Talking Heads: Elaine Magil Director, Affordable Housing Advisory & Transactions, TCAM
By Darryl Hicks
11 min read
Asset Managers Are Your New Revenue Centers
Whether an affordable housing deal succeeds and remains profitable many years into the future often depends on the asset managers you work with and their level of involvement during the earliest planning stages and in the ensuing years after a property is placed in service.
Developers tend to be optimistic, according to Elaine Magil, but it’s her job as an underwriter and asset manager to carefully look at the data and point out potential red flags.
Magil joined TCAM—the affordable sector’s largest asset management consulting firm—five years ago. Before that, she worked in acquisitions at a tax credit syndicator and in supportive services and consulting to nonprofit community development organizations.
While speaking at the National Housing & Rehabilitation Association’s Asset Management conference in Minneapolis this past June, Magil candidly remarked that affordable housing organizations must no longer see themselves just as developers who are concerned about “getting the next deal done” but increasingly as owners and operators of affordable properties. In her words, it was “a new era for the Low Income Housing Tax Credit program.”
Tax Credit Advisor sat down with Magil to get more details on these comments and to discuss best practices that will help your projects succeed.
Tax Credit Advisor: Tell us more about this comment you made about developer attitudes changing. Why is this an important trend?
Elaine Magil: It fundamentally shifts how you think and feel about many things. What do you pay upfront versus kicking down the line and deferring? It makes a big difference if you are focused on ‘what it’s going to cost me to own this property for the long haul, maybe for more than 50 years’ versus, ‘I am done, I need to think about the next project.’ It affects what you staff for. Do you pay a lot of money to get the smartest developer to put the best deal together? Maybe, but you also need to think about having sharp, attentive, skilled asset managers in back-office functions. These people are your new revenue centers. They are not simply ‘bean counters’ nor are they just making sure that you follow the development plan. They are doing that, but they are also driving potential revenue, protecting you from important risks and setting you up for the next avenue of business. We increasingly see development pipelines coming from existing portfolios. The relationship between asset management and development is evolving. Asset management helps tee up successful redevelopment, which is a new pipeline of development fees.
TCA: Why do asset managers need to be involved early in the deal planning process?
Magil: It is very easy for each of us individually to see that the work we do is hard and important. However, it can be difficult for us to see that what other people are doing is difficult and complicated and important. Even if everybody gets along and there’s no malice and competing incentives, it’s hard for people to fully understand how what other people are doing is equally useful. So, in the case of affordable development, there are finite dollars and sometimes the way you set up a deal affects how it operates. The development team has a very hard job putting together a tricky puzzle with finite resources. All those resources have strings attached to them and conditions that allow them to be used for this but not for that. Meanwhile, the asset management people are trying to run an operating budget and they might be worried that the development team has agreed to something or has projected something that the asset management team has concerns with. It’s not because the development team is foolish. They operate under constraints and do the best they can to thread the needle. The reality is from where I sit, the only way this gets fixed is for the company leadership—no matter whether it’s a nonprofit or for-profit—to say, ‘look, you, front-end people, and you, back-end people, both need to be comfortable with the deal we’re signed up for.’ Not just, ‘you, development, put the deal together and ship it down the hall,’ which historically has been the way some companies operate. At many organizations, development or originations puts the deal together and maybe AM gets to weigh in or maybe not. Or maybe AM gets to sit on the investment committee, but maybe not. Once the deal is baked, then it’s up to AM to figure it out. But for these deals to provide returns over the long term, it really does have to come from the top to say, ‘we all are left holding the bag, not just the AM people. We need to be sure we’re part of a deal that we are happy and proud to own for the next 15 years.’
TCA: What are the most important data points for you when evaluating property performance? What data is often overlooked by developers that should be scrutinized more closely?
Magil: Asset management is tied to data. We all understand occupancy rates, budget variance and compliance information. That’s not new to anyone. Performance versus underwriting is less commonly looked at as much as it could or should be. Unless your data system is set up well to have your pro forma queued up there and then map your performance against the pro forma, it’s more of a headache to get at actual versus underwritten. Whatever the pro forma was at closing that was part of the deal you made. While I am not saying that we should hold people to exactly what was in the pro forma, it is a more useful measure to pay attention to year-over-year to what you thought was going to happen. I often advise two things to my clients. First, and this often applies more to mission-driven companies, quantify and track what I call Feed. How many properties are you having to pay for property-level operations out of organizational money (including property management fees and expense reimbursements the properties cannot pay)? Some companies are savvy about tracking this, but a lot are not. If, by maintaining properties that are not self-sufficient, you must syphon money from the parent organization, that may be a decision you decide to make, but many are not aware that they are doing it or that they are not being strategic about it. The second thing I advise people to pay attention to seems incredibly obvious but it’s cash flow. Is a property helping your portfolio and, if so, by how much and what you are getting out of it? Getting to your net cash flow number means doing the work of determining what you pay on your soft loans and what capital needs you’re funding. I am not saying this is a chronic issue, but we do see some organizations that don’t follow through to that bottom number.
