DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT: PRIVATIZE PROPERTY MANAGEMENT SERVICES

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DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT: PRIVATIZE PROPERTY MANAGEMENT SERVICES

 

Problem Identification:
HABC operates its properties at substantially higher costs, and with substantially lower performance, than conventional operators of multifamily housing in the Baltimore area. In part, this can be traced to HABC’s centralized structure, which also serves to stifle initiative, diffuse accountability, and limit responsiveness. At a number of properties ‘ including, but not limited to, Westport, O’Donnell, and Scattered Sites ‘ management has collapsed.

Recommended Action:
Privatize HABC property management services and the ownership and management of scattered site public housing.

Classification:
Cost Savings, Organizational, Service Improvement

Functional/Operational Area:
HABC property management

Estimated Annual Impact:
Cumulative ‘savings’ to HABC could be as high as $8-$10 million annually. These would result primarily from two sources. First, the agency could conservatively reduce its operating costs by some $25 per unit monthly (PUM) for the 12,500 units that the agency currently manages in-house ($25 x 12,500 units x 12 months) = $3.75 million. Second, the agency ‘subsidizes’ the operating budget with approximately $7.3 million annually from the Capital Fund, of which $5.2 million is targeted for ‘vacancy reduction.’ Under private management, the agency would no longer need to subsidize the operating budget, except possibly in the first year to clear the backlog of vacant units (but not ongoing, as the current plan anticipates).

These ‘savings’ could be used to fund extraordinary maintenance and capital improvement projects, for which there is great need. In other words, under privatization, more funds would be invested directly in the properties and would not be lost to unnecessary administrative costs (central crews, security, etc.).

Estimated Implementation Costs:
Between $500,000 and $1 million, which is estimated to be the cost for the 1 to 2 years of technical assistance required to develop appropriate asset management systems (see Recommendation 3-C).

Barriers to Implementation:
The single largest barrier to implementation is the impact on staff. The agency currently employs over 800 persons to operate its public housing program, from housing managers to building monitors to centralized purchasing staff. Under full privatization, a small percentage of these employees would be retained by the agency to provide monitoring and oversight functions. (Based on the experience in other cities, the vast majority of affected employees would be absorbed by the private firms.)

Another barrier to implementation is the need for the agency to develop accompanying ‘asset management’ systems (see Recommendation 3-C). The agency cannot privatize property management without, at the same time, developing appropriate oversight and monitoring systems.

Projected Implementation:
1 – 2 years: first year to privatize; second year to stabilize.

Next Steps:
The next step would be to determine which properties would first be put out to private management and over what period of time the remaining properties would be privatized. Once determined, the agency would need to develop and issue an RFP and prepare an orderly transition plan, especially with respect to staff reductions.

Analysis:
The agency currently operates in stark contrast to norms in the conventional market. Whereas private operators entrust significant authority to the manager of a housing development to manage that property on a day-to-day basis, the housing managers in HABC have little real control over their properties. This centralized structure not only raises costs but results in significantly reduced performance and loss of pride and initiative. It also has a significant impact on crime. The first defense against crime in multifamily housing is strong property management. This is essential in creating a sense of community and respect for property. Such community standards are nearly impossible to establish under the existing structure (when, for example, a manager can’t even get the grass cut on a regular basis because he/she must wait on the central crews).

To replicate the management systems (and supporting culture) found in private property management, the agency would need to radically decentralize its operations. Under such arrangements, HABC’s housing managers, among other matters, would:

– order goods and supplies directly from vendors (there would be no central warehouse);
– hire/fire their own staff (as opposed to centralized personnel decisions);
– be equipped with a proper complement of trained maintenance staff and, when needed, would procure specialized services ‘ plumbing, painting, electrical, lawn service, etc. ‘ from local contractors (as opposed to central maintenance); and
– contract with local security firms for security guards in elderly buildings (as opposed to a central security office); etc.

At the same time, the agency would need to develop much stronger budgeting, accounting, and property management reporting systems.

The task of successfully engineering such a revolutionary change ‘ to move from a centralized organization to a decentralized one ‘ is a daunting one. It would take many years for the agency to develop the necessary infrastructure. Even then, there is no guarantee that the agency could accomplish the task; indeed, experience would indicate that reform would get bogged down and not be successful.

The goal ‘ improved property management services ‘ could be achieved much more quickly and much more efficiently if the agency instead contracted with professional property management companies for day-to-day property management services. There are an ample number of qualified property management organizations, nationally and locally, to provide this service.

Unlike national defense or public safety, there is no inherent justification for a public agency to manage real estate. There are no issues of public trust. Property management is a well-developed industry with a multitude of suppliers and with easily identifiable measures of performance (vacancies, rent collections, etc.).

Although the total number of jobs is not likely to change under privatization (only the source of employment) it is true that privatization will result in substantial HABC staff reductions. However, were the agency to decentralize its operations, it would also face significant staff reductions. For example, rather than obtaining supplies from the central warehouse the housing managers would obtain their goods directly from vendors and rather than rely on agency-employed building monitors the housing managers would hire contract guards.

The Committee gave considerable thought to the notion of partial, as opposed to full, privatization, i.e., where the agency might privatize half of the stock and manage the rest. (The committee did not entertain any scenario where the agency continued to manage most of the stock.) In the end, the Committee rejected this option. The agency would need to radically decentralize its operations at the same time that it was also privatizing half of its stock. Managing both processes at the same time would be a massive organizational challenge. The Committee felt that the energies of the agency were best directed at managing the transition to private management than attempting to replicate what the private market already provides.

Other large public housing agencies that have privatized (full or partial) management services include: Chicago, Atlanta, Dade County (Miami), St. Louis, and Puerto Rico. Chicago recently privatized all of its properties (about 38,000 units) as did St. Louis (about 5,000 units).

HABC’s Poe Homes, a 298-unit family property, illustrates the costs and benefits of privatization. This property has been under private management for over a year (the developer for the adjoining HOPE VI project, the Terraces ‘ the old Lexington Terrace high-rise — requested permission to manage Poe Homes with the hope of stabilizing neighborhood conditions). Unlike agency-operated properties, this is essentially a stand-alone operation. The management company does not rely on HABC support services for vacancy preparation, extermination, lawn service, etc. Exclusive of utilities, this property operates for about $220 PUM, which includes a pro-rata share of the agency’s insurance costs, but does not include any pro-rata share of the agency’s protective services expenditures or resident programs. In contrast, the agency receives about $315 PUM in operating funds. Of this amount, $4 PUM is spent on centralized resident programs and about $40 PUM on protective services (police, building monitors, and contract guards). Allowing $25 PUM for overhead costs under privatization, this would leave at least $246 PUM to operate the properties, which, based on Poe Homes, would result in a ‘savings’ of $25 PUM. Thus, the agency could put an additional $3.9 million annually (12,500 agency-managed units x $25 ‘savings’ x 12 months) directly into the properties, which would go a long way to funding much-needed deferred maintenance items. Additionally, the agency would no longer need to ‘subsidize’ the operating budget with capital funds, currently budgeted at $7.3 million annually. (Please note that the operating costs of Poe Homes appear, based on discussions with local operators, representative of comparable private housing in the Baltimore area.)

Privatization would eliminate a need for HABCO, which is the agency’s in-house construction unit. Presently, HABCO is used primarily for vacancy preparation work and is assigned about one-third of vacant units to prepare. Under privatization, the private firms would be entirely responsible for vacancy preparation and would accomplish this work for substantially less money (it costs HABCO an average of about $10,000 per unit).