November 17, 2017
Mary Hull Caballero, City Auditor
Office of the City Auditor
1221 SW 4th Avenue, #140
Portland, OR 97204
Dear Auditor Hull Caballero,
Thank you for the opportunity to review and comment on the audit entitled Prosper Portland: Disciplined Property Management Needed to Achieve Future Revenue Goals, Equitable Outcomes, which Prosper Portland requested in order to strengthen the agency’s asset management practices and the agency transitions.
Prosper Portland takes its stewardship of public resources seriously and the audit helps identify areas of improvement that would benefit the agency’s operations and delivery of services to the public. We appreciate the time and effort invested by your staff, and the thoroughness of the review conducted. In addition, we appreciate the consideration of additional information throughout the audit process and the openness of our dialogue.
Prosper Portland’s 2015-2020 Strategic Plan demanded a significant shift in the way the agency approaches its work and achieves its goals. This strategic plan, and the associated draft long-term financial sustainability plan the Prosper Portland Board will consider for approval in early 2018, point toward a fundamental transition in the way that the agency manages its assets and investments over the next decade. Specifically, financial sustainability necessitates moving away from a historical property management (property-level) approach toward an asset management (portfolio-based) approach.
We generally agree with the audit’s conclusions and recommendations. The remainder of this letter details several of the actions already under way to address the recommendations and explains how the transition toward portfolio-based asset management will institutionalize the actions recommended in the audit.
To ensure that real estate management activity is aligned with Prosper Portland’s strategic objectives, Prosper Portland should:
Since the appointment of a new executive director in August 2016, Prosper Portland has restructured its real estate department and hired three key staff members with the skills and experience required to manage the real estate portfolio to achieve its strategic objectives. In support of the transition toward a portfolio-based approach, Prosper Portland has taken numerous steps to create the infrastructure necessary to manage assets in a manner that is consistent with its strategic, financial and equity goals.
In the last twelve months, the real estate team took on the following steps to evaluate and implement effective asset management infrastructure:
- In early 2017, staff evaluated the software used to perform property management activities and determined the need for new software. They engaged in market research throughout the spring, solicited a new software vendor through a competitive Request for Proposal (RFP) process in June, and signed a contract with Yardi Systems at the end of October. Full implementation of Yardi Voyager 7S with the Advanced Budgeting and Forecasting module (Yardi) is projected by the end of the fiscal year. The new software will allow staff to perform higher-level analyses, automate functions to reduce user error, increase efficiency, and generate customized reports for leadership, all of which will result in better decision making and fiscal stewardship.
- Staff undertook a wholesale review of the agency’s real estate policies and procedures, including real property management, acquisition, disposition, and valuation, to ensure that they reflect not only the strategic, equity and financial sustainability plans but also that they represent acceptable market and community standards. Staff will present revised policies and procedures to the Board of Commissioners for approval in 2018. Once approved, revised policies will be the basis on which existing and future assets will be formally evaluated.
- Staff established a portfolio target return working with the Financial Sustainability Committee (FSC) in Fiscal Year 2016/2017. This return has been refined over the past year based on feedback from individual FSC members and, more recently, the new Development and Investment Department director and managers. With the implementation of Yardi, the portfolio return will be tracked and reported to Prosper Portland leadership and the Board on a regular basis.
- Staff has also identified process improvement opportunities with respect to budgeting and forecasting and has been working with the accounting department to redesign the process for real estate budget tracking and property management. The result will be practices which align with market standards, more detailed accounting and clearly defined metrics against which staff can assess performance.
By the end of Fiscal Year 2017/18, the above evaluation and procedure improvements will be implemented through individual property plans. Each property plan will act as a roadmap for that property and will outline basic data (asset class, year acquired, square footage, etc.), set its strategic purpose (as dictated by URA action plan, strategic plan, etc.), and document financial return expectations, capital budgeting priorities and leasing strategy.
The individual property plans referenced above will include specific language pertaining to the steps by which the equity plan will be achieved across each property in the portfolio. Specific emphasis will be on opportunities for expanding vendor contracting opportunities to MWESB-certified businesses and leasing opportunities for businesses owned by people of color and those middle-wage employment opportunities.
Once Yardi is fully implemented, Prosper Portland staff will provide regular reports to the Leadership Team as well as annual reports to the Board concurrent with the budget approval process.
To maximize revenue from third-party operators, Prosper Portland should:
We agree that a documented risk assessment should be performed for each income-generating property. Risk assessment will be included in the updated real estate policies and procedures and will consider an array of risks to include property management, physical asset condition for safety and tenanting as well as market risks dependent on the strategic goals outlined in the individual property plans associated with each property as discussed above.
Staff has begun to create property-level capital budgets for Prosper Portland’s real assets. This process may include, if necessary, engaging a third-party consultant via competitive RFP. Once the capital budgets are in place, they will be included in each contract signed with third-party property managers and monitored accordingly. Staff is also in the process of reviewing existing agreements to make sure they contain sufficient provisions for budgeting, reporting and protecting physical assets, and will ensure that all future agreements signed with third parties contain appropriate provisions that reflect the level of associated risk.
With the implementation of Yardi, Prosper Portland will be able to more closely track each property’s performance and budgeting needs. This increased efficiency and granularity of data will allow staff to more closely and routinely monitor the assets’ physical and financial condition and to more consistently interface with third-party management to ensure compliance with contract requirements as well as strategic and financial goals.
To increase revenue at specific properties, Prosper Portland should:
In March 2017, the asset management team evaluated the ICC operator agreement and, as a result, issued a RFP in July to engage the services of a hotel asset management firm to provide the technical skill and industry depth necessary to evaluate the hotel in support of the 2020 Strategic Plan, Financial Sustainability Plan and Oregon Convention Center community framework plan. Pinnacle Advisory Group, a nationally recognized firm with deep experience in hotel management, was awarded the contract and began its engagement in November.
This firm will evaluate the existing operating agreement and present Prosper Portland with a white paper outlining multiple options for hotel operations moving forward. The result of this work will enable Prosper Portland to issue a competitive RFP for hotel operations in 2018.
A comprehensive review of the operations of Union Station is currently under way by Prosper Portland staff to determine a framework for updating the operations of the train station to a contemporary standard. The current agreement with OMF will be terminated, and a new operating agreement will be put into place. Given the many parties involved in the operations of the Station (OMF, TriMet, Amtrak, Police Bureau, Transit Police etc.) Asset Management staff intend to develop a property stewardship plan that focuses on assessments and upgrades of life safety systems, security, a prioritized schedule of repairs and costs associated with changes anticipated by this review. This review shall be completed by May of 2018, after which Prosper Portland will develop a new operating agreement for Union Station to explicitly state property management reporting requirements and structure the compensation structure to align with industry standards and responsible financial stewardship.
Upgrading the parking control system at Station Place Garage is a high priority. Prosper Portland staff are finalizing a RFP to competitively bid for parking management services which consolidates management of all of the agency-owned parking garages, in order to control costs and increase efficiencies. Staff plans to issue the RFP by the end of the calendar year.
Ultimately, Prosper Portland requested this audit to both manage its transition and guide and inform the steps necessary to ensure that as a key agency it continues to achieve the City’s goals around economic development and equity. On behalf of the Prosper Portland Audit committee, please extend our thanks and appreciation to the Audit Services staff for their effort on this audit.
Mayor Ted Wheeler
City of Portland
CC: Prosper Portland Audit Committee