Find out what you can do about it
When utilities are included in an apartment complex’s rent, some tenants are naturally going to consume more than others. High utility users, even if they represent a small group of tenants, can substantially increase costs. Since these cost increases are effectively hidden in the rent, those residents who use utilities responsibly subsidize those who don’t.
A question to consider then is how much are high users increasing utility expenses? Does it make financial sense for an owner to include utilities or bill tenants directly? If an owner does decide to transition away from the utilities included model, what options are available?
The Challenge of a Master-Metered Multifamily Complex
An owner is most likely to include utilities in the rent when his multifamily complex is master-metered for water, gas, or electricity. The drawback of a master-metered community is that there’s no way to tell how much of a given utility each resident is using.
If I’m one of those residents who runs the heat continually, lets a broken toilet flapper leak without reporting it, or keeps the air conditioning on even when I’m not home, it’s my neighbors who pick up most of the tab. The usual feedback loop that links the amount I pay, to the amount I consume, is missing. Without this feedback loop, I’m more likely to consume carelessly.
As we’re about to see, careless or abusive consumption can raise multifamily utility expenses as much as 70%!
The RUBS Example
Assume you own a 150 unit complex, each apartment has two bedrooms, and the property is master-metered for natural gas. The complex uses 7,500 ccfs of gas during the heating months and the rate is $1.00/ccf. If you were to use a Ratio Utility Billing System or RUBS method to determine each resident’s approximate usage, it would be 50 ccfs.
Assuming the monthly rent is $750, $50 would be allotted to gas expense. (See Example 1 in the Supplemental Information section at the end of this article.)
Moderately High Users and Their Influence on Utility Expenses
Let’s consider a different case where 10% of tenants (15 households) use 200% more gas than the average. Total gas usage for the property is still 7,500 ccfs. Average gas users (135 households) consume 41.7 ccfs each and moderately high users consume 125 ccfs each. The gas portion of the rent should have been $41.70 but residents effectively paid $50. High users created an increase in the rent of $8.33, a 20% increase in the portion allocated for gas expense. (See Example 2.)
High Users May Be Increasing Utility Expenses By 70%!
Now let’s look at the case where 10% of residents are truly high users and they consume 700% more gas than the average. (While this may seem like an excessive estimate, many experts believe that high utility users will consume at this level or higher when they don’t pay for utilities directly.) This elevated usage can be a result of: running the heat continually, leaving windows open when the heat is on, or undetected maintenance issues.
In this scenario, average gas users consume 29.4 ccfs each and high users consume 235.3 ccfs each. The gas portion of the rent should have been $29.40 but residents effectively paid $50. High users increased the rent by $20.59, a 70% increase in the portion allocated to gas expense. (See Example 3.)
High users didn’t actually double the overall gas expense but they came pretty close. Our group was relatively small too–only 10% of residents. Imagine the effect if a greater percentage of tenants were high users.
“Utilities Included” Is Not So Appealing To Renters
Had the owner in our example billed utilities separately, he could charge $700 for rent and the gas bill would be $29 – $50. Lower rent is clearly more attractive to renters. Separating utilities would also encourage the community to use gas more responsibly thereby lowering everyone’s total housing costs.
Transitioning Away From “Utilities Included” By Submetering
There are two very effective ways to separate utilities from the rental fee and bill tenants directly. The first, utility submetering, offers the most benefit for tenants and owners. When the water lines, electric disconnect panels, gas lines, or central heating system in your multifamily residence support it, you can install a wireless submetering system. Submeters measure individual consumption for each resident and the data are used for billing.
Submetering Serves Owners and Tenants
Submetering helps owners by increasing net operating income (NOI) and property values. It insulates them from paying for excessive resident usage or losing money when utility prices spike unexpectedly. Metering provides useful data that can be analyzed to detect maintenance issues, leaks, and other problems, ultimately saving the owner and tenants money. This data can also demonstrate how energy efficient your property is compared to others.
Submetering is the best and fairest way to bill tenants for their utility usage. It’s been shown repeatedly to reduce utility consumption by 15-35%–dubbed the “conservation effect.” Not only do tenants benefit financially when they conserve, they’re no longer accountable for the consumption habits of their neighbors.
The “Conservation Effect” In Action
Let’s say you decide to submeter your property and the conservation effect causes consumption to drop by 35%. In our example, usage for the property would decrease from 7,500 to 4,875 ccfs. This would lower the average resident’s gas bill from $50 to $32.50, generating a notable savings of $17.50 per month. (See Example 4.)
Submetering Pays For Itself Quickly
A wireless heat metering system for a 150 unit complex with central baseboard radiation heating can run $30,000. Even though submetering systems generate a return on investment (ROI) in less than 12-18 months, the upfront expense is a concern to many owners.
To minimize out-of-pocket expenses, some owners finance equipment through a leasing company. In other cases, a nominal fee for the metering system is included on each resident’s monthly bill. Since submetering is a benefit to tenants and owners, it follows that both should share in the expense.
In an ideal world, federal and state agencies would recognize the powerful effect submetering has on conserving scarce resources and would offer rebates and affordable financing vehicles to owners. This strategy would accelerate the implementation of submetering systems in the millions of existing multifamily residences massively reducing utility consumption.
“Rubbing” Your Way To Higher NOI
The second approach to separating utilities from the rent is to bill tenants using a RUBS method. Depending on the apartment size, number of occupants, or some other factor, owners divide up utility costs amongst all residents. When “rubbing” gas, apartment square footage is the metric most commonly used.
Implementing a RUBS system has also been shown to generate a conservation effect. One research study conducted by the National Apartment Association (NAA) and the National Multi Housing Council (NHMC) reviewed 32 properties in three states and found that RUBS generated a reduction in water consumption of 6-22%. Although it’s a smaller conservation effect, it’s still an improvement over the situation caused when utilities are included with the rent.
The benefit of RUBS to tenants is that by conserving, reporting maintenance issues quickly, and minimizing waste, they can decrease their utility expenses. Owners benefit because RUBS doesn’t require a cash investment. In addition, RUBS makes it so owners are not financially responsible for the utility consumption behaviors of their tenants.
The primary disadvantage of RUBS is that high utility users still don’t pay the full price of their excessive usage. Compared with “utilities included,” however, it’s a marked improvement and one of the smartest, fastest ways for an owner to improve the bottom line.
Multifamily residences that include utilities can enable a small group of high users to raise utility expenses and rents considerably. To prevent this, owners can separate utilities from the rent by installing a utility submetering system or using RUBS to bill residents directly. Resident billing creates a financial incentive for residents to use utilities wisely, it increases owner profits, and all parties save money.
– End –
- Total monthly gas usage for the property = 7,500 ccfs.
- Gas rate = $1.00/ccf.
- Total gas cost = 7,500 ccfs. x $1.00 = $7,500
- Average resident bill = $7,500 / 150 units = $50
- Average users consumption = 41.67 ccfs per household.
- High users consumption = 125 ccfs per household.
- Average users’ gas bill should have been = $41.67; residents effectively paid $50
- Average users paid a “penalty” of = ($50 – $41.67) / $41.67 = 20% increase.
- Average users consumption = 29.4 ccfs per household.
- High users consumption = 235.3 ccfs per household.
- Average users’ gas bill should have been = $29.41; they paid $5
- Average users paid a penalty of = ($50 – $29.41) / $29.41 = 70% increase.
- Total monthly gas usage for the property = 7,500 ccfs
- Adjusted usage (35% reduction after submetering) = 7,500 – (7,500 .35) = 4,875 ccfs
- Average resident bill = $4,875 / 150 = $32.50