While a crisis is an opportunity, it's also a crisis.

The recession has forced many multifamily firms to re-engineer their balance sheets on the fly, cut costs, and generally hunker down to ride through the storm. So, Apartment Finance Today asked some of the industry's top CFOs to share their survival strategies in an environment that has pummeled many developers.

According to the results of a recent survey conducted by AFT, reducing head count and development pipelines are among the most obvious ways to cut costs. But companies are also seeing big savings by renegotiating contracts, fighting tax judgments, and centralizing operations.

Still, the downturn has forced many firms to take a hard look at their business models and make strategic choices that could pay dividends for years to come. Here are three ways companies are hunkering down to fight another day.


One strategy that has proven effective is increasing the level of floating-rate debt held on a company's books. When floating-rate benchmarks such as LIBOR or SIFMA decline, so do rents, helping firms to offset a decrease in NOI. And when those floating-rate benchmarks tick up again, rent growth is also on the rise, helping to offset the higher rates.

In short, cash is king, and the lower debt-service payment on floating-rate debt is one way to maximize cash flow. The strategy is particularly suited for a business that reprices its rents every 12 months. Office or retail properties with long-term leases are less likely to reap the short-term benefits of floating-rate loans.

AvalonBay Communities has increased its level of floating-rate debt every year for the past four years as a hedge against downturns. In 2005, a mere 2 percent of its capital structure was in floating-rate debt; today, it's 11 percent to 12 percent, a solid 1.2 percent of the company's overall value.

“We consciously increased our use of floating-rate debt,” says Thomas Sargeant, CFO of the Alexandria, Va.-based firm, adding that since rental revenue and shortterm interest rates are correlated, “revenue declines that occur in a downturn can be partially offset with lower interest rates.”

Mid-America Apartment Communities keeps an even larger part of its capital stack floating: About 20 percent of the company's $1.3 billion in debt is variablerate. “We're increasingly going to be using floating-rate debt,” says Simon Wadsworth, CFO of the Memphis, Tenn.-based REIT.

Private real estate investor Gables Residential has also become enamored with the low LIBOR rate. The Atlanta-based firm supplements its $250 million revolving line of credit with construction loans, most of which have three-year terms with two oneyear extension options. “That can really get you five years of financing,” says Dawn Severt, CFO of Atlanta-based Gables.

Today, those extensions are all getting exercised. Gables now has about a third of its debt stack in variable-rate. “From a cash-flow perspective, we've really benefited from the historically low LIBOR rate,” Severt says.

Like most public REITs, Houston-based Camden Property Trust has moved a big portion of its debt structure to secured debt through the government-sponsored enterprises (GSEs), putting about $800 million of new secured debt in place in the past year. One $420 million deal was fixed at 5.1 percent; the other $380 million deal, which was half-fixed and half-floating, has a blended rate of around 3.7 percent.

Still, LIBOR and SIFMA spiked to incredibly high levels at the end of September 2008. LIBOR reached nearly 7 percent, and SIFMA rates on seven-day variablerate bonds shot up to nearly 8 percent. Though a short-lived phenomenon, the episode reveals the importance of interestrate hedges such as caps and swaps.

“When overnight LIBORs were going up last September, that gives the CFO with hundreds of millions of exposure in floating- rate some pause,” says Jay Hiemenz, CFO of Phoenix-based Alliance Residential. “But it's been great to be in floatingrate over the last near term; at a half point, it's cash-flowing quite nicely. But that may not always be the case.”

Firms are also casting a wide net to find affordable debt, especially for new construction or rehab opportunities. For the first time, many companies are turning to the Federal Housing Administration (FHA), whose Sec. 221(d)(4) program for new construction and rehab features some great rates and terms. “We are learning a little bit more about 221(d)(4), trying to understand what it's all about. We've never looked at it since I've been with the company, since 1994,” Severt says. “It's a long process, but I will tell you that everything is a long process now.”

One of the biggest concerns facing multifamily firms is in managing maturing loans. Since lenders are routinely offering lower leverage debt, companies are forced to pony up more equity to make the refinancing whole.

To raise equity, many firms are entering into joint venture partnerships, raising private equity through grassroots networks, and selling assets to generate cash. One of Mark-Taylor Residential's properties has a loan coming due in 2011. The company is trying to stock up as much cash as it can, whereas two years ago, it would have distributed it on a monthly basis.

“We're trying to build a story for the lenders, so by the time this comes up for refinancing, we'll have money in the bank to show we're not trying to milk every dime—that we have the proper reserves in place,” says Clay DeMara, CFO of Scottsdale, Ariz.-based Mark-Taylor.


As the recession hits vendors, contractors, and white-collar professionals alike, multifamily firms are now saving big bucks by renegotiating contracts and fighting tax judgments on the fly. “We've found that, for once, the shoe is finally on the other foot,” says David Messenger, CFO of Highlands Ranch, Colo.-based UDR.

When it comes to contract renegotiations, there are several things to consider. First, analyze all of your contracts and compare them to current market rates. “Whether it's the suppliers or contract services from landscapers to security personnel, you have to make sure it's competitive in today's marketplace,” DeMara of Mark-Taylor says.

Mark-Taylor has found the biggest savings on rebidding contracts for routine capital improvements on its properties. “A lot of subcontractors are doing everything they can to cut their costs and make people pull the trigger, whether it's a roofing project or painting,” DeMara says. “But we're definitely seeing it on service-oriented jobs such as cleaning or landscaping, too.”

Second, make sure you've got the ability to terminate the contract. Alliance Residential has seen the biggest savings in rebidding all of its current construction contracts. The company has 3,000 units currently in development—in Portland, Ore.; Phoenix; Hollywood, Calif.; Denver; Atlanta; and Houston—all of which were financed in 2007 or early 2008.

