Financial Bootcamp - naahq.org

Financial Bootcamp

Facilitator Guide Instructions for

Half Day Workshop Delivery

March 2018

© 2017 National Apartment Association

LIMITS OF LIABILITY AND DISCLAIMER OF WARRANTY © 2017 by the National Apartment Association, 4300 Wilson Boulevard Suite 400 Arlington, VA 22203. All rights reserved. The course materials or any part thereof may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, or otherwise, without the prior written permission of the National Apartment Association Education Institute (NAAEI). NAA retains copyright to the original materials and to any translation to other languages and any audio or video reproduction, or other electronic means, including reproductions authorized to accommodate individual requests based on religious or medical deferments from classroom participation. DISCLAIMERS Although NAAEI programs provide general information on apartment management practices, NAAEI does not guarantee the information offered in its programs is applicable in all jurisdictions or that programs contain a complete statement of all information essential to proper apartment management in a given area. NAAEI, therefore, encourages attendees to seek competent professional advice with respect to specific problems that may arise. NAAEI, their instructors, agents, and employees assume no responsibility or liability for the consequences of an attendee’s reliance on and application of program contents or materials in specific situations. Though some of the information used in scenarios and examples may resemble true circumstances, the details are fictitious. Any similarity to real properties is purely coincidental. Forms, documents, and other exhibits in the course books are samples only; NAAEI does not necessarily endorse their use. Because of varying state and local laws and company policies, competent advice should be sought in the use of any form, document, or exhibit. POLICY STATEMENT REGARDING THE USE OF RECORDING DEVICES, AUDIO VISUAL EQUIPMENT, AND OTHER MEANS OF REPRODUCTION OR RECORDING OF THE “Financial Bootcamp” MATERIALS 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 photocopying of “Financial Bootcamp” materials is permitted. Authorized recording of programs or duplication of materials may be done only by the instructor on site.

© 2017 National Apartment Association

SUBJECT MATTER EXPERTS The NAA Education Institute wishes to thank the following apartment industry professionals for contributing their time and expertise to the development of the Financial Bootcamp.

Mindy McCorkle, CAM, CAPS, NAAEI Faculty

Chief Enhancement Officer, Enhancement Talent Development [email protected]

Alexandra Jackiw, CAPS, CPM, NAAEI Faculty

President of Milhaus Management, LLC

.

Financial Bootcamp NAA Education Institute

4300 Wilson Blvd, Suite 400 Arlington, VA 22203

(703)-518-6141 [email protected]

www.naahq.org

mailto:[email protected]

© 2017 National Apartment Association 2


Workshop Information Workshop Length: This workshop is designed to be presented in three hours, including a break. Actual time may vary depending on size of participant group and the knowledge level of participants. The estimated timing for the chapters in this workshop including the activities is as follows.

Section 1 Intro/Welcome/Workshop Goals 15 minutes Section 2 Number Types 30 minutes Section 3 Basic Algebra 15 minutes Section 4 Comparing and Predicting 20 minutes

BREAK 15 minutes

Section 5 Practical Property Management Calculations 35 minutes

Section 6 Area, Space, and Volume 15 minutes Section 7 Practice 20 minutes

Wrap Up & Q&A & Action Plan 15 minutes

Estimated Timing: 3 hours


Instructor Preparation • Read this guide carefully. Familiarize yourself with the organization and flow

of the workshop, as well as the content itself. • Review all the materials thoroughly and ensure that you are completely

comfortable with all the information and calculations. Even though this is a short workshop (1/2 day) with no exam, you should plan on spending several hours reviewing the materials, planning your workshop, and practicing the calculations.

• Do a dry run of the material (or at least some of it) in front of willing colleagues or family members.

Materials & Equipment Needed: • Financial Bootcamp Facilitator Guide for yourself • Financial Bootcamp Participant Guide for each participant and one for

yourself • Financial Bootcamp PowerPoint Slides • Calculators for each student and one for yourself (make sure to check if the

host is providing those or if students need to bring them) • Flipchart and stand or Whiteboard and colored markers • Computer, projector, and handheld clicker with laser pointer • Microphone or sound system (depending on size of room and participant

group)

Using This Guide Facilitator Instructions are indicated by < >. There is a suggested narrative for each slide included in this guide. The slides coordinate with the text and contain examples and participant activities as noted.


