Learn how to protect your NOI

If your multifamily complex includes utilities in the rental fee, brace yourself.  Utility cost increases are coming your way that may erode your hard-earned profits.  Even more concerning is that you're responsible for a sizable expense that you have little or no control over.  The "utilities included" model puts you squarely at the financial mercy of tenants, their usage tendencies, and utility companies.  "Utilities included" also means that you have to be an accurate budget forecaster to ensure that your rental rates cover the annual utility expenses.  Miss the mark and it's you who'll pay.

You can quickly and easily change this situation by separating utilities from the rent fee and billing tenants directly--at no cost to you.  By doing this, you'll make a positive and immediate impact on your net operating income (NOI) and the value of your property.

From a price perspective, your complex will be more appealing to prospective tenants and you'll have effectively removed yourself from the utility equation altogether.  Billing residents means no more worrying about the effects of runaway tenant usage and it leads to higher profits.

Another intrinsic flaw of the "utilities included" model is that it offers no financial pressure for tenants to notify property management when maintenance problems occur.  Water leaks are a perfect example.  A broken toilet flapper can waste hundreds of gallons of water in a short amount of time.  The owner relies on the tenant to inform the maintenance team when an issue like this arises.  Tenants, however, aren't paying directly for the water bill so there's less incentive for them to respond quickly…if at all.

The Financial Impact of Converting to Tenant-Paid Utilities

An analysis of the financial benefits of billing tenants for utilities is worthwhile.  Assume you have a 150 unit complex and the monthly water bill is $6,300.  If you can transition 80% of this bill back to tenants, you will realize:

• Monthly savings:  80% x $6,300 = $5,040
• Yearly savings:  12 mos. x $5,040 = $60,480

These savings can be achieved with a minimal time investment.

Nervous About Changing?

Some property managers and owners have initial concerns about separating utilities from the rent and billing tenants directly.  They worry that renters will leave or that it will make their apartments less appealing than their competitors who do include utilities.  It's worthwhile then to consider how a prospective tenant might evaluate two different apartments--one with utilities included and one with a resident utility billing program.

Assume you offer a two bedroom apartment for $750 per month (resident-paid utilities) and another complex down the road offers a two bedroom unit for $800 per month (utilities included).  Your complex will naturally be more appealing from a rental price perspective, and everything else being equal, will see more traffic.  But your property is also more advantageous from a total housing cost perspective too.  Here's why.

When residents are billed for utilities directly, whether through a Ratio Utility Billing System (RUBS) or via utility submeters, they can influence their own monthly housing costs.  If they conserve utilities, their bills will be lower.  And if residents quickly report maintenance issues and minimize wasteful usage, everyone's utility bills will decrease.

It's Easier Than You Think

It's a straightforward process for owners to separate utilities from the rent and bill tenants directly for water, gas, and/or electricity expenses.  They can also include trash, cable, Internet, rent or other recurring fees (aka "convergent billing") on the utility statement to make paying simpler for tenants.

The two most widely used methods for multifamily utility billing are:

1.  RUBS billings
2.  Submetered billings

RUBS or "Ratio Utility Billing System" is a method of allocating utility costs to tenants based on number of occupants, size of the apartment, or some other factor.  Submetered billings require that a utility metering system be installed to directly measure tenant usage.  This usage data is used to calculate resident bills.

RUBS is a Great Way to Start

The fastest, least expensive way to transition utility expenses back to residents is to implement a RUBS.  Here are the steps:

#1 - Research utility billing regulations in your state, county, and city

While most states approach resident utility billing in a similar way, a few states have unique rules.  For example, in Colorado, as long as an owner has a signed lease in place stating that residents can be billed for utilities, the entire amount of the master-metered bill can be allocated back.  The owner does not have to take a common area deduction of any kind.

In Texas, however, not only do you need a lease agreement signed by the tenant permitting utility billing, the Texas Commission on Environmental Quality (TCEQ) specifies the way bills are to be calculated and the deductions owners must take.

Research the regulatory laws where your complex is located.  Your local or state apartment association is a helpful place to start.

#2 - Have residents sign a new lease or lease addendum

Each resident must sign a lease agreeing that the owner/property manager can bill for utilities.  At a minimum, the lease addendum should include:  how bills will be calculated, when payments are due, any common area deductions (CADs).  Note:  A sample lease addendum from the TCEQ has been uploaded to the File Bank under Lease Addendums.

#3 - Setup the billing process

To initiate resident billing for water, for example, you'll need mailing information, occupancy figures for each household, and copies of the master-meter water bills.  Each month you will review updated move-in/move-out data to ensure that you are billing the proper tenants.

Use the information (above) to calculate tenant bills.  Establish a billing schedule.  For example:

• Billing period - 5th to the 5th.  You want these dates to coincide with the master-meter billing period.
•  Delivery date - Bills will be mailed on the 10th
•  Due date - Bills are due on the 25th
•  Past due notification date - Late letters will be sent on the 30th   

#4 - Notify tenants

We recommend notifying tenants in advance of sending the first bill and clearly describing how the process will be administered.  Be sure to include accurate contact information and describe how the bills will be calculated.  Some property managers host community Q&A sessions to provide a forum for residents to ask questions and to encourage buy-in.

#5 - Send the first utility bills

 After you send the first bills, make sure resident support is available.  Offering different payment options so that tenants can pay by mail, telephone, or online via the Internet is a bonus.  Clearly define who payments should be made out to and where those payments should be delivered.

#6 - Process payments and manage past due accounts

 Processing payments quickly and being vigilant about collections will keep your accounts receivables at a manageable level.  We recommend using an accounting system or utility billing application to track financial transactions.

Conclusion

 There's a real opportunity for multifamily owners and property managers, who currently include utilities in their rental fees, to improve their profits.  By separating utility costs and billing tenants directly, owners can increase the value of their properties, insulate themselves from rising utility prices, and benefit tenants.  If you elect not to perform billing, there are several third party billing providers that can competently manage the process on your behalf.

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About American Conservation & Billing Solutions, Inc. (AmCoBi)

AmCoBi offers affordable, high quality utility billing services to multifamily owners and managers.  For more educational information about utility billing and submetering, visit: AmCoBi - Utility Billing Services.