“The purchasing power has really shifted to the owners,” Hiemenz says. “Our biggest opportunity was seeing that we could rebid all of our construction contracts, even if it was stuff that was already contracted and under construction.”

The company has seen savings of as much as 25 percent on some of its construction contracts, especially in hard-hit markets. “We have a deal that finished recently in Las Vegas that was a $5 million or $6 million savings,” Hiemenz adds.

Finally, don't just limit your rebidding efforts to construction, maintenance, and service-oriented jobs. Many white-collar professionals are also desperate to keep business flowing, according to Dennis Steen, Camden's CFO. “The last couple of quarters, everything's up for negotiations,” Steen says. The company has seen significant savings in renegotiating contracts with accountants and lawyers.

If your construction contracts leave no room for renegotiation, there are still opportunities for cost-savings in fighting property taxes—one of the biggest debits on a company's balance sheet. Since apartment property valuations have fallen by at least 20 percent nationally over the past year, firms should do all they can to see similar drops in their tax bills.

“We're working diligently with county tax appraisers to ensure that real estate taxes don't get out of line or go up signifi- cantly at a time of declining asset values,” says UDR's Messenger.

That sentiment is echoed by DeMara, who says that Mark-Taylor is currently challenging the tax assessments of nearly its entire portfolio, all of which are located in the hard-hit Phoenix market.


As staffing levels shrink, companies are forced to do more with less. So, many have used the downturn to centralize operations and hone in on costs in a further attempt to create efficiencies.

Camden is in the process of rolling out a 10-person internal call center at its headquarters in Houston. The center takes overflow sales calls, as well as any other calls unanswered at its sites. “A lot of times, calls were being missed or not returned in a timely manner,” Steen says. “If someone doesn't answer that call, they're going to call the next community on their list. So capturing that call initially is a big thing.”

Before, the company used a thirdparty vendor for after-hours calls. But Camden prefers that residents interface with a staff that knows the portfolio well. “It makes sense for our people to sell our assets, and cross-sell,” Steen says. For instance, if someone wants a specific apartment community in Houston, and nothing is available there, the call center staff can steer the prospective resident to another Camden community two miles away.

Camden had already automated a lot of its accounting and accounts payable processes on site through software deployment. “It was the final move that was needed to take a rung down in staffing at the community level,” Steen says. The company hopes to roll all of its communities into the call center by the fall.

Likewise, AvalonBay completed an 18-month process of centralizing its operations into a shared services center in the second quarter. The facility centralizes accounts payable and receivable, handling all of the company's resident payment processing and account calls in one office, rather than at the site level.

“We're finding that consolidating onsite administrative functions in one location can improve compliance with policies, reduce costs, and preserve revenues,” Sargeant explains. Previously, individual communities had more discretion over waiving fees, but fee collection is improved by centralizing the function, the REIT says.

Multifamily firms are also increasingly taking a harder look at their benefits package to find some budget cuts and efficiencies. Most have eliminated or reduced cost-of-living increases, while some no longer match 401k funds or offer employee stock ownership plans. At Mid- America, such steps have saved the REIT roughly $1.7 million annually.

At Mark-Taylor, some resident-related services have been outright cut. Eliminating its concierge services, for example, saved about $13,000 a year per property for the 30 properties that once offered the service. “With the Internet being so prevalent now—and with what we were paying for the services—it just didn't make a lot of sense,” DeMara says. “Especially in this economy.”

Cutting Back

Top 10 steps companies plan to take to cut costs into 2010.

1. Renegotiate vendor contracts.

2. Reduce head count.

3. Fight tax judgments.

4. Delay groundbreakings/ reduce development pipeline.

5. Slow down purchasing volume.

6. Pass utility costs onto residents.

7. Cancel/rewrite insurance policies.

8. Reduce company benefits.

9. Leverage software to automate processes.

10. Defer maintenance.

Dealing with Debt

Key strategies that help work out debt problems in the new economy.

• Turn to the FHA 33%

• Pass debt onto unencumbered assets 23%

• Move to secured debt 23%

• Do cash-out refis 15%

• Find hard-money loans 14%

• Take on more mezz debt 5%

• Other 11%

Raising Funds

Tactics being employed to generate equity and meet tighter lending requirements.

• Strike joint venture partnerships 33%

• Raise private equity 27%

• Sell assets to generate cash 21%

• Use institutional equity 19%

• Do cash-out refis 19%

• Other 10%

Buying Occupancy

Three creative ways to keep rents flowing in.

1. Memphis, Tenn.-based Mid-America Apartment Communities is offering “rehab renewals.” This initiative allows residents to get a new appliance or flooring in return for renewing their lease. The goal? Keep occupancies up while limiting turnover costs.

2. At Gables Residential, a new “blend and extend” program allows the firm to restructure and extend a lease about two or three months before it expires. By reducing the rent—and getting out ahead of the lease expiration—the resident reups the lease before he or she shops the competition, “and maybe we've kept them in at a higher rate than if we were renegotiating three months from now,” says Dawn Severt, CFO of Atlanta-based Gables.

3. For Camden Property Trust, the best strategy is to focus on long-term asset values, job growth, and demographics. The Houstonbased REIT—which is active in distress Meccas Tampa, Fla., and Phoenix—has coined a new term, “WISO,” which stands for “worst in, strongest out.” “The markets that were the worst into the recession are going to be the strongest ones out,” says Dennis Steen, Camden's CFO. “The Florida and Phoenix markets are looking at pretty decent recoveries in 2010 and 2011.”