Table of Contents

Section 1: Welcome, Introductions, and Workshop Goals ........................................................................... 9

Participant Introductions .......................................................................................................................... 9

Learning Goals and Objectives .................................................................................................................. 9

Section 2: Number Types ............................................................................................................................ 12

Rounding ................................................................................................................................................. 12

Fractions .................................................................................................................................................. 12

Parts of a Fraction ............................................................................................................................... 13

Fractions – Additions (When the Denominator is the same) ............................................................. 13

Fractions – Additions (When the Denominator is different) .............................................................. 13

Simplify or Reduce a Fraction ............................................................................................................. 14

Fractions – Subtraction ....................................................................................................................... 14

Fractions – Multiplication ................................................................................................................... 15

Fractions - Division .............................................................................................................................. 15

When the Numerator is Larger than the Denominator ...................................................................... 15

Decimals .................................................................................................................................................. 16

Changing Decimals to Percentages ..................................................................................................... 16

Changing Fractions to Decimals .......................................................................................................... 17

Percentages ............................................................................................................................................. 17

Section 3: Basic Algebra .............................................................................................................................. 21

Solving for the Unknown (Addition and Subtracting) ......................................................................... 21

Solving for the Unknown (Multiplication and Division) ...................................................................... 21

Section 4: Comparing and Predicting .......................................................................................................... 25

Averages .................................................................................................................................................. 25

Average vs. Weighted Average ........................................................................................................... 26

Average vs. Median ............................................................................................................................. 26

Annualization versus Extrapolation ........................................................................................................ 27

Annualization ...................................................................................................................................... 27

Extrapolation ....................................................................................................................................... 28

Section 5: Practical Property Management Calculations ............................................................................ 32

Closing Ratio............................................................................................................................................ 33


Resident Turnover Rate .......................................................................................................................... 33

Physical Occupancy ................................................................................................................................. 34

Economic Occupancy .............................................................................................................................. 34

Variance Percentage ............................................................................................................................... 35

Percentage Change ................................................................................................................................. 35

Rent Increase Percentage ....................................................................................................................... 36

Using Percentages to Change a Number (Where number increases) .................................................... 36

Using Percentages to Change a Number (Rent Increase example where the percentage is known) .... 37

Using Percentages to Change a Number (Where number decreases) ................................................... 37

Using Percentages to Change a Number (Where number decreases – another example) .................... 38

Break-Even Occupancy Ratio .................................................................................................................. 38

Operating Expense Ratio ......................................................................................................................... 39

Loan to Value Ratio ................................................................................................................................. 40

Return on Investment (ROI) .................................................................................................................... 40

Cap Rate .................................................................................................................................................. 41

Section 6: Area, Space, and Volume ........................................................................................................... 44

Calculating Perimeter.............................................................................................................................. 44

Calculating Area ...................................................................................................................................... 44

Calculating Volume ................................................................................................................................. 45

Section 7: Practice ....................................................................................................................................... 49

Rent Per Square Foot .............................................................................................................................. 49

Cost Per Unit ........................................................................................................................................... 50

Pro-Rations .............................................................................................................................................. 50

Payback Period ........................................................................................................................................ 51

Variances ................................................................................................................................................. 52

Operating Expense per Square Foot ....................................................................................................... 52

Action Plan .................................................................................................................................................. 53



SECTION 1

Welcome, Introductions,

and Workshop Goals


Slide 1 Section 1: Welcome, Introductions, and Workshop Goals <Welcome participants to the workshop and introduce yourself if you weren’t introduced by the workshop host. Let the participants know that this half day workshop has been designed by NAA to provide them with an opportunity to refresh and sharpen their math skills in preparation for taking the CAM or CAPS Credential Program. Let them know they will be doing calculations throughout the workshop. Participants will be required to write out the calculations they are solving to aid in understanding the methodology behind the calculations.> Participant Introductions

<If the group size is less than 20, consider asking participants to introduce themselves by name, company, and why they chose to attend this workshop. If the group size is larger, ask participants to introduce themselves to several of the participants around them. Of course, you can use your own icebreaker activity that fits the time frame if you’d like.> Slide 2 Learning Goals and Objectives This workshop will help you achieve six key learning objectives. These goals are to:

