Will Clark has been involved in the multifamily sector in various capacities for twelve years, having started as a developer in New York.  He then joined KSI/Kettler in Washington, D.C. as an asset manager. This experience awakened his interest in the built ‘environment’. In his current position, REO Asset Manager for a special servicer, he manages a rotating portfolio of 15 to 35 REO properties for CMBS trusts – often needing to assess properties within 30 days and move them in as little as 90 days.  This vantage point has given him a comprehensive view into the operations, management and sale of a great number of commercial multifamily properties.

Our Editor-in-chief, Kimberly Madrigal, recently had the pleasure of interviewing Will with regard to sustainability and profitability. Together they endeavored to explore one question: Can the two actually co-exist?

GLL: From our preliminary conversation, I understand you were a developer but now work with REO properties in multifamily.  What sort of developing did you do?

Clark: For five years I was involved with rehab and repositioning for architecturally significant properties in New York and Manhattan. Targeting condo-conversions, we did a lot of townhouse conversions to or from multi-unit or single-family, commercial conversions to residential, and commercial repositionings.  Because so much of my work involved properties that were either landmarked or worthy of landmark status, I gained a deep appreciation for the methodology and design of older, prewar buildings. Floorplan efficiency was much lower than what you would build today, but the adaptability of these structures is far and above what can be done with today’s large footprint, ‘efficient core’ designs.

GLL: How is your new work related or different?

Clark: Working REO puts me back in the position of being an owner and allows me the freedom to think, “What could a developer do with this?” You know, you look at a property as a developer and ask “What can I make? What can I create?”  But at the same time, you have the counter-balance, which is, “What am I responsible for?”  We’re responsible for someone else’s money and have to recover as much as possible. So, it’s fun to think, “What could I do” but mainly because it helps me in my recovery, the question becomes “What can I do better?” I can either undertake things that will improve the property directly, or I might talk to brokers to sell or reposition the property and try to impart a little bit of the vision too. You can’t always finance that these days, but it certainly helps to be able to tell a story.

GLL: Right, sounds good.  So have you used any green property management companies to advantage?

Clark: Yes I have. When I was at Munimae/MMA Financial there was one property that really got me interested in the financial benefits of sustainability.  The utility bills were running twice what same-size properties three miles away experienced.  When I asked the management company for an explanation, they didn’t have an answer. I brought in Dominium, a great management company in the Minneapolis area, to replace them. One of the first things they did was show me their “Twenty-Three Commandments of Energy Conservation”.   It’s a fantastic internal booklet that lays out ideas and improvements of varying complexity with costs, benefits, and pay-back periods, all calculated for what you can do on-site. I did this in 2007 when it was hard to find management companies that really looked at these improvements from an NOI perspective. It can still be hit-or-miss and many companies don’t have a comprehensive asset plan, but companies like Dominium or Laramar, who we use extensively, have a base of knowledge that pervades the organization.

GLL: Could you give us a few examples?

Clark: They had little things like modifying washing machines for cold-rinse only and that cost what, fifty bucks? All sorts of water reduction ideas like replacing aerators on showers and faucets, which affects 25-40% of total water use in a unit and can achieve a simple payback under 5 months. Upgrade or re-install the weather stripping, which is fairly straightforward, reduces heat transfer, noise, and improves air quality Wrapping a hot water tank and the pipes with 1” of fiberglass insulation can reduce the heat loss by 30-40%. Lower the heating temperature of your hot water to around 130F which reduces your electrical or gas by around 1% per degree reduction. Seal exterior cracks with caulk; I mean there’s a lot of really good information and a lot of it is fairly straightforward.  Most importantly from my perspective, these are things that can be done on-site.

GLL: Why is that important to you?

Clark: For instance, I can give direction to my regional managers. “I want you to do these five things and when you’ve done that let me know and I’ll give you five more things.”  The problem with a lot of the new [green] construction and the ideas and systems is that they are simply not manageable by the folks who are on-site. You shouldn’t have to call a consultant or an engineer or a vendor to come out and fix everything.  What I worry about is that people get really focused on the expensive and the fantastic without looking at the more mundane things that have a much smaller impact but cumulatively improve the value of the property.

