Certified Financial Specialist
• Teach federal regulations and guidance for housing programs providing NCHM’s interpretation of both
• Provide examples of policies and procedures used in the industry
• Provide the instructor’s opinion on how to handle specific situations
• Do not give legal advice or set policy for your owner or management company
NCHM Courses and Instructors
Disclaimer
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Instructor Introduction •
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Instructor
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Course Materials
© 2018 National Center for Housing Management
CFS Course Book
Presentation Slides
Ta b
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Exercises
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Reference Material and SpreadsheetsTa
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HUD Documents
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Certification Exam Don’t panic…
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*CFS is relevant to any type of multi-family rental property, be it affordable or market-rate
(although we will discuss some of the differences).
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About the Program
Part 1 Part 2
Course Organization
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By the end of Part 1 we hope you will learn:
• What truly are the financial goals of
apartment ownership
• The basics of property-level accounting
and financial management
• The structure and purpose of different
financial statements
Objectives
• How to analyze financial statements;
quickly zeroing in on the numbers that
matter
• How to better understand your own
financial statements and make better
decisions
• Why good budgeting is so important!
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The Financial Goals of Ownership
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Financial Goals of Ownership
• Important to understand
goals of ownership
• Goals are financial and
non-financial
• Different owners have
different goals
To get us started, please do Exercise #1, Part A only, Tab 2, Page #1
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All owners essentially chooses from the same menu:
• Cash flow
• Appreciation of Value
• Preservation/Growth of
Equity
• Tax Benefits. … and a related goal: Preservation of the Asset
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CASH FLOW/NET CASH
Monthly/Annual net income flowing to the bottom-line
APPRECIATION
Increase in the fair market value of the property over time
Financial Goals – Definitions
PRESERVATION/GROWTH OF EQUITY
Protection and growth of the net value of the asset (the owner’s equity portion)
TAX BENEFITS
Improved financial return by taking advantage of certain income tax breaks
The above combine to result in “Return on Investment”
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What if the owner is a non-profit or housing authority? Does it still have these goals?
Is it still concerned with Return on Investment?
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Preservation of the Asset
• Goal – Ensure that the property continues to be a viable
asset in the future so that it will continue to meet the
owner’s financial and non-financial objectives
• Isn’t a direct financial goal; can’t be measured by one
factor as the others can
• Recognizes that the physical condition of the property
also matters
• Management “preserves” the asset by making wise
decisions in the core areas of operation
Generally, slum landlords aren’t interested in preservation of assets!
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• Initially, when the project is “underwritten”
(that is, when it is first financed or last re-financed)
• Assumptions are made and goals established, such as:
• Income and expense assumptions (A “pro forma”
budget)
• Expectations with respect to the amount of cash flow
and the expected “Return on investment (ROI)”
Return on Investment = The total financial return to the owners taking into consideration, annual cash flow, the projected gain on sale, and any applicable tax benefits. Usually expressed as a % of the owners’ equity.
How and when are financial goals established?
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• Most projects are financed with a combination of debt and
equity
• The details of the project financing are driven by the
requirements of the particular loan program (e.g. HUD, FHA,
private lender, etc.)
• Replacement reserve requirements
• Interest rates and terms of debt
• Debt service coverage
• Cap rate assumptions
• Etc.
Loan Programs Dictate Most Parameters of the Financing
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Financial Goals
• Identifies the value of the business
• It tells me what the NOI is worth
Therefore…
• It is important to have an accurate NOI
• Classifying expenses correctly
CAPITALIZATION RATE = NET OPERATING INCOME
PURCHASE PRICE
Why is the Cap rate so important?
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• How the property was structured financially
when it was built or at its last re-finance/purchase
• How it has been operated since, and,
• The current goals of the owner.
Management Has to Play the Cards That Were Dealt to It
Understanding these, helps you form operating expectations that are reasonable and achievable.
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Owner Goals
Based on what you have learned, what, if any, questions do you have regarding your owner’s financial goals?
• Are there specific cash flow expectations for the property?
• Are there any special loan requirements, such as Debt Service
Coverage requirements, that management should know about?
• Any there targets for replacement reserve balances, capital
expenditures, etc.?
Turn to Tab 2, Page 1 and complete Exercise #1, Part B
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Basic Financial Statements
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Before we dive in… What’s a Fiscal Year?