TCA: What distinguishes a good asset manager from a bad one?
Magil: I’ve seen asset managers come out of property management, accounting, compliance and development and from unrelated fields, like residential real estate. A good asset manager says, ‘I am the owner, the buck stops with me.’ A good asset manager notices problems and takes responsibility for mobilizing the resources to get them fixed.
TCA: What best practices have you learned over the years that you can share with our readers?
Magil: One, 15 years—the lifespan of LIHTC deals—is a very long time to be looking into the future. Nobody can underwrite perfectly and predict that far into the future. We should be more honest with ourselves and accept the possibility that things could look worse 15 years from now. Maybe it’s worth building in some back-up plans or cushions. Developers sometimes have to be optimistic. Listen to your asset management people. Take a cue from the last recession and recognize that there may be things you are not anticipating that will be worse than you expected and think about what that means for your portfolio and revenue stream. Two, soft loans matter a lot more than people give them credit for. Sometimes we treat them like squishy money that you can shove into a deal and never ask questions. That is not the case. They come with their own rules, their own interest rates. Don’t ignore your soft loan exposure. Third, put the time into the annual budgeting process. There are organizations that don’t spend a lot of time on it, and just roll forward the prior year’s budget with some escalation factor, irrespective of what’s been actually happening. Sometimes they get away with it, but other times they find it useful to check once a year whether they are way off course. Lastly, a lot of organizations are getting into property management because they think they can make money at it. The reality is that a lot of companies do not make money in PM. If it’s their core business, then yes, they are making money otherwise they wouldn’t be in business. If you’re doing PM as a side business, how sure are you that, net-net, it’s actually making money? There are good reasons to get into property management, but it is a tough business and you can lose money before you realize it. You need a solid business plan to make it work.
TCA: What common challenges do you encounter asset managing affordable housing assets and how do you overcome these challenges?
Magil: The core of it all is that operating affordable housing is a very thin business. Affordable housing was never meant to have a lot of room for error. That’s how it was designed. When things go wrong, it is notoriously difficult to solve problems. You can’t throw money at a problem when there’s no money to throw. Many organizations are now acknowledging that there are long-term risks that cannot be fully anticipated or underwritten ahead of time, so they are building reserves and contingencies at the organization level and putting money away while times are good.
TCA: Some of your clients are state housing finance agencies. How do you approach your job differently working for an HFA as opposed to a developer or a bank?
Magil: HFAs are in a tough spot, because, first off, they have to be careful about overstepping. They may want to rush in and try to solve every problem that occurs in their jurisdiction. I understand they face political pressures that private companies do not, but sometimes a state HFA must acknowledge an unfortunate situation and say, ‘we can’t fix this problem with our limited resources.’ The other issue that we see with HFAs is that they have so many different kinds of responsibilities and exposures. We try to help HFAs delineate that the stuff you only put tax credits on is not on your balance sheet. It’s on someone else’s balance sheet. That’s not to say they shouldn’t care about it, there may be a soft loan they put on a project, but they need to be clear with themselves about their exposure. There also may be a lot of stuff in HFAs’ portfolios that has nothing to do with the LIHTC program. After operating for 40 or 50 years, HFAs sometimes have a lot of weird stuff in their portfolios that isn’t tax credits, so we have to think about the diversity within that portfolio and what different exposures and drivers that comes with.
TCA: What other important trends are you seeing in the marketplace?
Magil: We are seeing a blurring of the for-profit and nonprofit lines. I am not talking about a tax status thing. More that some for-profit developers are getting better at delivering supportive services that were historically provided by nonprofits. This allows them to make a more compelling case to an HFA that they are not just building units but creating communities. Meanwhile, some nonprofits are becoming more savvy about making money. They don’t make a deal unless it provides a certain margin. It’s interesting to see this from both sides and how they are beginning to look more like each other. One last exciting trend is that our industry appears more eager to look beyond LIHTC. There’s a greater enthusiasm for homeownership, lease to own programs, addictions or rehab housing, multi-use development and intergenerational housing. All these things that are not what the LIHTC can easily do—or do at all—but are still exciting to see in the communities I work in.
Story Contact:
Elaine Magil
Elaine.Magil@tcamre.com
(412) 450-6055
