News & Research Listing
Pet fees are up while late fees are down.
As the COVID-19 pandemic continues to cast a long shadow over the rental housing industry, ancillary revenue would seem to be a low priority. In previous years, collecting ancillary fees was an important — though legally fraught — concern. But now, with job losses mounting around the country, many apartment operators are simply focused on collecting rent on time.
For example, Haven Realty Capital, based in El Segundo, Calif., is sacrificing the flow of one ancillary revenue stream in exchange for trying to keep its residents in place. “Month-to-month premiums were waived to allow flexibility for residents who had lease expirations during the pandemic months,” says Sudha M. Reddy, Managing Principal of Haven.
In a recession, apartment operators are justifiably focused on just “keeping heads in beds.” Operators may even need to think twice about imposing ancillary fees.
But in the longer term, the COVID-19 lockdown may present new revenue opportunities, if residents receive financial relief and the unemployment situation stabilizes. If trends such as teleworking become commonplace, the COVID-19 lockdown could change the way residents use energy and bandwidth and give operators the chance to consider residents’ high-speed connections to the outside world.
Not Pressing the Issue
The general rule for multifamily ancillary revenue is about 5 percent of total income, but many of the fees are also accompanied by attendant costs. In the short term, Max Sharkansky, Managing Partner of Trion Properties, based in West Hollywood, Calif., is more concerned about on-time rent payments.
“We [could] charge higher pet rates and higher lease-break fees, but we’re just not pressing that issue because it’s tough out there,” Sharkansky says. “We’re signing leases, we’re doing fine, our collections are in the mid-90s. But we’re also in a 12 percent unemployment market, so I don’t know if this is an optimal time to start increasing our fees.”
As the amenity wars heated up during the past decade, ancillary revenue took a back seat to services, such as dog walking. But as the recession lingers, those services are also in jeopardy.
“It’s so hard to compete on what has become a commodity,” says Brian Zrimsek, Industry Principal of the tech firm MRI Software, based in Solon, Ohio. “The apartment can only be so big; the pool can only be so grand. So we found operators moving to adding services, dog-walking services, laundry pickup services and yoga classes — amenities as a service. But when a recession comes, that’s the first thing to go.”
This strategy is a throwback to the 2008 housing market collapse. “In 2008 they lowered prices and increased terms to lock people in,” says Zrimsek. “They’d rather have sure but thin revenue. In good times, it’s okay to have a little nickel-and-diming for things. We’re also seeing concessions come back. It would not surprise me if things that people charge for in the best of times they change their mind on now.”
Sorry, You’re Late
Early in the pandemic, municipalities, states and the federal government moved to curtail evictions and late fees to help keep residents in their homes. Now, six months into the crisis, what were once seen as temporary measures are being extended in many parts of the country as the apartment business takes the hit.
At Haven Realty Capital, late fees have traditionally been a large revenue stream, followed by pet rent and admin fees. “[But] late-fee revenue has dropped to zero since April,” Reddy says. “The moratorium on late fees has also eliminated the incentive to pay on time, resulting in a delay in our collections at some of the properties.”
It’s the same story at Trion Properties, as Sharkansky simultaneously eyes what’s happening in collections and the state legislature. “We’re in California, and not allowed to charge late fees,” he says. “In California, it’s open-ended. It’s a function of when they remove the emergency order. In Oregon, it was set to expire but was then extended to Sept. 30. We still get the majority of our rents in the first week [of the month], but the next 20 to 25 percent are paying in the following three weeks.”
Future Opportunities
As many residents have been hunkered down for months now, apartment operators are seeing an increase in their energy and data consumption. Even before the pandemic, says Todd Richman, Senior Vice President at Morgan Properties, based in King of Prussia, Pa., marketing contracts with cable providers and Internet providers did well for his company.
Richman is predicting that addiction to Netflix and Zoom dependence is going to raise the income from fees. “I would assume that once we see the numbers, we might have higher income from these services,” he says. “With people working from home, they may have had to upgrade to a better Internet service, they may have ordered more services. It’s possible it’s remained the same. But I’m expecting Internet penetrations to be higher than they’ve ever been.”
Laundry rooms are another small but reliable revenue source for Morgan, and Richman is expecting to see an uptick — again, because people are spending more time at home.
Trion’s Sharkansky also is bullish on laundry. Trash collection, water usage, pest control and sewage fees are also looking up. “Ratio utility billing [RUBS] is huge,” he says. “Although I don’t know if you can qualify that as ancillary income; it’s more of an expense reimbursement, but it’s on the income side of the P&L.”