FISCAL YEAR
12-month period for financial purposes; it may or may not be the same as a calendar year (January to December)
In this program and on Exam everything is calendar year
APRIL 1ST MARCH 31STTO
OCTOBER 1ST SEPTEMBER 30THTO
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They are (or should be):
1) The way we track how the property is performing
with respect to its financial goals, and
2) Tools that help us make better operational decisions.
Financial statements are more than just reports on bookkeeping
To have them become this, we need to unlock their power! And we do that through knowledge and understanding.
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The Two Basic Statements
Income & Expense Statement
• Income the property
receives
• Operating expenses of
the property
• Difference between
income and expenses
• Referred to as Net
Operating Income
Balance Sheet
• Assets
• liabilities of the property
• Difference between
assets and liabilities –
often referred to as
Equity.
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Basic Statements in Plain English
Income
Subtotal $4,100
Pay from F/T job $3,400
Pay from P/T job $700
Expenses
Rent $1,050
Student loan $350
Car payment $400
All other day to day
expenses
$1,900
Subtotal $3,700
“Net Income” $400
Cindy’s Income & Expense Statement
INCOME SUBTOTAL
– EXPENSES SUBTOTAL
“NET INCOME”
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How is Cindy doing?
She’s doing okay financially
She’s not doing so good financially
I don’t have enough information to decide.
Basic Statements in Plain English
Q
a
b
c
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Assets
Subtotal $22,500
Checking and savings $1,000
401k $4,000
Liabilities
Student loan $25,000
Car loan $18,000
Credit card debt $6,500
Subtotal $49,500
Net Worth (“Equity”) -$27,000
Cindy’s Balance Sheet
TOTAL ASSETS
– TOTAL LIABILITIES
NET WORTH
Car $17,000
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Now, how is Cindy doing?
Like I said, she’s doing okay
Like I said, she’s not doing so good
I still don’t have enough information to decide.
Q
a
b
c
I’ve changed my mind.d
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• We need both statements to better
understand Cindy’s financial situation
• One gives us a picture of her day-to-
day situation; the other helps us see
the big picture
And, as we’ll see, we need to “combine” the two statements to understand the financial situation of an apartment community.
Key Takeaways
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The Balance Sheet
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See Tab 3, page 1 Course: Certified Financial Specialist © 2020 National Center for Housing Management 31
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Caution: Don’t mistake for market value!
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Liabilities
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See Supplemental Definitions in Tab #3 for more detail Course: Certified Financial Specialist © 2020 National Center for Housing Management
Other Balance Sheet items we will only mention briefly; not topics on Exam
Accumulated Depreciation
Retained Earnings
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Methods of Accounting
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Is your property’s income and expense statement on a cash basis, an accrual basis or something else?
Cash
Accural
Something else
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a
b
c
I don’t knowd
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Cash vs. Accrual Methods
Cash Method
• Income and expenses
are posted (i.e., record on
the books) as of the date
they are received or paid,
respectively
Accrual Method
• Income and expenses are
poste to the period to which
they apply:
• For income, the period the
income was earned (whether
received or not)
• For expenses, the period for
which the expense applies
(whether paid or not)
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In Plain English
Income Mar Apr May
Ms. Green $675
Mr. Calico $600
Ms. Blue $700
Total Income (Apr) $675
Accrual MethodCash Method
Income Mar Apr May
Ms. Green $675
Mr. Calico $600
Ms. Blue $700
Total Income (Apr) $675
Expense Mar Apr May
Education $195
Electric $950
Lawn Care $600
Total Expense
(Apr) $195
Expense Mar Apr May
Education $195
Electric $950
Lawn care $600
Total Expense
(Apr) $1,745
Mar Apr May
Net Income (Apr) $480
Mar Apr May
Net Income (Apr) $230
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Cash vs. Accrual
Turn to Tab 2, Pages 2-3 and complete Exercise #2
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Answers to Exercise #2
Income Oct Nov Dec
Ms. Gilder $950
Mr. Kim $975
Mr. Perez $975
Total Income (Nov) $975
Accrual MethodCash Method
Income Oct Nov Dec
Ms. Gilder $950
Mr. Kim $975
Mr. Perez $975
Total Income (Nov) $2,900
Expense Oct Nov Dec
Snow Removal $1,000
Plumbing $245
Supplies $445
Total Expense
(Nov) $690
Expense Oct Nov Dec
Snow Removal $1,000
Plumbing $245
Supplies $445
Total Expense
(Nov) $1,245
Oct Nov Dec
Net Income (Nov) $285
Oct Nov Dec
Net Income (Nov) $1,655
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February snow removal service paid in August
Why Accrual?
