A small group of renters may be doubling their multi-family utility costs

Find out what you can do about it

When utilities are included in the rent of an apartment complex, 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 rent, residents who use utilities responsibly subsidize those who don’t.

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

The Challenge of a Master Metered Multifamily 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 electricity. The drawback of a master metered community is that there is no way of knowing how much of a given utility each resident is using.

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

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

The Ruby Example

Assume you own a complex of 150 units, 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 expense of gasoline. (See Example 1 in the Supplementary Information section at the end of this article.)

Moderately high users and their influence on public service expenses

Let’s consider a different case where 10% of the tenants (15 households) use 200% more gas than the average. Total gas usage for the property remains at 7,500 ccfs. Average gas users (135 households) use 41.7 ccfs each and moderately high users use 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 allocated to gas spending. (See Example 2.)

High users may be increasing utility expenses 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 high utility users will consume at this level or more when not paying for services outright.) This high usage can be the result of: running the heat continuously, 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 the residents actually paid $50. High users increased rent by $20.59, a 70% increase in the portion allocated to gas spending. (See Example 3.)

Heavy users didn’t actually double total gasoline spending, but they were 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 as attractive to tenants

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

Transition away from “included utilities” through sub-metering

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

Submetering Serves Homeowners and Renters

Submetering helps homeowners by increasing net operating income (NOI) and property values. It protects them from paying for residents’ excessive usage or losing money when utility prices rise unexpectedly. Metering provides useful data that can be analyzed for maintenance issues, leaks, and other issues, 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 has been repeatedly shown to reduce utility consumption by 15-35%, known as the ‘conservation effect’. Tenants not only benefit financially when they conserve, 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 notable savings of $17.50 per month. (See Example 4.)

Sub-metering pays for itself quickly

A wireless heat metering system for a 150-unit complex with central radiation 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 expenses, 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 undermetering is a benefit to both tenants and owners, it follows that both must 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 rebates and affordable financing vehicles to homeowners. This strategy would accelerate the implementation of sub-metering systems in the millions of existing multi-family residences, greatly reducing utility consumption.

“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 split utility costs among all residents. When gas is “rubbed”, 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 conducted by the National Apartment Association (NAA) and the National Multiple Dwelling Council (NHMC) reviewed 32 properties in three states and found that RUBS generated a reduction in water consumption of 6-22%. Although it is a minor conservation effect, it is still an improvement over the situation 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 lower their utility bills. Owners benefit because RUBS does not require a cash investment. In addition, RUBS makes landlords not 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 of their 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 avoid this, landlords can separate utilities from rent by installing a utility sub-metering system or by using RUBS to bill residents directly. Resident billing creates a financial incentive for residents to use utilities wisely, increases homeowners’ profits, and saves money for all parties.

-Final-

Additional Information

Example 1

• 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

Example 2

• Average user consumption = 41.67 ccfs per household.
• High user consumption = 125 ccfs per household.
• The average users gas bill should have been = $41.67; 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.
• Average users gas bill should have been = $29.41; they paid $5
• Average users paid a fine = ($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