Doggy Day Care
The pandemic has been a huge boon for pet adoption, according to a number of sources. The consensus is that people who had been putting off getting a dog or cat because they didn’t spend enough time at home suddenly have no excuse.
In April, Kitty Block, CEO of the Humane Society, told the Chicago Tribune, “I think it’s a combination of reasons. We’re going through a global pandemic, and its anxiety-provoking and it’s isolating. Those who are fortunate enough to work remotely are doing it from home, so people have the time now and the desire to open up their homes to a pet, to give that animal a chance.”
The trend is confirmed by the numbers Trion Properties is seeing. “In April, May and June we had an uptick in pet fees,” Sharkansky says. “Looking at year-over-year for June, portfolio-wide, we did about $9,400, and last year [it] was around $7,000, so we’re seeing a 34 percent increase.”
But even enforcing pet fees will likely get some pushback from residents, demonstrating, once again, that at this point in time, fees are a touchy issue
“I don’t know that the first thing a resident does when they get a pet is call the office and let us know,” says Richman of Morgan Properties. “We’re trying not to be intrusive to residents about being in their apartments. We’re not doing walk-throughs of each apartment; it would be very hard to do that.”
Scott Sowers is a freelance writer.
Managing the entirety of the employee lifecycle should include protocols for the offboarding process.
Terms like “onboarding” and even “pre-boarding” have made their way to the forefront of focus for many businesses as the war for top talent continues for many organizations. But one topic heard about less often is that of offboarding.
The idea of a business making a great first impression, setting the stage for the entirety of a prospective employee’s tenure, is critically important. But what if the impact an organization makes when an employee departs was just as powerful?
Offboarding is the last opportunity your organization has to show employees value. Former employees are destined to be a part of your organization’s word-of-mouth marketing. How they perceive your company, especially in their final days, will be shared with their friends, family and even strangers on the internet. Following is guidance on how to make a significant impact during a staff member’s final days of employment.
Communicate the Change. Employees want to feel valued; preparing to leave a company is no different. It is important for the company to announce when an employee has given notice and thank the exiting employee for contributions made during their tenure.
Create a Checklist. It is critical to ensure that the exiting employee receives clear instruction concerning expectations prior to departure. A checklist of expectations should cover standard items like return of keys, transition of job duties and removing access to company systems. Other items such as the cessation of benefits ending and receipt of last paycheck also should be addressed.
Celebrate the Employee. When a departing employee gives notice, there will be emotions that, left unchecked or unacknowledged, will dampen the overall employee experience. While not convenient for all parties, the exiting employee has made their choice for reasons of their own and careful consideration should be given to ensure that this decision does not sway your opinion regarding their work ethic or the quality of work produced during their time with the company. Instead, the employee should be celebrated for their accomplishments and progress achieved. This may be social time spent together with the team or sending a thoughtfully crafted, handwritten card. Whatever the budget allows, make the time to send a message with impact.
Conduct an Exit Interview. It is insufficient to treat an exit interview as an item to be crossed off a to-do list; rather, focus on the information shared within the interview and dedicating effort to understanding how it can applied to improve the organization (further information below). Determine whether the company has the resources to conduct the interview in person or on a survey. Offering both options to exiting employees may increase the percentage of interviews completed.
Analyze Turnover. It is not enough to just gather feedback from departing employees via exit interviews, instead, the information gained should be applied to identifying enhancements and changes to company programs, where applicable.
There will be employees who leave for reasons outside of the organization’s control, such as moving out of state, graduating college, a life-changing event such as marriage, having children or death, or simply a change in career. These are unpreventable of course, but the real strategic understanding can be learned from employees leaving for reasons like compensation, poor leadership and lack of growth potential. It is up to the organization to leverage that information to identify where improvements can be made.
Offboarding Is Critical to Future Success
As your final opportunity to show exiting employees how much they are valued, make sure to put a strategic offboarding program in place, understanding that it will evolve over time as feedback is received. Removing negative energy and administrative burden from your offboarding process will allow you to review its effectiveness and help you put the employee at the center of the experience, to the great benefit of the organization.
Consider offboarding as risk mitigation for the organizational reputation, in that first impressions are important, but so are final impressions. Everyone suffers from recency bias, in that we instinctively bestow greater importance on recent events (offboarding) rather than past ones (onboarding). Additionally, everyone generally gives more credence to word-of-mouth recommendations. When considering both in conjunction, a departing employee with a positive offboarding experience is more likely to speak highly of the organization than they would otherwise be inclined to absent strategic offboarding efforts.
Stephanie Anderson is NAA’s Industry Operations Manager, and can be reached at [email protected].
New rules cap cash for rehabs, guts underlying asset values.