FEB MAR MAY JUN JUL AUGAPR
EXPENSES More accurately reflects the situation
INCOME More accurately reflects income
earned for the period (but need to
know accounts receivables)
NET OPERATING INCOME More accurately reflects
operations that month
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The Income and Expense Statement
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Income & Expense Statement
• Income the property receives
• Operating Expenses of the
property
• Difference between income and
expenses
• Referred to as Net
Operating Income (NOI)
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Let’s look at an example: Tab 3, pages 3-4 (Northfield)
Not all statements are alike!
THEY CAN GO BY DIFFERENT NAMES:
• Income statement
• Operating statement
• Profit and loss statement
• Monthly variance report
CAN BE FORMATTED DIFFERENTLY, BUT USUALLY CONTAIN:
• Name of Property
• Name of Report
• Period of Time Covered
• “Book” Type (sometimes)
• Time Stamp
CAN PRESENT DIFFERENT TYPES OF INFORMATION SUCH AS:
• Actuals only
• Actual vs. Budget
• Actual vs. Budget plus Variance
Most common and preferred
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• Used to make bookkeeping and accounting easier
• Most affordable properties follow HUD Chart of Accounts
• HUD Chart of Accounts is more than 100 accounts!
• Only use those accounts that are relevant
• Can customize charts of accounts as long as formal reports
conform to requirements
• Market-rate properties can adopt any chart of accounts,
though most use something similar to HUD
What are those numbers?
CHART OF ACCOUNTS
A list of numbers and descriptions for each line item
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The Income & Expense Statement
What are not “operating” expenses?
• Outlays of money reported on the balance sheet
• For example:
• Capital Expenditures
• Reserve for Replacement deposits
NET OPERATING INCOME:
INCOME – OPERATING EXPENSES
We’ll discuss these “outlays” later
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Net Operating Income
We’ll see how an income and expense statement is “modified” to give us the information we need to get to the bottom-line but for now let’s drill down on NOI.
River Bend Apartments had NOI of $400,000 last year. How is the property doing?
It’s doing okay financially
It’s not doing so good financially
I don’t have enough information to decide
Q
a
b
c
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Let’s Drill Down on the Income and Expense Statement starting with income…
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Full Income & Expense Statement for Northfield is in Tab 3, Pages 3-4
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Rental Income
Gross Potential Rent
Rent
Subsidy (if any)
Adjustments to GPR (+⁄−)
Loss to Lease
Incentives
Vacancy
Bad Debt/Recovery
+ Non Rental (or “Other”) Income
Total Income
Total Rental Income
Income (also known as “Revenues”)
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20 unit property
All 1 bedrooms
Budgeted rents:
$800/month
Monthly GPR
$16,000
12 months Monthly GPR
$16,000
Annual GPR
$192,000
MONTHLY GROSS POTENTIAL RENT
ANNUAL GROSS POTENTIAL RENT (for same property)
Gross Potential Rent The budgeted rent for a given period of time
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Gross Potential Rent
In market rate properties = The rent we planned to get for
a given unit (or unit type) when the budget was prepared
(sometimes referred to as the “asking” rent, although that
can be misleading)
In HUD Section 8 project-based properties = Contract Rents
In Tax Credit properties = Maximum (or Max) Tax Credit
Rent (or lower if market dictates).
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Rental Income: Subsidy
If a property receives
direct rent subsidies from
any governmental rental
housing program it is a
part of Gross Potential
Rent.
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Rental Income Adjustments
Rent concessions
• One month free rent
• $25 off first three months’ rent
Non-rent incentives
• Free parking for 6 months
• Reduced security deposit
• Improvement to apartment
(e.g. ceiling fans, new carpet, etc.).
Incentives (or Concessions) A discount or other item of value given to entice someone to sign or renew a lease
Usually only these tracked on incentives line
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Rental Income Adjustments
Concept not used by all properties; more common in market-rate
Unit No. 501 Jan Feb Mar Apr May
Budgeted $1,000 $1,000 $1,000 $1,050 $1,050
Actual $950 $950 $950 $950 Vacant
Loss to Lease (LTL) -$50 -$50 -$50 -$100 $0
Complete Exercise #3 at top of Page 4 of Tab 2
Loss to Lease Difference between budgeted rent and actual rent achieved
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Unit No. 45 Jan Feb Mar Apr May
Budgeted $950 $950 $975 $975 $1,000
Actual $925 $925 $925 Vacant $1,050
Loss to Lease (LTL) -$25 -$25 -$50 $0 +$50
Answers to Exercise #3
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Rental Income Adjustments: Vacancy
VACANCY LOSS Rental income (in dollars) lost due to vacant units
PHYSICAL VACANCY RATE Number of vacant units divided by number of total units
ECONOMIC VACANCY RATE Rental income (in dollars) lost divided by GPR.