GLL: To make sure our readers understand the way your business works, first your company takes over a property.  Then you may bring in a new management firm, and, if they set up the improvements, these will be handled by your on-site staff.

Clark: Right.  When a loan is sold into a CMBS trust, two servicers are appointed: the master and the special. The master receives your monthly mortgage payment. When that stops, or the loan matures without payoff, or some other event of default occurs, the special servicer is asked to step in and maximize the recovery for the Trust.  When we take title to a property (voluntarily or not), we appoint a property management company to manage the daily operations. My job is to oversee those operations and provide direction.  What I appreciate most about what Dominium [Management] did is that they understood, number one, the constraints of the site teams.  In my world service managers make anywhere from twenty-five to thirty-eight grand a year. Training is primarily on-the-job and supplemented by what classes you can take for certification. The managers are working with a bunch of service guys.  Good, capable people but not engineers. These are guys who picked up all their knowledge by doing what they do everyday.

GLL: So it is important to you that maintenance and servicing of systems and procedures are accessible for staff.

Clark: That’s right.  These are hard-working, busy people, who do a lot. I can’t afford to have them out for a week and a half learning how to operate some complex water filtration or HVAC system. I can afford to lose them for six hours a month for supplemental training, however, as there is a lot to learn. They need to learn if there is a change of materials, a change in process, a change in timing; what sort of things they can do to improve the value of the property.

GLL: So, if I understand correctly, you’re not bench-marking the properties?

Clark: Not yet, and that’s probably something we’ll discuss more internally as we change our parameters for the [property] hold periods. Typically, what we do in special servicing is a very fast thirty day focus when the property transfers.  Once a receiver is put in place – or once a foreclosure occurs – the title conveys to us and we get out there with the REO team. We inspect the property and then we make a determination. Is this something that is worth pursuing and improving or is this something we just need to get out the door and sell? And as the balances of these properties increase, or the share of properties increases from say majority sub-five million to ten million to twenty million dollars, we’re going to be spending more time evaluating these properties. We will see what we can do to improve them, rather than just prep them and move them out for sale.  When we make that shift, we’ll start looking at it from a long-term perspective.

GLL: What is long term for you?

Clark: Long term for us will be under three years because we’re essentially required by tax law to get these properties off our books by then. But, once we start shifting to a longer hold period of twelve, twenty-four, or even thirty-six months, I think we’ll start doing more benchmarking.

GLL: Do you think benchmarking could be a value-added service that management companies could provide?

Clark: I think it would be extraordinarily valuable because it’s a service that is needed. You can attach it to small funding requests that can be done to correct more egregious problems. You get back to “what can a site team do?” And if you can provide them with a list of “all right, if you do these fifty things… and if you maintain these things then you’re going to see a reasonable rate of return on your investment”.

GLL: You and I had kind of tweeted about energy auditing and commissioning. Did you go forward with any of that?

Clark: Again, as far as benchmarking, we’ve looked into some of that. I’m going to try and get Hydrametrics, another Minnesota firm, to do some water audits for me and then figure out whether or not that works within our structure, looking at the time and money investments and the hold periods.

GLL: Are you doing anything specifically to address energy?

Clark: What I’m doing right now is kind of a first step.  Where energy markets are deregulated we are moving to a wholesale purchase from Glacial Energy.  This would allow us via an agent to contract with the utility provider , not the retail carrier.  If we’re buying at the spot rate, that usually gives us several cents per kilowatt below the retail rate.  Because our hold-periods are indeterminate and unpredictable, Glacial gives me the ability to cancel in thirty days; I’ll take a lower return in exchange for the flexibility. So, while some people might be able to see a 25 percent drop in their electricity prices in Ohio with a twelve-month contract, I’ll happily take a 15 to 17 percent drop because I have a thirty-day cancellation option.

GLL: That all makes sense. So, you haven’t gone through with any commissioning?