One-third of the apartments that make up New York City’s residential real estate market—valued at more than $2.6 trillion as a whole and worth as much as the gross domestic product of the United Kingdom—just lost 20 percent of their value.
That’s the consensus of apartment market watchers who are trying to quantify the fallout from New York’s recently passed rent control measures, which dramatically limit the dollars owners can spend on renovations at rent-regulated buildings, and thus how much they can increase rents to enhance the value of their assets.
“The law disincentivizes owners from making improvements at their properties because they can no longer recoup those costs through increased rents,” says Robert Dremluk, a real estate attorney and Partner at law firm Culhane Meadows.
That, in turn, is pummeling the valuations of properties caught in the crosshairs of the new rules.
While it will take time for transactions to emerge and actual price discovery to occur in the market, “you’re looking at devaluation of at least 20 percent, or more,” says Paul Mullaney, Senior Loan Originator at New York-based Pembrook Capital, which provides bridge financing to multifamily rehab projects. “Cap rates are going to rise from the 3’s to the 5’s. That’s an enormous value erosion.” (In rental housing arithmetic, when capitalization rates go up, prices go down.)
That stark downward revaluation is happening now because rent control puts one of this industry’s most successful and fundamental investment strategies – value-add rehabilitation – in its crosshairs.
With value-add rehab, buyers seek underperforming buildings with deferred maintenance where rents are currently low. They buy those buildings, make improvements, and then raise rents to reflect the higher quality living standard they’ve built into the apartments. It’s a foundational strategy for rental housing improvement that’s now been eliminated for New York’s 1 million rent-regulated apartments.
Scenarios such as this could play out nationally in any markets that pass rent control legislation.
“Owners who bought rent-regulated buildings that had low rents and the potential to raise them by making improvements don’t have the incentive to add value anymore,” says Jamie Heiberger Harrison, a real estate attorney and President of real estate law firm Heiberger & Associates. “There’s just no more room to grow.”
No More Improvements in Stuy Town
One major institutional apartment owner already announced it won’t be making any but the most-needed fixes at Stuyvesant Town and Peter Cooper Village apartment community. An iconic landmark of affordable housing in Manhattan originally championed by New York power broker Robert Moses and built after World War II to house returning GIs, the 11,000-unit community was purchased by the Blackstone Group in 2015 for $5.3 billion dollars.
But according to Crain’s New York, Blackstone is now halting any improvements it had planned to make at the community. “In light of the recent legislation, we are in the process of evaluating capital investments at Stuy Town,” a Blackstone spokesperson told Crain’s.
It’s also not the only example of plans to improve the city’s housing stock that has been cut at the knees by Albany’s rent control package.
“We have clients who were already under contract when rent control passed and who are now going back to try to renegotiate those deals, because the original numbers just don’t make sense anymore,” says Mullaney.
Squeezing Investors Out of New York
Together, the new limits put a squeeze on two interrelated measures of rental housing worth – net operating income and net asset value – at rent-regulated buildings. The result is a real estate environment that just two months ago would have been unimaginable in New York: Real estate investors reportedly leaving the Big Apple for locales like Cleveland to put cash to work.
“Investors who would typically be buying and developing properties in the New York metropolitan area are looking to Texas, Florida, Cleveland and other markets to put their money into residential properties there,” Dremluk says. “They’re abandoning the New York market because they don’t think they can make money here anymore.”
What Rent Control Does
The changes, passed in June, limit how much owners of rent-regulated apartments – or approximately 1 million of the 3 million total units in New York – can invest and recoup for improvements at their buildings.
Previously, upon vacancy of a unit, owners could make improvements and then increase the rent by as much as 20 percent. If that pushed the rent over a certain threshold, the apartment could then be de-regulated, and return to being classified as a market-rate unit.
But the new rules eliminate that provision, as well as the 20 percent vacancy bonus, while limiting how much owners can spend on improving individual units to just $15,000 over 15 years.
Previously, there wasn’t a cash limit on upgrades, and owners could raise rents by 1/40th of the cost of improvements in buildings with less than 35 units, and 1/60th in building over 35 apartments. Those ratios now change to 1/168 and 1/180, respectively, under the new rules.
“You can do paint and carpets for $15,000 in New York,” Mullaney says. “It doesn’t buy a lot.”
For major capital improvements that affect an entire building – such as common area renovations, a new roof or central air conditioning system – owners previously were allowed to increase rents by as much as 6 percent per year for all residents to recoup added costs. But that type of increase is now capped at just 2 percent per year.
For owners who want to forgo running rental housing altogether and convert their building to a co-op or condo, the new rules made that significantly harder, too: Owners will now need 51 percent of residents to sign off on a proposed conversion, versus 15 percent under old rules.