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Turn to Tab #2, Page #4 and do Exercise #4 (a) and (b)
Exercise #4: Vacancy Loss
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Unit No. Days Vacant Rent per Day Rent Loss
102 23 $30
219 5 $35
220 12 $35
341 17 $32
412 13 $31
501 21 $30
623 30 $36
TOTAL
(a) Physical Vacancy Rate: 10 units 120 units = 8.3%
(b) Economic Vacancy Rate: $3,942 $108,000 GPR = 3.7%
$690
$175
$420
$544
$403
$630
$1,080
$3,942
Answers to Exercise #4
Which is more accurate: physical or economic?
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• Typically rent owed by residents that have
vacated
• Usually shown under income as a negative
number (deduction from income)
• Any funds actually collected shown as bad
debt recovery (added to income)
• Typically accounting department or senior
management determines when an account
is to be declared bad debt, per policy.
Rental Income Adjustments
Bad Debt Money owed to the property that you have no reasonable expectation to collect
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Other Income
• Parking
• Laundry/vending
• Pet Rent/pet charges
• Interest income
• Maintenance charges
Non-Rental Income All other income of the property; income other than rent
• Security deposit
recoveries
• Late fees*
• NSF fees*
• And others
* Not permitted in HUD 202
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Let’s take a look…
Now let’s move on to Expenses and the Bottom Line…
There are two kinds of expenses:
OPERATING
and
“NON-OPERATING”
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• We will get into details of line items in
budgeting
• For now, we need to understand how they
are organized: different from company to
company.
Operating Expenses All cash outlays except balance sheet items such as capital expenditures and reserve for replacement deposits
Let’s look at an example: Northfield Apartments – Tab 3, pages 3 and 4
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O P
ER A
TI N
G E
XP EN
S ES
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• A simple income and expense statement ends at NOI
• However, many statements are “modified” to add balance sheet
items and report “net cash” (the bottom-line)
• Financial activities that takes place after NOI are referred to as
“other cash transactions”.
Net Operating Income and Net Cash
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Income
Operating Expenses
Net Operating Income
Other Cash Transactions (OCT)
Other Cash Transactions (OCT)
Net Cash
NOI and Net Cash
Simple Income & Expense statement ends here
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Other Cash Transactions
Lower cash in operating account
• Reserve for Replacement Funding
(or Deposits)
• RE Tax Escrow Funding (or Deposits)
• Property Insurance Escrow Funding
(or Deposits)
• Principal portion of Mortgage Payments
• Fixed Asset/Capital Improvements.
Increase cash in operating account
• Reserve for Replacement Releases
(or Recovery)
• Tax & Insurance Escrow Releases
(or Recovery)
OPERATING ACCOUNT
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• Standard in HUD and FHA properties
• Required by most private lenders
• Usually determined by formula when
property is financed (or re-financed)
• While money is asset of owner, requires
the lender or loan servicer’s consent to
spend it
• Can’t spend it on non-capital items.
Replacement Reserves Money set aside, usually in a “restricted” account, for major capital improvements
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EXTENDED LIFE
COSTS OVER
$5,000
CAPITAL ITEM
• A major replacement or “betterment” to the property; an item
having an extended life (more than a year) and costing over a
fixed amount
• Exact “fixed amount” varies from organization to organization
• May be paid for out of the Replacement Reserve, operating
cash, owner equity or borrowing.
Capital Improvements
Also known as “Fixed Asset Improvement”
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Let’s practice with Other Cash Transactions
Turn to Tab #2, Page #5 and do Exercise #5
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Answers to Exercise #5
NOI (Net Operating Income) $45,045
Other Cash Transactions
Replacement Reserve Funding
Fixed Asset (Capital) Improvements
Tax & Insurance Funding
Replacement Reserve Releases
Cash Position
– $12,000
– $3,450
– $5,000
+ $8,820
$33,415
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• Sometimes referred to as “cash flow” although that
has another meaning to accountants
• Often called “cash position” in non-profits
• A related concept is “surplus cash”:
• Used in many HUD-financed properties
• Dollar amount determined to be excess income
for any given fiscal year over and above the
property’s financial obligations (aka “net cash” or
“cash position”)
• Amount must be verified by a qualified auditor.
