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 add substantially to costs. Since these cost increases are effectively hidden in rent, residents who use utilities responsibly subsidize those who don’t.

So a question to consider is how much do high users increase utility costs? Does it make financial sense for a landlord to include utilities or bill tenants directly? If an owner decides to drop the utilities included model, what options are available?

The Challenge of a Master Metered Multi-Family Complex

A landlord is more likely to include utilities in the rent when their multi-family complex has a master meter for water, gas, or electric. The drawback of a master metered community is that there is no way to know how much of a given utility each resident is using.

If I’m one of those residents who continually runs the heat, lets a broken toilet valve leak without reporting it, or leaves the air conditioner on even when I’m not home, it’s my neighbors who foot most of the bill. The usual feedback loop that links the amount I pay to the amount I consume is missing. Without this feedback loop, you are more likely to use carelessly.

As we are about to see, Careless or abusive consumption can increase multi-family utility expenses by up to 70%!

The rubs example

Assume you own a 150-unit complex, each apartment has two bedrooms, and the property has a natural gas master meter. The complex uses 7,500 ccfs of gas during 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 allocated to the cost of gas. (See Example 1 in the Supplementary Information section at the end of this article.)

Moderately High Users and Their Influence on Utility Spending

Let’s consider a different case where 10% of renters (15 households) use 200% more gas than average. Total gas usage for the property remains at 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 the residents actually paid $50. High users generated an increase in rent of $8.33, a 20% increase in the portion dedicated to gas spending. (See Example 2.)

High users may be increasing utility bills by 70%!

Now let’s look at the case where 10% of residents are really heavy users and consume 700% more gas than average. (While this may seem like an overestimate, many experts believe that high utility users will consume at this level or more when they don’t pay for services directly.) This high usage can be the result of: running the heater continuously, leaving windows open when the heater 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 the residents actually paid $50. High users increased rent by $20.59, a 70% increase in the portion devoted to gas spending. (See Example 3.)

Heavy users didn’t actually double total gas bills, but they came pretty close. Our group was also relatively small – only 10% of the residents. Imagine the effect if a higher percentage of tenants were high users.

“Utilities included” are not that attractive to renters

If the landlord in our example had billed utilities separately, they could charge $700 for rent and the gas bill would be $29 to $50. The lower rent is clearly more attractive to tenants. Separation of utilities would also encourage the community to use gas more responsibly, which would lower everyone’s total housing costs.

Transition away from “included utilities” through submetering

There are two very effective ways to separate utilities from the rental rate and bill tenants directly. The first, utility submetering, offers the greatest benefit to tenants and homeowners. When your multi-family residence’s water lines, electrical disconnect panels, gas lines, or central heating system support it, you can install a wireless submetering system. The submeters measure the individual consumption of each resident and the data is used for billing.

Submetering Serves Landlords and Tenants

Submetering helps homeowners by increasing net operating income (NOI) and property values. It protects them from paying for excessive resident usage or losing money when utility prices rise unexpectedly. The measurement provides useful data that can be analyzed to detect maintenance issues, leaks and other problems, ultimately saving money for the owner and tenants. 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 has been repeatedly shown to reduce utility consumption by 15-35%, known as the ‘conservation effect’. Renters not only benefit financially when they conserve, but they are no longer responsible for their neighbors’ spending habits.

The “conservation effect” in action

Suppose you decide to undermeter your property and the conservation effect causes consumption to drop by 35%. In our example, the use of the property would decrease from 7,500 to 4,875 ccfs. This would reduce the average resident’s gas bill from $50 to $32.50, generating a remarkable 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 radiant heating can cost $30,000. Although submetering systems generate a return on investment (ROI) in less than 12 to 18 months, the initial expense is a concern for many homeowners.

To minimize out-of-pocket costs, some owners finance equipment through a leasing company. In other cases, a nominal fee for the metering system is included in each resident’s monthly bill. Since submetering is a benefit to both tenants and owners, it follows that both should share the expense.

In an ideal world, federal and state agencies would recognize the powerful effect that undermetering has on conserving scarce resources and offer affordable rebates and financing vehicles to homeowners. This strategy would accelerate the implementation of submetering systems in the millions of existing multi-family residences, which would greatly reduce the consumption of public services.

“Rubbing” your way to a higher NOI

The second approach to separating utilities from rent is to bill tenants using a RUBS method. Based on apartment size, number of occupants, or some other factor, landlords divide utility costs among all residents. When “rubbing” gas, apartment square footage is the most commonly used metric.

It has also been shown that the implementation of a RUBS system generates a conservation effect. A research study by the National Apartment Association (NAA) and the National Multiple Housing Council (NHMC) reviewed 32 properties in three states and found that RUBS generated a reduction in water consumption of 6-22%. Although this is a minor conservation effect, it is still an improvement over when utilities are included in the rent.

The benefit of RUBS to tenants is that by conserving, reporting maintenance issues quickly, and minimizing waste, they can reduce their utility bills. Owners benefit because RUBS does not require a cash investment. In addition, RUBS holds landlords financially responsible for the utility consumption behaviors of their tenants.

The main disadvantage of RUBS is that high utility users still do not pay the full price for its excessive use. However, compared to “utilities included”, it is a marked improvement and one of the smartest and fastest ways for a homeowner to improve their bottom line.

Summary

Multi-family residences that include utilities can allow a small group of large users to significantly increase utility costs and rents. To prevent this, landlords can separate utilities from rent by installing a utility submetering system or by using RUBS to bill residents directly. Resident billing creates a financial incentive for residents to use utilities wisely, increases homeowner profits, and saves money for all parties.

-End-

Additional Information

Example 1

• Total monthly gas usage for the property = 7,500 ccfs.
• Gas fee = $1.00/ccf.
• Total cost of gas = 7,500 ccfs. x $1.00 = $7,500
• Average resident bill = $7,500 / 150 units = $50

Example 2

• Average user consumption = 41.67 ccfs per household.
• High user consumption = 125 ccfs per home.
• The average users gas bill should have been = $41.67; the residents actually paid $50
• Average users paid a “penalty” of = ($50 – $41.67) / $41.67 = 20% increase.

Example 3

• Average user consumption = 29.4 ccfs per household.
• High user consumption = 235.3 ccfs per household.
• The 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.

Example 4

• 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