“Having worked on many of those transactions during the last 20 years, that is an extremely high threshold,” Mullaney says. “If you need 51 percent of tenants, you’re basically not going to see any more co-op or condo conversions in New York.”
Bronx and Harlem: The Ghost of the 1970s
The result, say apartment financiers and dealmakers, is likely to be a calcified deal market – Bloomberg is already reporting sales at a standstill -- where owners of rent-regulated buildings stop investing in anything but the most basic and immediate maintenance needs required by law, such as health and safety issues, leaking pipes or clogged drains.
“The unintended consequences of this means the quality of the apartments is going to decline due to deferred maintenance or a lack of incentive to improve them,” Dremluk says. “These buildings are going to get worse.”
The final outcome, many say, could be a return to 1970s-era images of hollowed-out buildings in disrepair, especially in the Outer Burroughs – the very circumstances that led to prior reforms to allow owners to make improvements to buildings and raise rents in the first place. “The Bronx was finally getting better, and now it’s going to fall apart,” says Heiberger Harrison.
Adds Dremluk, “We may go back to what Harlem looked like 20 years ago.”
Forcing Owners to Sell
Aside from owners pulling back on improvements at their properties, the changes could also have some drastic effects on deals that have already been done.
For instance, in a typical rehab deal, a borrower might be able to secure as much as 65 percent to 70 percent of an asset’s value to buy it and make improvements.
Those loans are typically made by short-term bridge lenders, who hold the note at a higher rate until the improvements are done, usually two to three years. Then, when owners raise rents and increase the value of the asset, they can seek permanent re-financing on the building at a lower interest rate and lower loan-to-value (LTV) ratio based on the new, higher valuation of the property.
But with that mechanism now effectively dismantled by rent control, many owners who recently went into rehab deals are now sitting on short-term debt that will eventually need to be paid off. Whether they’ll be able to secure longer-term financing without getting a boost in asset value from improvements is anyone’s guess.
“For portfolios that were acquired using short-term, floating rate debt, my feeling is they may have a very hard time refinancing or getting out whole, without forcing the owner to sell,” says David Eyzenberg, President of New York-based investment bank Eyzenberg & Company, and a finance professor at New York University’s Stern School of Business.
Indeed, market jitters over existing loans already played out when rent control was first announced in June. Immediately after the new rules were adopted in Albany, several community banks that lend to apartment companies saw their stocks take a hit. The reason why, observers explain, is because the basic premise behind the existing loans on banks’ books had effectively been erased overnight when values on underlying assets tanked.
“The senior lender who was at 65 percent leverage may find themselves at 85 percent to 90 percent leverage when these deals trade,” Eyzenberg says. “They’ll make it out, but at a similar or worse LTV than they signed up for. That’s why the banks take a hit. There’s now a heavy preponderance of these loans where there’s no clear view of how you’re going to exit in a better position than you are in today.”
That means, just like the owners who took out the loans, the banks who made them may have a hard time finding another, long-term lender to replace them in the deal stack. Much like single-family homeowners who were unable to re-finance subprime teaser mortgages when housing collapsed in 2008, rental housing owners of these assets could now be in the same spot.
Cash Buyers, Less Lending
Going forward, that means banks are likely to lend less, based on an asset’s existing cash flow, or only at rates that won’t be sustainable for apartment owners.
“Instead of being able to get a 70 percent loan to value, you’ll only be able to get a 50 percent cost to loan,” says Mullaney. “There just won’t be any cash flow there to underwrite.”
That means owners – if they enter into new deals – will need to make up the difference with so-called “hard” money at higher rates.
“If you are used to borrowing 70 percent of your costs at 3 percent interest, now you can only borrow 50 percent of your costs at that rate,” Mullaney says. “You’ll now pay 9 to 12 percent for the financing that covers the portion of the loan from 50 percent to 70 percent of LTV. Your blended rate is going to go up significantly.”
The outcome of those deals would likely be cash buyers taking out assets at depressed values, and then simply managing the existing cash flow, without making any improvements to the property.
“Cash-rich companies will come in and scoop it up at 60 percent of the value of the building, and say take it or leave it,” says Dremluk. “It turns the process of valuation into a situation where you have a focus on just the cash yield of the property. The business will turn into just managing occupancy.”
Beyond New York City, the real concern now is that other cities in New York State will adopt similar rules, which is an option under the new law from Albany. Owners groups are currently fighting the new regulation in court.
“They left the window open that this can creep into other markets where it’s not currently enacted,” Eyzenberg says. “This could spread.”
Pages
GoWithVisto
Earn your NALP and CAM credentials entirely online and take your career to the next level. Login with your NAA ID for course discounts.