1. Refresh your knowledge of fundamental math functions: fractions, decimals, rounding, and percentages

2. Solve for the unknown using basic algebra 3. Understand averages versus weighted averages 4. Learn the difference between annualization and extrapolation 5. Understand how to calculate area 6. Work with common property management calculations that you will use in

the CAM and CAPS programs



SECTION 2

Number Types


Let’s get started by looking at some number types. Slide 3 Section 2: Number Types We’re going to look at several number types: fractions, decimals, and percentages, but first, let’s look at the process of rounding. Slide 4 Rounding It’s much more efficient to work with values when they are rounded to the nearest tenth or hundredth. Slide 5 In the CAM and CAPS credential courses, you may be instructed to round to the nearest tenth when working with percentages, and to whole numbers when working with dollar amounts. The fundamental rounding technique tells us if the number you are rounding is followed by 5, 6, 7, 8, or 9, round the number up. If it’s followed by 4, 3, 2, or 1, round the number down. Slide 6 Remember to use whole numbers when working with dollar amounts. Slide 7 Fractions Fractions are a big part of our daily lives, even if we don’t realize it. Perhaps it’s when you split the check at lunch with your friends. Or when you want to make half of that stir fry dish for dinner and you only need ½ of 1/3 cup of olive oil. In property management, sometimes we have to allocate expenses across multiple properties or figure out our break-even occupancy, so we need to understand fractions.


Slide 8 Parts of a Fraction The top number of a fraction is called the numerator and the bottom number is the denominator. The denominator tells the total number of parts in the fraction. This number shows how many equal 'pieces' something has been divided into. Slide 9 Fractions – Additions (When the Denominator is the same) When adding fractions with the same denominator, the denominator stays constant. The addition takes place with the numerator only. Slide 10 Fractions – Additions (When the Denominator is different) When adding fractions with different denominators, there are a few steps required. In order to add the fractions, we have to convert the denominator to a common denominator.

Step 1: Multiply both numbers on the first fraction by the bottom number of the second fraction. We're not changing the value of the fraction; we're just changing how the fraction looks. It's still the same fraction. Step 2: Multiply both numbers on the second fraction by the bottom number of the first fraction. Again, we're not changing the value of the fraction; we're just changing how the fraction looks. It's still the same fraction. Step 3: Add the numerators of the two fractions together. Step 4: Simplify (or reduce if needed).


Slide 11 Simplify or Reduce a Fraction To reduce a fraction to its simplest form, divide both the numerator and denominator by the Greatest Common Divisor (GCD). The GCD may be obvious, or it may take several steps to find the simplest version of the fraction. Slide 12 Fractions – Subtraction If you are subtracting fractions that have a common denominator, all that is required is to subtract the numerator. (Top example on slide) If the denominators are different, we’ll use the same steps we used when adding fractions with different denominators. (Bottom example on slide.)

Step 1: Multiply both numbers on the first fraction by the bottom number of the second fraction. We're not changing the value of the fraction; we're just changing how the fraction looks. It's still the same fraction Step 2: Multiply both numbers on the second fraction by the bottom number of the first fraction. Again, we're not changing the value of the fraction; we're just changing how the fraction looks. It's still the same fraction. Step 3: Add the numerators of the two fractions together. Step 4: Simplify (or reduce if needed).


Slide 13 Fractions – Multiplication Multiplying fractions is straightforward. Multiply the numerator and the denominator and simplify if needed. <Have participants simplify the answer.> Slide 14 Fractions - Division Dividing fractions is a bit more complex. There are three things to remember when dividing fractions.

1. Leave the first fraction as is. 2. Change the divide function to multiply. 3. Turn the second fraction over or invert the one you are dividing by.

Slide 15 <Walk through example using the Leave, Change, Turn process. Let participants simplify the answer.> Slide 16 When the Numerator is Larger than the Denominator Sometimes a fraction calculation will result in the top number – the numerator – being larger than the bottom number – the denominator. In this case, the denominator is divided into the numerator to simplify the fraction, resulting in a whole number/decimal combination. To convert the decimal back into a fraction, we leave the whole number as it is. Convert 0.25 to a fraction: 0.25=25/100. Then reduce the fraction to the lowest term, which is 1/4.


