Apartment Value Add: RUBS & Submetering

The latest value add apartment community in your queue advertises “utilities included”. Including utilities in the rent is a kind gesture by the landlord but there could be some upside here. Water, sewer, electric, gas, and trash can all be billed back to the resident. In addition to potential rent increases, value can be added by examining how the utilities and trashbilling is handled. Utility bills are an easier sell to residents than rent increases because residents understand the concept of usage.

Considering where the rents are, is there room to bill back utilities ?  We want to run our value add program so we can raise the rents after renovating the units. Let’s review similar vintage comps to see where their post-renovation rents are and how they handle utility/trash billing.

Tenant Pays

1 Bedroom Units Rent Gas Electric Water Sewer Trash
Subject $800 No No No No No
Community A $900 Yes Yes Yes Yes Yes
Community B $915 Yes Yes Yes Yes Yes
Community C $905 Yes Yes Yes Yes Yes
Community D $945 Yes Yes Yes Yes Yes

The subject property is the only community not billing back for utilities/trashand their standard rents are still at least $100 behind the rents being achieved by the comps. It looks like we can close this gap by renovating the interiors to achieve the $100 premium and then bill the residents for the utilities/trash.

The trailing property level financial statement shows approximately $500,000 in water, sewer, electric, gas, and trash removal expenses being absorbed by the owner. That works out to $140 per unit at this 300 unit apartment community. Being conservative, let’s assume in our proforma financial model that we can recoup $70 per unit per month in utility expenses. Combining the renovation premiums and utility income, we could potentially add $170 to $215 per month in additional revenue.

Capturing an additional $70 per month in revenue by billing back the utilities/trash will create substantial value since every dollar recouped grows the property’s net operating income. Since the value of a commercial property is based on its net operating income, the subject property’s value will increase by $4.2 million since an additional $252,000 will be added to the bottom line.

Value Creation via Utility/Trash Reimbursement
Apartment Units 300
Monthly Charge x $70
Months x 12
Annual Utility Revenue = $252,000
Cap Rate ÷ 6.0%
Value Creation = $4,200,000

So how do we go about implementing a billing program ?  We have two choices – either individually submeter each unit and directly bill the residentfor their usage or we can implement a Ratio Utility Billing System (RUBS).

Getting a RUBS program off the ground is relatively straightforward and isn’t capital intensive. RUBS is easy to implement and can be used to bill residents for water, sewer, trash, electric, and gas usage.  It is a good alternative when individually metering units proves to be cost prohibitive.

The program determines the resident’s monthly utility bill using different factors:

  • Square Footage
  • Number of Occupants
  • Bedrooms
  • Plumbing Fixtures
  • Washer/Dryer
  • Gas Fireplace

Multiples are applied to the above factors to adjust for different units. For example, a hypothetical 1.5x multiple is applied to the water fee for units with washer/dryers or a 1.2x multiple is applied to the gas charge for units with gas fireplaces.

RUBS programs are administered by utility billing service companies like Multifamily Utility Company.  The billing company will send a notice directly to the tenant detailing their monthly bill. The tenant will pay the billing company who will then reimburse the property owner. Multifamily Utility Company offers “convergent billing” so that all the charges appear on one bill which makes it easier on the residents. Rather than having multiple bills, residents receive one easy to understand bill that outlines the charges. It is a “win win” – residents are more likely to pay and owners are more likely to recoup the utility costs. In addition to multifamily communities, RUBS can be leveraged in other asset classes like office, retail, and warehouses.

Individually metering units requires an up-front capital outlay but allows property owners to bill residents for their exact usage rather than the estimated ratio-based fee charged through a RUBS program. Residents who are directly metered have more “skin in the game” than residents who know their community’s billing system is ratio-based which will effectively spread the utility costs across all the residents. Direct billing provides some agency as residents know they will be charged for exactly what they use.

Not all communities will be great candidates for individual metering due to space or cost constraints. Older communities could have outdated plumbing systems that will make is difficult to individually meter and could require multiple meters per unit.  An older asset might be better served by a RUBS program.

Depending on the property’s location, there could be regulations regarding how owners are allowed to bill their residents. Aligning with a utility billing company will help owners avoid trouble on this front. Utility billing companies will often provide a free consultation to show property owners how much they will save with the new program. The consultation will include an analysis of the property, currentutility bills, and the projected savings, along with an explanation of the applicable regulations.  These companies handle the billing and payments which reduces the property owner’s administrative burden.

Whether we choose to go with a RUBS program or individual metering, there seems to be some operational upside on this deal since the current owner is not billing back for utilities or trash. There is also a nice spread between the community’s current leases and the renovated units at nearby similar vintage communities that require residents to pay for their utilities. This deal seems like an attractive value add opportunity and will require some more investigation.


Get new posts about commercial real estate investing by email