Submetering: Going with the Flow
By Tim BradleyCOPYRIGHT 1999-2011 LANDLORD.COM
Landlords, what if you could make a tax-deductible investment in your property that would increase its value and net operating income (NOI), reduce operational expenses, eliminate a major uncontrollable cost, give you a return on investment (ROI) in 14 to 18 months, and demonstrate to your tenants and community your concern for the environment and conservation?
Enter submetering.
What is submetering?
Traditionally, utility companies provided water, gas and electricity to an apartment building through master meters and billed the property a monthly lump sum. In this model, each tenant paid approximately the same amount for utilities, most often water, as a part of the unit’s rent. It didn’t matter if one unit housed a family of six, including two newborns and a dating teenager, while another was rented by a bachelor airline pilot who was rarely home.
With no accounting for heavy and light users, you’ve probably noticed how difficult it is to increase rents fast enough to keep pace with rising utility costs. Utility expenses have certainly been in the news lately and grown far faster than inflation in recent years, especially for properties with master metering.
Submetering simply means measuring each unit’s utility consumption and making the bill the tenant’s—not your—responsibility. A property owner undertaking submetering typically hires a company that installs the submeters in each unit, reads them, and bills residents for monthly utility and sewer usage, plus a service charge. That company then writes one monthly check, less its own service fees, to the property owner or management company, which pays the utility. Management companies can also handle meter reading themselves and have residents pay the property manager.
What’s required?
For new properties, the necessary meters are best installed when the property is built. New residents then understand when they move in that they’ll be paying for their utilities themselves. Owners of existing, occupied properties face the dual challenges of retrofitting the meters for older plumbing or wiring and “retrofitting tenants” to the idea of paying for their own utilities.
Meter installation is not a lengthy process, but may vary depending on how easy it is to access lines and meters. Installing a new meter takes about 20 minutes, while a retrofit can average 30 minutes or more per unit.
Which meter system should you buy?
Meter products for the multi-unit housing industry are evolving apace with communications technologies. Costs are going down as capabilities are going up.
In earlier days, a human (some more than others) reader had to read the dial on the meter. Now there are touch pads for reading entire buildings from one place, electronic systems for polling meters by telephone, and radio transmitters that send consumption data to a meter reader in a truck or to a central computer. There are pluses and minuses for each, depending on your own circumstances.
Property owners or managers considering utility submetering should be aware and beware. For water, look for meters approved by the American Water Works Association (AWWA), the association that sets the standards for all utilities throughout the U.S. Their particular standards are recognized by all utilities and essentially guarantee accuracy in readings.
This is a burgeoning industry with many newcomers. Some companies both sell and install the meters; others do the selling but hire out the installation. In new construction, plumbers usually install the devices and a submetering company connects them. It’s not an off-the-rack proposition—every situation is different. Beware of inexperienced vendors who might be grabbing units off shelves and trying to put systems together.
When evaluating submetering companies, favor those that have been around a few years. You need to know they will be available in the future if problems arise. Ask your CAA colleagues about their experiences and get their referrals.
Milton DiGregorio, president of Denver-based Master Tek International and a founding member and president of the National Utility Allocation Association, recommends that you ask questions. For example, is a prospective vendor willing to help you present the change to tenants? Will the vendor supply literature and attend meetings to answer residents’ questions? Are permits required? Is the company licensed to perform this kind of work? Does the company know and observe local regulations on submetering?
A submetering company that includes billing in its services greatly simplifies your role as a utility provider. They’ll organize the data, calculate charges, produce statements that comply with all regulations, and stay current with the latest rate changes, allowance schedules for low-income tenants, and local taxes. Professional statement preparation by the experts will improve tenant relations and reduce the number of complaints about utilities.
Companies like Master Tek that specialize in submetering, billing and collection usually will provide the best overall value in the long run. To paraphrase a rusty old saw, an ounce of prevention is worth a gallon of cure.
How can I convince my tenants?
An important concern of property owners and managers is tenant reaction to the submetering program. Selling the program effectively to your residents should be an important aspect of the vendor’s proposal. A knowledgeable vendor will guide you, your on-site staff, and your residents through the transition period with the least disruption to anyone and, most important, to your property’s cash flow.
Once you have decided to submeter, inform your tenants in writing about the reasons why. Make sure they are fully informed about your current average costs per unit and the average charges they will pay. Remind them about how local government and public utilities have worked hard to encourage conservation. Submetering usually reduces a property’s utility consumption by 25 to 35 percent, a compelling argument in areas where there are shortages.
The most liquid asset…
Submetering utility consumption is no different than paying for one’s own telephone or cable TV. If tenants are conservative, they’ll have a small bill. If they use a lot of energy and water, the bill will be high. Chances are, most tenants would be amazed to learn how much energy and water they consume. For example, an apartment dweller uses 80 gallons of water a day on average, 60 of which is for the bathroom. Leaving the faucet off while brushing teeth saves three gallons a brush. Cutting the number of dishwasher and laundry loads could save 75 to 200 gallons a week. Installing a low-flow shower head saves between 500 and 800 gallons a month. Toilets use a lot of water to flush. Putting a spacer into the toilet tank to lower the amount of water can save eight to 20 gallons per person per day. Fixing a leaky toilet could save 200 gallons a month, and a dripping faucet up to 600 gallons a month. Cutting only one minute from each shower, which typically consumes 35 gallons, would save an additional 700 gallons a month!
Most submetering companies provide sample letters to send to your tenants, suggested lease language, and brochures explaining what submetering is, how it can help them conserve energy resources, and how they can be more sensible in their utility use by reporting problems. One way to soften the impact of the change for tenants is to send them a grace bill that shows them how much water, gas and electricity they used that month. The property owner pays the grace bill, but tenants are told to be careful about their usage in the future because “next month it will be for real.”
[Editor’s note: If your property is subject to rent control, be sure to consult a lawyer to find out if conversion to submetering might constitute an increase in the burdens of tenancy amounting to a “rent increase” under the ordinance.]
As tenants become more sophisticated and informed, they’ll realize they would prefer to pay for only their own utility consumption, not their neighbors.’ Submetering gives the tenant better control of living expenses—the less they use, the less they pay—and doesn’t penalize the landlord or tenants for someone else’s high consumption habits. Alert tenants to the fact that if they rent at a “utilities paid” property, they’re actually paying for everyone else’s usage in their own rent.
To sweeten the deal, some property owners help residents keep their utility bills down by putting water-saving devices on toilets and showers when meters are installed and promise immediate attention to leaky fixtures. Encourage residents to report drips and leaks immediately, since they’re paying for the lost water.
A Better NOI and ROI for moi ?
The benefits of submetering can be tremendous. One of the most obvious is the property’s increase in net operating income. For example, a 200-unit property with an average water bill of $40 per unit per month could increase the property’s NOI by $96,000 per year or more, depending upon local utility and sewage rates. The cost of the conversions may also be tax-deductible when treated as a capital improvement.
This dramatic increase in your properties’ value based on the NOI for our example would add nearly one million dollars in value when factored on a reasonable multiple of 10 times earnings. Not a bad investment! Of course, the figure will vary depending on the current valuations of real estate in your area.
And how many investments do you know of that benefit everybody—the landlord, the tenant, and the environment?
Tim Bradley is a marketing communications consultant and “word wrangler” with several clients, one of whom is Southwest Water Company. He handles an assortment of writing, design, media and web assignments.
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