If the decimal goes to the 10th spot, you’d multiply by 10; if it goes to the 1000th spot, you’d multiply by 1000.

.25 X 100 = 25 1 X 100 = 100 25/100 = ¼

Slide 17 <Have participants answer.> Slide 18 Decimals Decimals are important because we use them every day in different situations, such as counting money, looking at price tags, calculating miles per gallon, or figuring price per square foot. Slide 19 Changing Decimals to Percentages To convert a decimal to a percent, multiply the decimal by 100, then add the % symbol. An easy way to multiply a decimal by 100 is to move the decimal point two places to the right. Slide 20 Practice <Have participants answer.>


Slide 21 Changing Fractions to Decimals The diagram on the slide shows the relationships between percentages, decimals, and fractions. To change a fraction to a decimal to get to a percentage, divide the top of the fraction (the numerator) by the bottom (the denominator), multiply by 100 and add a "%" sign. If the fraction is 1/10, divide 10 into 1 resulting in 0.1. Then, using the process we looked at earlier, move the decimal point two places to the right and add the % sign resulting in 10%. Slide 22 Percentages Fractions, decimals and percentages are related and can be used to express the same number, or proportion, in different ways. If we understand fractions, decimals, and percentages, we have the basis for being able to make sound estimations and valuable calculations. Many of the Key Performance Indicators (KPI) and benchmark figures your company may use to evaluate performance or achievement are in the form of a percentage. Think about closing ratios and work order completions. Slide 23 The diagram on this slide shows the relationship between fractions, decimals, and percentages and demonstrates how one number can be expressed in multiple forms. Slide 24 Looking at the example number from the previous slide, 3/10 becomes a decimal by dividing the denominator into the numerator. It becomes a % by moving the decimal point 2 places to the right.


Slide 25 <Using the ¾ case of light bulbs from the earlier example, have participants convert the fraction to a percentage.>



SECTION 3

Basic Algebra


In addition to fractions, decimals, and percentages, there are some basic algebra functions that can be helpful in our property management world.

Slide 26 Section 3: Basic Algebra Algebra is a form of mathematics that uses letters or symbols for unknown numbers so that we can solve for those unknowns. Slide 27 Solving for the Unknown (Addition and Subtracting) We may know that A = B + C, but what if we only have A and C? We find B by subtracting the last figure from both sides. Slide 28 Solving for the Unknown (Multiplication and Division) The same principle applies to multiplying and dividing.


Slide 29 <Have participants answer.>




SECTION 4

Comparing and Predicting


Much of the financial analysis we conduct in property management pertains to comparing data to historical information or market data, and predicting future income and expenses. Slide 31 Section 4: Comparing and Predicting Let’s look at a few tools to help us perform those tasks. Slide 32 Averages Many of the Key Performance Indicators used in Property Management are averages: things like average rent per square foot and average square feet. Using an average, or a weighted average, aids in analytical comparison of data from multiple sources. Slide 33 To determine an average, add all the figures together and divide by the number of figures used. In this example, to determine the average square footage and average rent, add the figures in each column and divide by 5.

Average Square Footage: 450 + 680 + 1,075 + 1,425 + 1,650 = 5,280 ÷ 5 = 1,056 Average Rent: $575 + $720 +$925 + $1,250 + $1,800 = $5,270 ÷ 5 = $1,054


Slide 34 Average vs. Weighted Average A weighted average is the average of values which are scaled by importance. The weighted average of values is the sum of weights times values divided by the sum of the weights. To find a weighted average, calculate the TOTAL square footage and rent for all units first. In this example, we would multiply the # of units x the SF and Rent for each unit type to determine the total square footage and total rent. The totals are divided by the total # of units.

Total SF ÷ # of Units = weighted average SF 264,925 ÷ 260 = 1,019

Total Rent ÷ # of Units = weighted average rent

258,975 ÷ 260 = $996 Slide 35 Average vs. Median As we saw earlier, to determine an average, the total of all the figures is divided by the number of figures. 1200 + 1200 +1200 +1200 + 1300 + 1300 + 1300 + 1300 + 1400 = 11,400 11,400 ÷ 9 = 1266.66 or 1267 The "median" is the "middle" value in the list of numbers. To find the median, the numbers should be listed in numerical order from smallest to largest; then identify the middle one of the list. In this example, there are 9 numbers so the middle number (the one in the 5th spot) is the middle or median. If there were an even number of items on the list, the median would be the midpoint between the figures in the middle 2 spots.



