Utility costs are one of the largest operating expenses for multifamily property owners. Anything apartment owners and operators can do to control utility expenses is going to fatten their net operating income. Saving money on utilities (electricity, gas, water, trash, and sewage services) is also going to determine who’ll be competing in a multifamily climate where everyone—from owners to tenants to local officials—is increasingly becoming concerned about limited resources.

“The new development of properties in some cases is being constrained by the availability of resources to support those properties,” said Michael Radice, president and CEO of NWP Services Corp., an Irvine, Calif.-based firm that provides utility cost management solutions and resident billing and payment capabilities to multifamily owners.

“Cities and municipalities are asking developers who want to build large apartment complexes, ‘What are you doing to conserve?’” said Radice. “Residents are becoming more sensitive to this issue of conservation, too.”

A number of apartment owners have implemented cost-recovery solutions in varying degrees to bill utility costs directly to residents instead of shouldering the burden of those costs.

Utility crisis across the country

With the cost of utilities going nowhere but up, it’s no longer feasible to simply raise rents. In the 2007-08 winter alone, gas prices are expected to increase by as much as 50 percent, according to Phil Neeves, director of HVAC Solutions for ista North America, a submetering and resident billing provider based in Alpharetta, Ga.

Apartment owners in the Midwest and Northeast may be hardest hit by rising heating costs, but gas and electricity aren’t the only utilities owners must keep an eye on. If you are an apartment owner in Phoenix, Southern California, or the Southeast, the cost of water is going to be a big concern.

Last October, Georgia Gov. Sonny Purdue declared a water supply emergency in drought-stricken north Georgia. Since 1980, the population of Atlanta has doubled to 5 million, placing a strain on the water supply. Alabama, Florida, and Georgia have been wrangling over water usage from two river basins for years.

Multiple options

Multifamily owners have a multitude of utility options to consider. The first option to consider is whether utilities are deregulated in the states in which developers are operating. Electricity is deregulated in 24 states; gas is deregulated in 23. It pays to look at purchasing utilities from a deregulated supplier. In many cases, they can offer very competitive rates for utilities, compared with the local power company. The important thing is to lock in rates if possible.

What if you own a number of properties in Tennessee, where you are restricted to using the local power company?

“Even in areas that are highly restrictive, most utility companies offer a variety of programs that allow you to procure your utilities at different rates,” said Radice. “You can be on different programs in terms of volume and time-of-day usage that could save you quite a bit of money.”

Further, utility procurement specialists can advise multifamily owners on how to get the best deal. The easiest way to find one is to contact your local utility company. The procurement specialist can help, even if you decide not to go with the local utility company for one or more of your utility needs.

Although the idea is not new, another option for apartment owners is to put in individual meters at each unit and bill residents for utility usage. Installing water meters at a new complex will cost around $100 per unit. To retrofit an existing property, the cost is about $175 to $200, said Radice.

It’s payback time

“The payback for us was probably less than a year,” said Tim Rogers, senior vice president of Simpson Property Group, a real estate firm based in Denver. Simpson has installed meters at more than 12,000 market-rate units in its portfolio. More than 3,000 market-rate units in Simpson’s portfolio function under what is known as the RUBS (Ratio Utility Billing System). Residents are billed for utilities based on a formula calculated to take into account the square footage of the unit. In some markets, the formula is based on the square footage and number of occupants. RUBS can be used to allocate electricity, gas, water, sewer, or trash expenses to each individual unit. A number of firms exist to help owners set up the system. A joint study sponsored by the National Apartment Association and the National Multi Housing Council has shown that implementing a RUBS program can reduce a property’s water consumption by up to 20 percent.

Utility theft

Another way to control utility costs is to have an outside firm assess utility bills to make sure owners and residents are being billed accurately. Bill monitoring might not seem like it would save owners a lot of dough, but Radice estimates that in 2006 alone, his firm saved 450 clients more than $3 million in utility theft by monitoring property owners’ utility bills.

The most prevalent method of utility theft is simple avoidance of charges, which happens when residents move in and fail to get the electricity bill put in their names. In most states, meters are installed at properties under what is known as a continuous service agreement (CSA). That means when a meter at a unit is not assigned to a resident, it automatically defaults to the apartment owner.

A number of firms will analyze utility bills and match up meters to the usage at each unit and common areas. For example, these firms determine whether a resident moved in on the first of the month but didn’t turn on the electricity until the 15th. Under the CSA, the owner would have been paying the electricity bill on that occupied unit for 15 days. The firm will bill the resident directly for what is owed. Bill monitoring can also uncover cases in which residents failed to switch the utilities into their names, or paid their utility deposit to prove the switchover to the property manager and then had the service shut off.

Utility theft can also go beyond the utilities within a unit. Some residents have been known to raid common areas, filling buckets and bottles with water. Other residents run wires into their apartments from other units to obtain free electricity.

“I’ve seen residents run hoses from common areas and run them up the windows into the apartment,” said Radice.

Bill monitoring can also detect other anomalies like water leaks.

“I would be surprised if there were a lot of developers out there who don’t have a system in place to recover utility costs,” said Rogers. “It makes sense economically and environmentally.”