Net Cash
Bottom line is – it’s the bottom line! 74
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• Net cash is distributed to
owners or retained for the
future (although sometimes
distributions are limited)
• Net cash is retained within the
property for future use
• Non-HUD properties usually
are permitted to distribute net
cash to the non-profit sponsor
for other charitable uses
Non-ProfitsFor-Profits
Net Cash: What happens to the money?
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Reading the Income and Expense Statement
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Southtown Apartments
Instructions: Review the Southtown Apartments Income and Expense
statement (found behind the 3rd Tab, Pages 5-7); identify the important
information; record your answers and be ready to report your findings
in 10 minutes.
Turn to Tab #2, Page #6 and do Exercise #6
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What did you learn about Southtown Apartments?
Reading an Income & Expense Statement
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How the Pros Read Statements
• They don’t start at the top; it takes too long and doesn’t
provide a context
• They read a statement from the bottom up; starting with
the bottom-line, usually cash flow
• They typically ignore monthly data at first, focusing on
Year-to-Date numbers
• They start with the variance information.
Let’s pause here to define “variance”
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Perhaps the single most useful tool on an
income and expense statement!
Actual Budget Variance
Rental Income $14,000 $12,000 $2,000
Payroll $14,000 $12,000 ($2,000)
Variance The dollar difference between what was budgeted and the actual result
Variances (and therefore the income statement) are only as good as the budget they are based on.
Note: Numbers in brackets “( )”, red numbers and/or with a minus sign mean “Unfavorable to budget”
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Let’s look at Southtown again…
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• Start with the bottom-line — the one that
matters to you (whether NOI or net cash)
• Look at the variance FIRST
• Assess if the property is on track or not
• If it is not, look at the totals for income and
expenses versus budget
• Zero in on the biggest contributors to the
problem and work back from there.
To summarize:
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• Don’t be fooled by what appear to be good variances
• Example: Being “under budget” on maintenance may
not be a good thing
• Look at relationships between variances
• Example: Under budget on marketing while
vacancy loss is higher than budgeted
Remember, when it comes to variances…
Stay away form “good/bad” and “over/under”; use “favorable to the budget” and “unfavorable to the budget”
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• Two basic reports:
• Balance sheet
• Reports on property’s assets and liabilities
• Income and expense statement
• Site staff primarily use the income and expense
statement
• Reports revenues and routine operating expenses
• Need to know if statements are cash or accrual
• There are at least two “bottom-lines”: NOI and net cash
• Other cash transactions are typically balance sheet items
that impact net cash.
Summary of Part 1 of Program
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• Income and expense statements are often modified to
report other cash transactions
• “Variances” from the budget help identify problems or
issue areas
• Be careful with so-called “good” variances
• “Read” an income and expense statement from “the
bottom up” to quickly zero in on potential problems
• An income and expense statement is only as good as
the budget it’s based on.
Summary of Part 1 of Program
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Course: Certified Financial Specialist © 2020 National Center for Housing Management
• If the property is a “HUD” they need to be followed
• If your property is not “HUD” they’re great supporting documents
Guidance for Replacement Reserve 4350.1 Financial handbook and HUD Chart of accounts 4370.2 Management Handbook 4381.5
HUD Handbooks
Discover…
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Part 2 Developing a
Site-Level Budget
Course: Certified Financial Specialist © 2020 National Center for Housing Management
By the end of Part 1 we hope you will learn:
• A deeper understanding of the
purpose of a budget.
• Key steps in the budgeting process
• Why and how to “forecast” a budget
Objectives
• How to develop accurate line item
estimates
• How capital planning fits in
• How to properly spread the budget
over the year
• How to present a budget and get the
best reaction. 90
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Course: Certified Financial Specialist © 2020 National Center for Housing Management
• A financial prediction about what will happen in some
future pre-established time period
• A plan for the future expressed in dollar terms
• It is based on our assumptions about future conditions
• It gives us an objective tool to measure financial
performance (including how we are doing in meeting
the owner’s goals).
Budget
91
Course: Certified Financial Specialist © 2020 National Center for Housing Management
Budget Workshop
Course: Certified Financial Specialist © 2020 National Center for Housing Management
Task: Each company put together its budget for the trip by line item
Assume Leaving on the 1st and returning on the 8th.
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