Average SF: 425 + 820 + 1100 + 1470 + 1809 = 5624 ÷ 5 = 1,124.8 or 1,125 SF Average Rent: 604 + 780 + 1015 + 1350 + 2100 = 5849 ÷ 5 = $1,169.80 or $1,170

Total SF ÷ Total # of Units = weighted average SF

216,428 ÷ 260 = 832 Total Rent ÷ Total # of Units = weighted average rent

211,596 ÷ 260 = $814

Slide 37 Annualization versus Extrapolation While we typically think of annualization and extrapolation as being part of the budget process, we can also use them to reforecast financial performance throughout the year. Sometimes these two concepts are used interchangeably but they are different. Slide 38 Annualization Let’s look at annualization first. To annualize a dollar amount, determine the average monthly amount by adding the amounts that are known together, and divide by the # of months represented. This provides an average monthly amount that is then multiplied by 12 months to estimate an annual amount.


Slide 39 Extrapolation Extrapolation takes a list of known numbers and extends the list based on what can be predicted from the list of known numbers. In this example, we can see that the monthly amount has increased by $300 each month so we can predict that trend will continue in the coming months. Before extrapolating known data, check that the numbers aren’t skewed for some reason (artificially high or low), and that seasonal changes or anomalies have been considered. Slide 40 <Have participants answer.>

Calculate the total for each line item. Advertising, Office Supplies, and Landscape Maintenance are extrapolated by using the number trend shown in the diagram. Clubhouse/Amenity Expense and Appliance Repair are Annualized.

Clubhouse/Amenity Expense: 129 + 312+ 175 + 43 + 98 + 450 + 64 + 72 = 1,343 1,343 ÷ 8 = 167.88 x 12 = 2,014.50 or $2,015


Appliance Repair Expense: 412 + 188 + 142 + 302 + 241 + 142 + 340 + 115 = 1,882 1,882 ÷ 8 = 235.25 x 12 = $2,823

Slide 41

BREAK – Take a 15-minute break before transitioning to Property Management Calculations



SECTION 5

Property Management

Calculations


Now that we’ve reviewed decimals, fractions, percentages, averages, annualization, and extrapolation, let’s look at how they are used in property management calculations. Slide 42 Section 5: Practical Property Management Calculations There is a long list of important calculations in property management. Many are important Key Performance Indicators (KPI), and some are important measurements for lenders and owners. Slide 43

Practical Property Management Calculations In the next phase of the workshop, we will explore these calculations.

• Closing Ratio • Resident Turnover Rate • Physical Occupancy • Economic Occupancy • Variance Percentage • Rent Increase Percentage • Percent Change • Calculating Area • Breakeven Occupancy • Operating Expense Ratio • Loan-to-Value • Rate of Return • Cap Rate


Slide 44 Closing Ratio A closing ratio measures the number of leases or closed sales being secured as a portion of all potential sales. It’s a KPI used to determine the sales effectiveness of the leasing team. Many companies set a closing ratio goal for the leasing team, usually 35-40%, but it varies. To calculate closing ratio, the number of leases is divided by the number of traffic. But what happens if a lease (application) is not approved for some reason? When we adjust the number of closed sales, and recalculate, what is the NET closing ratio? <Have participants answer.>

2 ÷ 12 = .167 = 16.7% Slide 45 Resident Turnover Rate Resident turnover rate shows the ratio of move-outs compared to the total number of units. Resident turnover rate is most often stated as an annual figure. Organizations often set a resident turnover goal for each property or submarket, usually 50-60%, but those goals vary depending on property type and market conditions. In the student housing market, the turnover rate can be as high as 100% or even higher in some cases.


