply and Demand Definition

If demands for a particular property type is high, prices ten to increase. This takes into consideration the existing properties that are unsold or vacant and properties being constructed, converted, or planned. More new units may decrease demand.

Capital Expenses

Non-recurring capital expenditures such as appliance replacement, renovations, roofing, etc. intended to add to the life of the property

Units unable to generate revenue example: model units Employee units Maintenance or renovation Other uses

Offline units

Once a property is fully leased and operating under stabilized conditions, budgeting is more routine. What type of budget is this?

Operating budget

What is the purpose of measuring performance?

Shows if goals are met and drives investment decisions

A log where you track monthly purchase orders and payments as they occur is what?

A budget control log

When doing an financial analysis, why do you need to identify the GPR first?

All the other income & expense are measured and evaluated as a percentage of GPR

What is Fixed Expense?

Always the same amount; they do not vary with occupancy level. Includes property taxes and insurance premiums. - Property taxes - Insurance Premiums include liability, casualty, auto, workers' comp.

Replacement Reserve (RR)

An account used to set aside money for anticipated future expenses/large projects.

What is the definition of Cost Benefit Analysis?

An analysis weighing the cost against the possible resulting benefit

Operating Expense Ratio

An expense to income ratio showing the percentage of Effective Gross Income (EGI) needed for Operating Expenses. It is used to measure property performance and expense control. FORMULA OE / EGI = OE

What is it called to understand normal income and expenses at a property, know what items account for the largest expenditure and the potential impact on the budget, note any steady increases or decreases and determine the reason for the trend and look for anomalies or one-time events that impact numbers?

Analyzing numbers

How do you find the Cap rate?

Annual Net Operating Income / Capitalization Rate = Value

When managing a budget- what are the CAM's Responsibility?

Annualization & Extrapolation, Analyzing numbers, analyzing Variances, Explaining variances, recommending Action

When managing a budget, to annualize and extrapolate a number is the act of using data that is known for a few months to estimate that is likely to occur in future month. This is called?

Annualization and extrapolation

Uncollected rental income due to non-payment

Bad debt

Once you've analyzed and can explain variances, what should you do next?

Determine what, if any, action to take

A CAM's responseablilty is to recommend actions. What does it mean to recommend action?

Determine what, if any, action to take and when to implement the plan. EXAMPLES: -Adjust rents in response to market conditions -Re-evaluate advertising and marketing expenses -Incorporate a new service or amenity to attract new residents -Reduce the number of times the grass is mowed - Delay expenditures -Monitor payroll overtime

What are the three primary types of income you will look for/calculate?

Effective Income (EGI) , Net Operating Income (NOI) , Cash Flow (CF)

What is used to "Generate" an Income Statement?

Entries in the general ledger

What is the Cost Approach?

Estimates the current cost of reproducing or replacing the building, minus depreciation, plus land and value.

What is Extrapolation/ Annualization?

Estimating future information by extending known information

How does a lower cap rate indicate lower or higher value?

Higher Value

Why is the Cost Approach Useful?

Improvements and land are valued separately, it is useful for instance and accounting purposes when depreciation must be estimated for income taxes.

A CAM's responsibility is to Explain Variances- what does it mean to Explain Variances?

In reports, you should be able to explain WHY an actual figure is more or less than projected in the budget.

Operating Expenses (OE)

Includes all expenses, fixed and variable, incurred in the course of managing the property. Capital Expenses are not typically included

Other Income (OI)

Income from items other than rent e.g. laundry, vending, parking, late fees, pets fees, ect.; can be up to 10% of total property income.

List some benefits of minimizing financial loss

Increases the financial success of a property, Improves property performance, Makes your job easier

IREM stands for what?

Institute real estate management

Document that lists products, quantities and agreed upon prices for products or services

Invoices

Replacement Reserve (RR)

Is included in CE. It is an account used to set aside money for anticipated future expenses/ large projects.

Why is income capitalization approach useful?

It is useful for making purchasing decisions.

What is income capitalization approach?

It uses methods, techniques and mathematical procedures to analyze a property ability to generate income and convert future earnings to present day dollars.

When a property is constructed, a budget is created to guide activities during lease up. What type of budget is this

Lease up budget

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 effect on value.

What is the most important thing to keep in mind when developing a budget?

The owner's property objectives and investment goals

A fund available cash to handle one-time minor expenses such as gas or incidental office supplies is what?

Petty Cash Fund

Describe a Cost Benefit Analysis

Process of weighing a potential expense against a potential benefit

Properties being rehabbed or undergoing renovation/modernization require specialized budgets. What type of budget is this?

Rehab/renovation budget

What is the benefit to the investor resulting from an investment?

Return ; the financial benefit

What measures the rate of return based on a properties income stream.

Return on Investment (ROI) Formula: (gain - cost) / cost = (ROI)

What type of property valuation approach would you use if there are several similar properties in the area that have recently sold?

Sales Comparison Approach

What information do you need in order to complete an financial analysis on a property?

The Income Statement

Total Rent Revenue

The amount of GPR less vacancy , concessions, collections loss and non revenue units. Also called Net Rental Income (NRI) FORMULA GPR- VAC= TRR

Effective Gross Income (EGI)

The amount of GPR less vacancy, concession, collection loss and non revenue units plus Other Income. Total property revenue from all sources. FORMULA GPR - VAC + OI = EGI

What is Gross Potential Rent (GPR)

The amount of rent that would be collected if a property was 100% occupied & residents were paying market rent. FORMULA # of occupied units X market rent

What is Gross Potential Income (GPI)

The income of occupied units at existing lease rates and vacant units at current market rents. (WHAT REGENCY CALLS LOSS TO LEASE) FORMULA # of occupied units X average monthly rent + # of vacant units X average market rent

Debt Service (DS)

The loan or mortgage payment. It covers the interest on and retirement of an outstanding principal on a mortgage loan

What determines Cap Rate?

The market and the quality of the property; can be as low as 5% and as high as 12%

Cash Flow

The money remaining after all sources of income are collected and all property expenses (including CE, RR, & DS) are paid. FULL CALCULATION GRP - VAC + OI = EGI EGI - OE = NOI NOI - CE - DS - RR = CF FORMULA NOI - CE - DS - RR =CF

During the rent collection process, what is the purpose of resident communication efforts?

To facilitate the rent collection process

Are increased expenses favorable or unfavorable variances?

Unfavorable

Loss of potential rental income due to vacant units

Vacancy

What are the main types of financial loss you should work to prevent?

Vacancy Loss, Offline and non-revenue units, Bad Debts, Concession and discounts

What is a Chart of Accounts?

a list of accounts to which revenue and expenses are posted and show up on the general ledger