Income, budget and balance sheet
60 multiple choice , 3 hours timed, open book
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Course Presentation
Certified Financial
Specialist
Teach federal regulations and guidance for housing
programs providing NCHMs interpretation of both
Provide examples of policies and procedures used in the
industry
Provide the instructors 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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Course: Certified Financial Specialist
2020 National Center for Housing Management
Instructor Introduction
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Instructor
Course: Certified Financial Specialist
2020 National Center for Housing Management 6
Course Materials
2018 National Center for Housing Management
CFS Course Book
Presentation Slides
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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
Dont 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 owners
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
owners financial and non-financial objectives
Isn’t a direct financial goal; cant 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 arent 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 owners 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 Whats 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
Cindys Income & Expense Statement
INCOME SUBTOTAL
– EXPENSES SUBTOTAL
NET INCOME
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How is Cindy doing?
Shes doing okay financially
Shes not doing so good financially
I dont 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
Cindys Balance Sheet
TOTAL ASSETS
– TOTAL LIABILITIES
NET WORTH
Car $17,000
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Now, how is Cindy doing?
Like I said, shes doing okay
Like I said, shes not doing so good
I still dont have enough information to decide.
Q
a
b
c
Ive changed my mind.d
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We need both statements to better
understand Cindys financial situation
One gives us a picture of her day-to-
day situation; the other helps us see
the big picture
And, as well 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
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Caution: Dont
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 propertys 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 dont 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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Lets 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:
Well discuss these outlays later
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Net Operating Income
Well 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 lets drill down on NOI.
River Bend Apartments had NOI of $400,000
last year. How is the property doing?
Its doing okay financially
Its not doing so good financially
I dont have enough information to decide
Q
a
b
c
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Lets 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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2020 National Center for Housing Management 49
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Rental Income
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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Lets take a look
Now lets 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
Lets look at an example:
Northfield Apartments Tab 3, pages 3 and 4
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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 servicers consent to
spend it
Cant 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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Lets 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
propertys financial obligations (aka net cash or
cash position)
Amount must be verified by a qualified auditor.
Net Cash
Bottom line is its the bottom line!
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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 dont 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.
Lets 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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Lets 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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Dont 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 propertys 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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Course: Certified Financial Specialist
2020 National Center for Housing Management
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 its 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 theyre 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.
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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 owners goals).
Budget
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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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Course: Certified Financial Specialist
2020 National Center for Housing Management
Best to involve the key functions and levels
Not produced by the accounting department in isolation
Involve central office and site-level staff; management,
financial, and maintenance
Good research leads to better decisions!
Allow enough time; dont start too late, or for that matter, too early.
Budgeting is a Process
The better the process, the better the budget
So, whats a good time schedule?
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2
MONTHS
OUT
6
MONTHS
OUT
4
MONTHS
OUT
DUE DATE
PREP AND
CAPITAL PLANNING
Put together
schedule and
assignments
Train new staff, if
necessary
Review capital
needs (conduct site
inspection)
DATA COLLECTION AND
BUDGET DRAFTING
Prepare the
re-forecast
Collect market data
and other needed
information
Prepare the first
draft of the budget
PRESENTATION,
ADJUSTMENTS AND
APPROVAL
Get input from
supervisors; adjust
budget
Submit final draft to
owner/board/others
for review and input
Finalize and formally
submit for approval
Work back from the due date!
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2020 National Center for Housing Management
Capital Planning
Determining the larger expenditures on the physical property
for the comi