To determine resident turnover rate, the number of move-outs is divided by the total number of units. <Have participants answer.>

163 ÷ 260 = .6269 = 62.7% Slide 46 Physical Occupancy Physical Occupancy is calculated by dividing the number of occupied units by the total number of units. (Example on slide.) <Have participants answer.>

235 ÷ 260 = .903 = 90.4% Slide 47 Economic Occupancy Economic Occupancy represents occupancy after vacancy, bad debt, concessions, and non-revenue units have been factored out. The formula is Total Rent Revenue ÷ Gross Potential Rent. Note: You’ll learn more about GPR and TRR in CAM. Slide 48 <Have participants answer.>

$207,320 ÷ $248,595 = 0.834 or 83.4% Economic Occupancy


Slide 49 Variance Percentage When there is a variance between actual expenses or income and budgeted expenses or income, the variance is often expressed as a percentage to aid in comparison and analysis. To calculate a variance percentage, the actual amount is subtracted from the budgeted amount to find the dollar variance. The variance number is then divided by the budgeted amount. <Have participants answer.>

$2,500 - $2,300 = $200 ÷ $2,500 = 0.08 = 8.0% This answer represents a favorable variance since the amount of total expenses is less than budgeted.

<Have participants answer.>

$1,800 - $1,100 = $700 ÷ $1,800 = 0.3888 = 38.9% This answer represents an unfavorable variance since the amount of income is less than budgeted.

Slide 50 Percentage Change We are often asked to express changes over time as a percentage. This is done by dividing the change amount by the older or earlier amount. Looking at the amount of the water bill each month for the last 4 months, we see that from April to May, there was an increase of $250. If the increase amount is divided by the earlier amount of $5,000, we see that the percentage change in May is 5.0%.


What is the percentage change for June? <Have participants answer.>

$5,785 - $5,250 = $535 ÷ $5,250 = 0.102 = 10.2% What is the percentage change for July? <Have participants answer.>

$6,360 - $5,785 = $575 ÷ $5,785 = 0.099 = 9.9% Slide 51 Rent Increase Percentage We can use that same percentage change process to determine rent increase percentages. The increase amount is divided by the old rate. <Have participants answer.>

$925 - $850 = $75 ÷ $850 = 0.088 = 8.8% Slide 52 Using Percentages to Change a Number (Where number increases) In the percentage change process we just reviewed, the numbers were known so those numbers were used to calculate the percentage. Sometimes we know the percentage but need to find the number. For example, we know that Bob Brown earns $35,000 per year as a maintenance tech. If he gets a 3% pay increase, what is his new salary? <Have participants answer.>

$35,000 x .03 = $1,050 + $35,000 = $36,050


Alternate Solution:

$35,000 x 1.03 = $36,050 (this process saves a step by including the whole number 1 to the known number)

Slide 53 Using Percentages to Change a Number (Rent Increase example where the percentage is known) We looked at rent increase percentage earlier where we knew the old and new rate, but if we need to calculate the new rate based on a known percentage, we can do that by multiplying the percentage by the known rate. <Have participants answer.>

$525 x .04 = $21 + $525 = $546 (to raise rent by 4%) OR $525 x 1.04 = $546

Slide 54 Using Percentages to Change a Number (Where number decreases) If the percentage indicates a reduction, we still use the known number multiplied by the percentage to find the change number. Then we subtract that number from the original known number. <Have participants answer. What is 93.5% of $1,800?>

$1,800 x .065 = $117 $1,800 - $117 = $1,683


Alternate Solution: Similar to the alternate solution we reviewed on the previous slide, we can subtract the known percentage from whole number 1, and use that percentage to multiply the known dollar amount.

1 - .065 = 0.935 $1,800 x 0.935 = $1,683

Slide 55 Using Percentages to Change a Number (Where number decreases – another example) <Have participants answer. What is 88% of $15,600?>

$15,600 x .12 = $1,872 $15,600 - $1,872 = $13,728 OR $15,600 x .88 = $13,728

Slide 56 Break-Even Occupancy Ratio Break-Even Occupancy Ratio is an important measurement as it tells us the lowest occupancy percentage a property can maintain and still be able to pay all the necessary bills. When a property’s occupancy falls below the break-even occupancy level, the owner may have to supplement the property financially, which is never a desirable scenario.


