A utility bill back system is a method for allocating utility expenses among tenants in a multifamily property. The goal of this system is to ensure that tenants pay their fair share of the building’s utility expenses, rather than having a single tenant or landlord bear the entire cost of utilities. In this way, revenues are increased, raising the NOI of the property.
In a single family unit, it is easy to determine who is responsible for utility use: the lone tenants of the residence. However, where multiple families live, this becomes more complicated.
Here is a process for implementing a utility bill back strategy:
Gather information about the building’s utility usage. This includes information on the types of utilities used (electricity, gas, water), the number of units in the building, the number of tenants, in each unit, and the average usage per unit.
Determine the allocation method. A major question that will guide the course of action is this: Will the building be submetered or not? If so, easy. If not, we offer some alternatives below.
Communicate the utility bill back system to tenants. Utility billing should be spelled out in lease agreements, but it is best to over-communicate the process: tenant meetings and e-mail correspondence upfront will save misunderstandings later on.
Bill the tenants. Tenant bills should show detailed bills that should show usage and cost.
Monitor and adjust the system as needed. Is this system working in a fiscally responsible manner? Are bills being paid on time? What feedback, if any, are tenants offering?
Let’s zoom in on the second step in the process above: Determining the allocation method.
Let’s use a four-family complex like the one sketched below. Apartment A is a 1,200 square foot apartment occupied by Mr. Anderson; Apartment B is also a 1,200 square foot apartment where the Bradshaws--a family of four--live. Apartment C, a 2,100 square foot space, is where Ms. Cole lives, and Apartment D is a 900 square foot studio apartment where the Dawson twins live.
Who pays for the utilities? Let’s address some possibilities and their complications:
Each apartment pays for what it uses. Fair. This is a scenario where utility use is submetered, where each unit is individually billed according to its measured use. Monitoring usage requires a sub-metered system, which might not be practical or unreasonably expensive to install.
If submetering is not feasible, we could explore a RUBS formula. RUBS refers to a Ratio Utility Billing System; that is, a formulaic manner to determine how much of the utility expenses will be charged back to each of the tenants. Several methods are available. With non-submetered properties, we would need to establish a baseline usage rate, tracking the utility use and cost for the building as a whole over time. This baseline could be implemented in several ways.
Pro-rata method: We could take that baseline rate and divide the cost by four--since there are four apartments in our scenario described above. Easy. But not fair. Apartment D is a smaller space, and Mr. Anderson really cranks the heat in Apartment A. And let’s talk water: those Bradshaw kids take the longest showers, and it doesn’t seem like old Ms. Cole showers at all. No, that’s not fair. This also requires continual monitoring to make sure that the established baseline rate stays consistent.
A tiered billing system: If sub-metering isn’t practical and simply dividing by four isn’t fair--perhaps a tiered system could work. Some utility bills--like heat or air conditioning--could be based on square footage since it doesn’t matter how many people are living in space for heating and cooling; square footage plays a more significant role. After all, Ms. Cole’s Apartment C is more than double the size of the Dawson twins’ Apartment D. Other bills--like water--could be allocated per resident since water usage tends to go up if more people occupy an apartment--ask the Bradshaws in Apartment B.
A hybrid model: The pro-rata system does not seem fair; the tiered billing system can be tedious, especially with a greater number of units and variations in both apartment and family size. A combination of the two can seek fairness without the accounting hassle. In such a system, a baseline utility rate is measured and used to establish a pro-rata cost. Then based on unit size and the number of residents within the unit, the pro-rata cost can be raised or lowered.
Utilities, without a means of recovery, are too big of an income source to be absorbed by the owner or left under-analyzed. Doing so prevents a property’s NOI from being fully maximized. Ideally, units are submetered for the fairest and most accurate billing of utilities, but when submetering cannot be done, sensible strategies like those shown above can be employed to secure a valuable source of revenue. In all systems, diligent monitoring of usage and subsequent adjustments must be made to ensure fairness to tenants and profitability for the owner.
We would love to talk more about investing in multifamily properties. If you are interested in learning more please contact our office at (724) 900-0009 or e-mail Mark Brooks at mark@evergreen-pgh.com.