Clark: Not yet. To give you some additional color on this, the properties we get are generally B and C quality with significant deferred maintenance.  These properties are failing to provide sufficient cash flow for a multitude of reasons.  This might include units that need to be replaced. It always includes sidewalk repairs and that’s ten to fifteen grand easily. It might include sprinkler issues. It might include problems with the landscaping or water seepage, things like that.  When we come in we have to address all the immediate health and safety concerns.  After that we can start looking at everything else, but we’re also tasked with recovering as much of the investment as we can. To the extent that a particular investment can increase the value of a property, we’ll go through with it, but that’s not really our purpose. Our purpose is to stabilize the property as quickly as possible and then make a decision whether to hold or sell.

GLL: What is your relationship to the residents at that point? Are they dealing with the regional offices or are you changing their leases in any way?

Clark: No, we’re not doing that as again, our hold-period has been traditionally fairly short, between three and eighteen months, I would say. We wouldn’t deal directly with the residents but work through the management companies and generally follow their guidelines. For example, we’re not going to ban smoking but we will enforce municipal regulations like recycling.  Anything where we might be responsible for the consequences, such as your standard credit and criminal checks and Fair Housing Act compliance, we’re going to enforce.  Beyond that – which isn’t to say that’s not a good idea or that we shouldn’t – we just don’t intervene.

GLL: As it’s the management companies that are dealing with the residents, do you give them any direction in terms of promoting sustainable property management?

Clark: Yes, we encourage them to think about it as a business opportunity. I would say that most of my interaction on sustainability is through a business analysis.  It’s selfish, but it’s what I’m asked to do, which is to be responsible for the maximum recovery on the investment.  So to give you an example, low VOC makes sense to me.  I can move people in faster and it’s better for the air quality of all residents.  It reduces the likelihood I’m going to get complaints about chemical sensitivity, mold, or whatever the late-night TV litigation pitch happens to be.

GLL: Have you found sustainable practices save you money?

Clark: Yes.  For instance, reducing the number of cleaning solvents we use is about improving purchasing power but also improves indoor air quality. Again, that makes a lot of sense to me. Reducing the amount of grass on site and moving toward either natural landscaping or something drought-resistant saves water expense as well. Water’s a big part of what we do. It’s a big part of our utility costs and so areas where we can reduce our expenses are always areas that we’re interested in pursuing. We’re trying to be smart about that. Fortunately, we’re at a point in the development of sustainable materials and practices where it’s a clearer cut case that you’re going to save money by acting in a sustainable manner.

GLL: Have you had any success in reducing paper or going paperless all the way?

Clark: Well, we are still working on that but with regard to marketing, I have found great ideas from Eric Brown at Urbane in Royal Oak. All his leasing materials are on zip drives, or actually little thumb drives. They can just hand the thumb drive out to people and say, “take it home, look at the brochure, look at the application, fill it out, and send it in to us.” Well, that makes a lot of sense because four-color glossy brochures are pretty expensive. And given my limited hold period, it makes no sense to go through the time and expense; in real terms the waste of producing all those brochures. Give the same information to people electronically and you’re going to save time and money. I would prefer if I could to put everything on an iPad.  Do your comment cards, do everything, just by carrying this iPad around.

GLL: So what are some other benefits of using that iPad?

Clark: Well you’re reducing electricity consumption at the property, you’re making a cleaner, more inviting environment, but you’re also taking that information with you while you tour with people. You get to the model unit and you can say, “Let’s just go ahead and take your application right now.”  If I do that, think about all the paper I’ve saved, think about the time that I’ve saved too, because now I’m able to produce the lease immediately while I’m still on-site. We can process it and by the time the folks get back to the office, the approval is in hand. They don’t have to drive back. They don’t have to deliver any documents. Everything’s taken care of electronically.  I think examining our operations holistically is going to be the way to start identifying areas like this where you can save time and money. Ultimately that’s what really matters to me.

Other Articles of Interest:

• Wednesdays With Will Clark: Carbon, Corporate Insight and Uncommon Sense
• Wednesdays with Will Clark: Certifications, Retention & Creating Community
• Networks for Increasing Multifamily Housing Profits