Break-even occupancy is calculated by adding the expense components the property is responsible for paying - operating expenses, debt service, and replacement reserve (if applicable) – and dividing it by Effective Gross Income (total revenue including other income for the property). Note: You’ll learn more about GPR and EGI in CAM.

(OE + DS + RR) ÷ EGI

(Operating Expenses + Debt Service + Replacement Reserve)

÷ Effective Gross Income

<Have participants answer.> Calculate the Break-Even Occupancy Ratio using the following information:

• Operating Expenses are $525,667 • Debt Service is $306,000 • Replacement Reserve is $125,000 • Effective Gross Income is $1,101,660

($525,667 + $306,000 + $125,000) ÷ $1,101,660 = .868 or 86.8%

Based on this example, the property will need a to maintain 86.8% occupancy rate in order to break even. Slide 57 Operating Expense Ratio Operating expense ratio is an important Key Performance Indicator in property management as it shows the correlation between our operating expenses and our total property revenue. It is calculated by dividing Effective Gross Income into the annual Operating Expenses.

OE/EGI = Operating Expense Ratio


<Have participants answer.> Using the following information, calculate the OE Ratio

• Operating Expenses (OE) = $1,411,870 • Gross Potential Rent (GPR) = $2,957,350

$1,411,870 ÷ 2,957,350 = 0.477 = 47.7%

Slide 58 Loan to Value Ratio Another important measurement, Loan to Value Ratio (LTV), is expressed as a percentage. The lower the LTV, the lower the risk to the lender. It answers the question, how much of the property’s value is covered by the loan. The higher the percentage, the higher the risk to the lender. It is calculated by dividing the property value into the loan amount. <Have participants answer.> If the loan amount is $35,000,000 and the property value is $48,000,000, what is the loan value?

$35,000,000 ÷ $48,000,000 = 0.729 or 72.9% Slide 59 Return on Investment (ROI) Return on Investment measures the rate of return based on a property’s income stream. It is used to identify the efficiency of an investment. It is calculated by dividing NOI by the property value. <Have participants answer.>


If Heavenly Haven’s NOI is $890,000 and the value of the property is $9,000,000, what is the ROI?

$890,000 ÷ $9,000,000 = 0.0988 or 9.9%

Slide 60

Cap Rate Cap Rate is a rate of return used to measure a property’s value based on its NOI and to reflect the investor’s desired ROI. The lower cap rate = higher value; the higher cap rate = lower value. The Cap Rate is calculated by dividing NOI by the purchase price. Once the Cap Rate is determined, you can find the value by dividing the Cap Rate into NOI. <Have participants answer.>

If NOI is $605,875 and the purchase price is $9,000,000, what was the Cap Rate? What is the value of the property based on its income?

$605,875 ÷ $9,000,000 = 0.067 or 6.7%

$605,875 ÷ 6.7% = $9,042,910 This example show that the property is valued at a higher rate than the price the owner originally paid for the asset.



SECTION 6

Area, Space and

Volume


Understanding how area and space is calculated can be very helpful in our property management world. Slide 61 Section 6: Area, Space, and Volume Knowing how to calculate area, space and volume can allow us to calculate the volume of a swimming pool, the area of a room to be painted, or the size of an apartment unit. Slide 62 Calculating Perimeter Calculating the perimeter of a space can provide us with valuable marketing information or allow us to verify information we’ve been given. Slide 63 Calculating Perimeter The perimeter is the sum of all sides of the area. This may be useful in determining in how many feet of holiday lights you would need to go around the building or how many feet of molding you’ll need to add a chair rail. Slide 64 Calculating Area Area is the measurement of how much space there is inside a room or space.


Slide 65 Calculating Area Area is determined by multiplying width times height. Calculating the area of a space can be useful for determining how much paint to buy to cover a wall or how much grass seed is needed for an area of the lawn. Slide 66 Calculating Volume Calculating volume can be useful in estimating costs and determining how much a vessel or container can hold. Slide 67 Calculating Volume In property management, the most common need for calculating volume is for determining how many gallons of water a swimming pool holds. Volume is calculated by multiplying width x height x depth. The result gives us cubic feet. (Example on slide) <Have participants answer.> In this example, the swimming pool is _______ cubic feet.

