Building Sustainable Organizations: Early Warning Systems May 9, 2012
Agenda • Introductions • Early Warning Systems • Putting the Profit in Nonprofit 2
Early-Warning Systems • What is your risk appetite? • What risk(s) does this project pose? • Does it align with your risk appetite? 3
Early-Warning Systems Feasibility Predevelopment Construction Operations Year 15/End of Compliance 4
Early-Warning Systems Feasibility Develop go/no-go criteria Create internal underwriting guidelines 5
Feasibility – Develop go/no-go criteria Mission/Core Mission/Core Risks/Rewards Risks/Rewards Competency Competency X amount of Geographic area developer fees Guarantees Project type < X% corporate assets Strong likelihood of Constituents obtaining funding 6
Feasibility – Develop go/no-go criteria 7
Early-Warning Systems Feasibility Senior Staff Board Management • prepares report • recommends • adopts go/no- demonstrating go/no-go go criteria whether or not criteria • approves a project meets • reviews and projects based go/no-go approves report on go/no-go criteria to the board or criteria board real estate committee on whether or not a project meets go/no-go criteria 8
Feasibility Create Internal Financial Underwriting Guidelines Create Internal Financial Underwriting Guidelines Realistic revenue and expense trending Inclusion of all fees – asset management, property management, resident services Long-term property performance 9
Early-Warning Systems Predevelopment Review risk criteria at various milestones y Preacquisition spending over X amount or beyond specific items that the board has approved y Entering into a contract over X% of the organization’s liquid assets Mitigate risk at acquisition 10
Early-Warning Systems Predevelopment Senior Staff Board Management • prepares • reviews and • determines report approves which demonstrating report to the triggering whether or not board or events require a project project review review meets go/no- committee on • approves at go criteria whether or not those when a a project still junctures triggering meets go/no- event occurs go criteria 11
Early-Warning Systems Construction Use risk categories to prioritize focus of monitoring Risk category criteria 12
Construction Risk Categories Risk Categories On Target: the project requires no special action, and should continue as planned Monitor Closely: the project faces major problems that will need further action if the problems are not remedied Workout: the project faces serious problems that require action and decision making by the board and senior management 13
Construction Risk Category Criteria Risk Category Criteria Scope Schedule Sources and Uses Tax Credit Adjusters 14
Early-Warning Systems Construction Senior Staff Board Management • manages • reviews and • determines construction approves acceptable projects, and report to the financial (and provides board on risk other) risk updates to the status, and level of board, makes day-to- projects, and including the day risk how to address risk status mitigating projects that decisions have exceeded acceptable risk levels. 15
Early-Warning Systems Operations Create a dashboard to provide at-a-glance information Include performance categories in the dashboard Performance criteria 16
Operations Performance Categories Performance Categories Performing: require no special action and limited board review Watch List: are at risk, and should be monitored more frequently, with appropriate actions taken as needed Workout: face serious problems that require action and decision-making by the board and senior management 17
Operations – Dashboard criteria Compliance Compliance Occupancy Occupancy Replacement Replacement Physical Physical Accrued Accrued and Operating and Operating Condition Condition Fees Fees Reserves Reserves Organization Organization ’s Share of ’s Share of Cash Flow Cash Flow Must Pay Debt Must Pay Debt Cash Flow Cash Flow 18
Operations – Dashboard criteria Compliance Compliance Occupancy Occupancy Replacement Replacement Physical Physical Accrued Accrued and Operating and Operating Condition Condition Fees Fees Reserves Reserves Organizatio Organizatio n’s Share of n’s Share of Cash Flow Cash Flow Must Pay Debt Must Pay Debt Cash Flow Cash Flow 19
Early-Warning Systems 20
Early-Warning Systems Operations Senior Staff Board Management • prepares the • reviews and • provides portfolio approves expectations for dashboard report dashboard report the portfolio as a to the board on to the board whole, monitors projects in portfolio • Monitors trends operations with performance and in a portfolio and recommendations provides property specific for action on leadership for performance, and Watch List and underperforming makes the day-to- Workout projects day risk properties mitigating decisions 21
Early-Warning Systems Year 15/End of Compliance Perform analysis of properties starting in Year 5 The board needs to know: y Status of limited partner accounts y Projected value of the property at Year 15 y Debt and potential for refinancing y Cost of capital improvements and deferred maintenance y Potential tax liability for the investor upon exit y Project reserve balances 22
Early-Warning Systems • www.EnterpriseCommunity.org/strengthen • Questions? 23
www.EnterpriseCommunity.org | www.EnterprriseCommunity.com
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