Utility Costs - Reduction By Transfer

Utility Costs
Reduction By Transfer
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Introduction
      Beginning seriously in about 1990, an ever increasing number of landlords and property managers have been transferring utility costs to the tenants. It is estimated that, of the more than 25 million apartment units in the United State, about 12 million, almost half, are candidates for sub-metering of water and that about 15 percent have been completed. Some of the largest owners and/or managers report that they have already sub-metered water for 50 to 75 percent of their units. Over the next few years, the majority or apartment communities that can be sub-metered will be doing so. Between 90% and 95% of all new apartment community construction are being sub-metered. Many states will likely start requiring multi-family communities to sub-meter or offer tax incentive programs to do so.

Why Transfer Costs?
      There are several reasons to transfer costs to tenants, either through sub-metering or allocation, usually more formally called Ratio Utility Billing System (RUBS).

Water/Sewer, Electric, and Gas prices continue to rise

Tenants are more inclined to waste utilities when the landlord is paying for them - transferring cost encourages conservation

Moving utility costs to tenants is often easier than raising rents by the cost amount even though the result may be the same

Rising Costs
      In general, all utility costs are rising. In many areas, the rates of increase in utility expenses are significantly greater than the rate of inflation and/or significantly greater than the rate of rent increases.  For example, water and sewer fees across the country are skyrocketing. Increases of 25% per year have become commonplace in many areas, and conservation efforts are now a must for practically all types of residential properties.
      Increasingly expensive water is being flushed down the drain by residents who are not responsible for their own usage. Along with that water goes a property owner's profits. It has been found that residents use 30% less water when they have to pay for it directly. Without direct financial incentive, residents are not motivated to control their water use.
      Recent studies have indicated that the monitoring and billing for a resident's water usage has little or no effect on a property's turnover rate. Of course, an abnormal high-vacancy market will increase the chance of tenants moving for a variety of reasons.  Even for areas where you might have trouble renting a unit that requires a tenant to pay for the utilities, things will change as a larger percentage of units turn to transfer of costs.

Decreasing Resources
      Conservation has long been important concern and this will only increase as resources are strained due to population growth, more stringent water quality standards, and decreasing power sources. Increased restriction on construction of dams, nuclear power plants, and coal fired power plants due to environmental concerns will only further exacerbate the problem. Existing nuclear power plants will become even less helpful as they are commissioned after their useful lives are up.
      Because of rising energy costs and all the recent attention to existing and potential energy shortages around the country, sub metering is an increasingly attractive practice at many types of residential, commercial and industrial buildings.

Higher Rents vs. Transfer of Expenses
      In theory, a landlord can obtain the same net profit by simply raising rents instead of the more complicated transfer of expenses. However, there are some important reasons why transfer of expenses is often the better approach.
      First, tenants are much more likely to conserve water, gas, and electricity if they know that they will personally pay the bills directly. Even though most tenants may know that increased utility expenses will eventually contribute to increased rents, this does not usually translate into current concern about usage. They may figure that they already use less than other tenants in the building or they may note that certain other tenants are wasting a lot. In either case, they may assume that their share is not important or that their usage will not greatly affect the total. Their lack of concern is usually justified because landlords generally absorb increasing costs, either because they don't pay attention to why their profits are declining or because they are simply reluctant to raise rents even when they know.
      Horror stories of mounting costs and vast waste continue to circulate. One of the most recent is about an elderly woman in New York City who didn't want the super entering her apartment. She allowed water to stream down her kitchen sink for more than two years, costing the apartment owner $8,800 in water bills and a nickel for a new washer -- the only piece of hardware required to fix the problem. You can be sure that this would not have occurred if the tenant were directly paying for her water.
      The financial impact of paying for their own usage should obviously result in less waste, but it may also result in true conservation efforts for non-financial reasons by some environmentally conscious tenants.
      Second, in many markets it is easier to transfer expenses to tenants rather than to raise rents. This is particularly true for expenses that are directly related to tenant usage of services.
      In considering whether to transfer expenses you must consider several factors.

The extent to which the local market is sub-metered or allocated - what is the competition doing

Market occupancy numbers - can the tenants easily move

The legality of transferring - there may be jurisdictions where payment of certain expenses by the tenant is prohibited or at least restricted. This is more likely to affect allocation methods rather than sub-metering. A typical restriction is that only actual cost can be passed on to the tenant - the landlord can't make a profit.

A Win-Win Situation
      Transferring costs benefits both the landlord and the tenants.

Benefits to owners and property managers

Ability to offer lower advertised rental rates or to minimize rent increases

Accurate accounting resulting in billing reflective of actual use creates the incentive for energy conservation by all tenants

Benefits to tenants

Pay only for energy actually used, so that conservation-minded tenants do not have to subsidize wasteful or otherwise heavy users in the same complex.

Options For Cost Transfer

Build in sub-metering for new construction

Use existing separate meters where available

Install separate meters where none currently exist - retrofit existing units

Allocate owner's bills among units based on a particular criteria

      Obviously, it is better to utilize separate physical metering rather than allocation schemes if possible. This makes tenants for each unit responsible for energy actually consumed rather than for energy costs by square footage or other allocation that disregards individual usage.  Sub metering for new construction is a "no-brainer." It is much less costly to build for separate metering of utilities compared to splitting things afterwards, even when the sometimes high cost of meter placement itself is factored in. Even if the owner plans to pay for certain utilities because the local market current requires it, having the meters in place allows for transfers at a later date.
      Installation of meters in existing structures is more costly, but the relatively short payback period and the increased project value makes it worthwhile. For example, assume that the cost of a water meter retrofit for a 25-unit complex is $500 per unit (on the high side), for a total cost of $12,500, and that pre-installation average monthly water costs of $30 per month per unit is passed through to the units.   First of all, the payback time is less than 17 months ($12,500 divided by $750). Second, and just as important, is the fact that expenses are reduced by $750 per month, or $9,000 annually, increasing the net operating income by that same amounts. Applying a capitalization rate of 9 percent gives us an increase in value of $100,000. No matter how you look at it, this is very good return on investment, gained simply by shifting water costs to residents.
      Sometimes, structural impediments, such as multiple water entry points, can make the cost of retrofitting prohibitive. In that case the only choice may be to institute an allocation scheme. However, before deciding that the cost is prohibitive, do a serious analysis of the overall picture, including return on investment. You may be surprised.
      There are a number of possibilities for allocation of utility expenses among units of a building or within a complex that is not separately metered. Possible allocation criteria include unit square footage, number of bedrooms, number of bathrooms, the number of persons in the unit, or a combination of several criteria. A different allocation method may be used for each type of utility, taking into account the fact that different utility services are affected by different factors and some are more variable among the tenants than others..

Water & Sewer
      Water sub-metering has only been around for a little over 5 years because it was not much of a concern. But over the past couple of years, with the cost of water increasing across the country by as much as 25% in a year, sub-metering has become one of the biggest concerns of multi-family communities.  Since most sewer billings are based on water usage, only water usage is usually really of concern. When possible, sub-metering is preferred over allocation. The payback period is relatively short and sub-metering most accurately measures water usage by each unit.
      In selecting water meters, there are advantages to picking units that do not require manual reading, Although sub meters are installed on site, remote monitoring of meters is possible through the use of PCs, software programs and computer modems.