Is Climate Change Affecting Your Bottom Line?
The 2019 Polar Vortex was a scary moment for the Midwest, and an exciting meme-generating opportunity for millennials nationwide. A few of the social media posts (namely the #FrozenPantsChallenge) and the dad-joke news updates were admittedly hilarious, i.e. “it’s so cold, the cows are producing ice cream” and “it’s so cold, Hell has frozen over (Hell, Michigan that is)“ and “it’s so cold, politicians have their hands in their own pockets.” But that frigid, arctic blast was no joke. Schools closed, flights were canceled, mail service stalled, many families lost power in their homes, and worst of all, several deaths have been linked to the extreme temperatures.
A terrifying truth is that “snow-maggedons,” droughts, heat waves, and other crazy weather phenomena are now somewhat of a norm. Chatting about the weather has actually become an interesting topic, not just elevator small-talk. But how does this relate to the property management industry? These events may be a catalyst to get property management companies to consider the hidden (and not-so-hidden) costs associated with climate change. It’s important to stay one step ahead of the weather by thinking of ways to mitigate the hit to your bottom line.
Fluctuating Utility Prices
During extreme weather conditions, residents head straight for the thermostat. And property owners who aren’t recouping utility costs are feeling the pinch due to this increased utility usage. However, we can’t solely blame the residents’ heating/cooling habits, or their long, hot showers. Recent harsh winters and sweltering summers have caused utility companies to raise their prices, making it even more challenging for property managers to cover all the costs. Take a look at the pricing trends of water, natural gas, and electricity over recent years:
- The average cost of residential drinking water service for a family of four using 100 gallons per person per day rose 4 percent last year, according to Circle of Blue’s annual survey of 30 large U.S. cities.
- The consumption and pricing of natural gas swings drastically depending on the season. Natural gas prices in the U.S. regional market have been trending down since the mid 2000’s, but they “… were volatile in 2016” according to the EIA website.
- While U.S. residential electricity prices fluctuate, the U.S. Energy Information Administration reported a 3% rise in the first half of 2017.
With the unpredictability of weather, utility prices, and resident habits, there’s no better time to consider decoupling utilities from rent. Without an effective strategy, properties that cover all utility costs are putting themselves at financial risk, and will struggle to grow their net operating income (NOI).
Let’s take a look at the negative financial impacts management companies face when they fail to fully recoup utility costs for individual units, vacant units, and common area expenses during both extreme, and typical weather patterns.
The most obvious financial impact on a property is the cost of utilities incurred in each unit. So what can be done? Submetering is the best method for tracking and billing for individual consumption. However, if submeters aren’t an option, RUBS (or Ratio Utility Billing System) is a great alternate solution.
Companies without any billing solution are in a tough spot. Because if residents are not billed for their usage, they don’t feel the impact on their wallet. When they’re not held accountable, they are less likely to conserve.
“When owners paid for all energy costs, median annual energy use was 26% higher than when tenants paid for the energy costs.”Fannie Mae
Lack of conservation on the residents’ part results in rising overall utility costs for the property.
Vacant units can present two problems. First, when the unit is unoccupied, especially during extreme weather conditions, maintenance crews may inadvertently leave the AC or heating settings at unnecessary levels when they depart. Second, when a new tenant moves in, they may neglect to transfer the utilities in their name immediately, creating an increased cost burden for the property.
“The annual vacant unit cost recovery for one multifamily firm that manages 120 communities nationwide is about $6 million per year”Buildings, Smart Facility Management
Without effective tracking, this cost is difficult to identify, bill and recoup. The process of identifying and recouping un-transferred utility charges is called Vacant Cost Recovery. A Vacant Cost Recovery solution ties occupancy information together with utility bills, enabling Property Owners to catch opportunities to recover un-recouped utility expenses. It also improves revenue potential by allowing Property Owners to charge the resident a fee for their tardiness. Such programs also increase focus on hibernating vacant units at all times, resulting in reduced energy consumption.
Similar to vacant cost recovery, but on the other end of the lease cycle, is the move-out calculator. Move-outs are stressful enough for residents and property managers between packing, patching holes, scheduling walk-throughs, sending bills for final charges, etc. So when residents leave your property, make sure to to utilize a move-out billing process to recoup final utility charges. Hunting down residents for missing funds after they’ve already left the building is an unpleasant task. Oftentimes, property management companies never recover that money because they can’t track down the resident.
But don’t worry, the best billing providers will offer a helpful feature (like the PayLease Move-out Calculator) that automatically includes the resident’s prorated utilities on their final bill. The value of this calculator is to simplify the move-out process through automation. It reduces manual work and maximizes the opportunities for companies to collect the appropriate charges upon the resident’s move-out.
Property managers typically have to heat and cool most of their building’s shared spaces too. But many struggle to find a simple way to gather, calculate and bill renters for communal areas.
“Depending on the property, common areas can consume significant amounts of energy, particularly if the common space includes interior hallways, large parking garages, or laundry facilities.”Buildings, 5 Money Saving Ways to Manage Utility Expenses
Billing tenants for common area utility charges gets tricky with certain state regulations. Some states require property managers to subtract a reasonable common area deduction from the amount billed to tenants. Others allow the entire utility bill to be charged back to tenants, including all of the common area utilities. Some states allow bill back of common areas as separate line items. Trying to keep up with numerous billing regulations that are constantly being updated is overwhelming. That’s why most property managers opt for a provider with a compliance team whose sole responsibility is to keep clients compliant with their specific state and municipal regulations.
Weather the Weather
In short, volatile utility costs and environmental pressures lead to financial risk for property managers. Those who aren’t prepared for these hidden (and not-so-hidden) costs when another “snow-maggedon” hits will feel the financial impact. With a resident billing program, you can recoup utility costs for individual units, vacant units, and common areas so you’re not stuck footing the entire bill when utility companies raise their prices.
“Rising utility rates create financial risk for owners and reduce affordability for tenants of multifamily properties.”Fannie Mae
Don’t put your property at risk. Instead, allocate and bill residents for their share of utility expenses. This method eliminates unpredictable utility expenses in an operating budget, increases cash flow, and can even increase your NOI.
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