20 ft. x 12 ft. x 5 ft. = 1,200 cubic feet


If there is 0.134 cubic feet in a gallon, how many gallons will this pool hold? <Have participants answer.>

1,200 ÷ 0.134 = 8,955 gallons



SECTION 7

Practice


We’ve covered a lot in this workshop: fractions, decimals, formulas and more! And we’ve completed some calculations for practice. Let’s spend a few more minutes practicing what we’ve learned. Slide 68 Section 7: Practice Property management software does much of the calculation for us in today’s world. Software isn’t flawless and there are hundreds of behind-the-scenes settings that may impact the results we see on reports and dashboards. That makes it important for us to be able to manually calculate when needed or as a way to verify the accuracy of what our property management software system tells us. Slide 69 Rent Per Square Foot Rent per square foot can help us more appropriately compare our rental rates with our competition. It expresses the rent rate in a way that allows for apples-to-apples comparison. <Have participants answer.> What is the AVERAGE Rent Per Square Foot?

(1.28 + 1.06 +.86 +.88 + 1.09) ÷ 5 (the # of floorplans) = $1.03 What is the WEIGHTED AVERAGE Rent Per square Foot?

Average Rent ÷ Average SF $996 ÷ 1,019 = $0.98


Slide 70 Cost Per Unit <Tell participants two different calculations will be used to complete the graph.> Expenses are often expressed in a cost-per-unit manner. This allows us to be able to compare the results of multiple properties in a meaningful manner. Heavenly Haven has 260 units. Cost per unit is determined by dividing the number of units into the total expense. $32,500 ÷ 260 = $125 $256,100 ÷ 260 = $985 and so on. The TOTAL cost per unit is determined by adding together the CPU for each line item. <Have participants answer.>

125 + 985 + 620 + 195 + 2,115 + 550 + 75 = 4,665 total cost Slide 71 Pro-Rations Aside from dealing with pro-rated rent at move-in and move-out, we sometimes have to allocate a portion of a salary or expense to multiple properties. To determine the portion of Mary’s salary that each property should pay, divide each property’s total units by the total # of units to determine an allocation percentage. Then multiply that % by the total salary. To determine how much each property pays for the joint ad, divide $15,000 by 600 to determine the cost per unit ($25) and then multiply the cost per unit by the # of units for each property. <Have participants answer.>


Slide 72 Payback Period When recommending upgrades or improvements to a property, one of the critical calculations that will help obtain approval is the estimated payback period. <Have participants answer.> In this example, the number of units multiplied by the cost of the washers/dryers gives us the total cost of the upgrade. What is the total cost?

If we know we will be able to charge an extra $50 for the 50 units we upgrade, the monthly additional income would be how much? At $2,500 per month, it will take how many months to recoup the total cost of the washers/dryers? Of course, that assumes that each of these units will be occupied every month. The payback period may be slightly longer if these units are vacant for periods of time during the 13.6 months.

$680 per washer/dryer in one unit $50 additional revenue x 50 units = $2,500/month $680 ÷ $50 = 13.6 months to recoup cost


Slide 73 Variances Application Fees are budgeted to be $165,000 for the year. Actual Application Fees for the year is $153,357. What are the variance % compared to budget? <Have participants answer.>

165,000 – 153,357 = (11,643) negative variance -11,643 ÷ $165,000 = -.0705 or -7.1% This example shows an unfavorable variance since the actual income is less than budgeted.

Slide 74 Operating Expense per Square Foot Biscayne Bay is a 320-unit apartment community with 353,000 total square feet. For the period ending August 31, the Operating Expenses total $1,237,643. What is annual operating expense per square foot? (Hint: don’t forget to annualize.) <Have participants answer.>

$1,237,643 ÷ 8 = $154,705 x 12 = $1,856,465 $1,856,465 ÷ 353,000 SF = $5.26


Slide 75 Wrap-Up <Wrap by asking the participants if they have any final questions or want to go over any component of the workshop one more time. Ask them how they feel about what they learned.> Slide 76 Action Plan <Have the participants complete the action plan worksheet in their participant guide. Once they are done, ask for volunteers to share an action item from their plan.> Slide 77 THANK YOU Thank you for being here today. Congratulations on investing in yourself with continued learning!

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Financial Bootcamp - naahq.org