Utility billing demystified: Consider transferring utility costs to your residents to insulate your NOI

Until recent years, it was standard practice in the multifamily industry for utilities such as heat to be included in the rent. However, escalating and volatile natural gas costs have led many management companies to conclude that transferring utility costs to their residents is the best means of insulating their net operating income (NOI is operating revenues minus operating expenses) from unpredictable utility expenses. The process of transferring accountability for utility expenses from the owner to the residents is commonly done in one of three ways: individual residences are metered, residents are assessed utility surcharges in addition to the rent, or a utility billing system is used to formulaically divide a utility bill originating from a meter that services multiple units amongst the units serviced by that meter. Billing residents for their utilities not only reduces a property's vulnerability to the indeterminate operating costs of natural gas, it promotes energy conservation as well. Government funded studies indicate that such practices reduce total consumption by as much as 25%. Once the residents become responsible for utility payments they are also more likely to report leaks, as the property owner is no longer paying the bill. If you have not given any consideration to billing for utilities, you are strongly encouraged to do so. Of the aforementioned utility billing methods, individually metering every unit is certainly the easiest. However, it is also the most cost prohibitive and many times not mechanically possible. Most apartment communities in the upstate market were not constructed with separate meters for every unit and retrofitting a property for individual installation can be expensive or physically impossible. Assessing utility surcharges is rather arbitrary as it does not account for individual consumption and therefore does not promote energy conservation as effectively as the other methods. Thus, a utility billing system is often times the most practical application based on cost and mechanical configuration. That said, it can also be challenging to implement. Many management companies rely on the expertise of a third-party billing service to facilitate a utility billing system. For most properties, implementing a utility billing system requires either the installation of specialized equipment that measures each individual units' demand for a particular utility or development of a ratio utility billing system (RUBS) formula to allocate a utility bill assessed from a meter servicing more than one unit amongst the units serviced by that meter. Property construction dictates the best approach. In many instances, properties can opt to install specialized equipment designed to accurately measure the individual gas consumption of forced air furnaces and domestic hot water heaters. These systems use various energy monitors to calculate and decode the operating time of devices and/or circuits such as a thermostats, valves, motors, pressure switches, etc. The "run time" data is then used to calculate the residents' bills. Alternately, RUBS formulas are normally developed based on factors that include square footage or number of occupants. Once established, bills that originate from a meter serving multiple locations are divided among residents according to that formula. Before you incorporate a utility billing system, be certain to familiarize yourself with the corresponding legal issues to avoid unnecessary complications. Your management company should have clearly defined operating policies in place to ensure the utility billing system's process is properly administered. Poorly executed, the process can be both daunting and frustrating for owners and residents alike. Expertly employed, there is minimal disruption to residents and owners are immediately rewarded with increased net operating income. Jordan Debes is director, multifamily management division, at The Cabot Group, Rochester, N.Y.