“E Pluribus Unum.” For Nearly 200 years, the latin phrase meaning “out of many, one” was our country’s motto.
But it could just as easily be applied to the line item marked “ancillary income.” Out of many small fees comes one larger number. And for many operators, the challenge and opportunity of ancillary income is optimizing that number, and making sure you’re not leaving any money on the table.
Put another way, little things can mean a lot.
Tacking on and locking in additional fees to a lease, such as valet trash or bundled telecom, can sometimes be a hard sell. With the right approach, however, such services can not only boost your bottom line but become a source of differentiation, a selling point for your community.
That’s the power of ancillary income—operators can inject a significant amount of extra revenue throughout the year, just by adding a few dollars to each lease. And according to the industry’s top managers, no stone should be left unturned in the search for latent income.
“Any rentable items, trash fees, ensuring that the properties are maximizing their utility incomes,” all add up, says Gardner Rees, executive vice president of ancillary services at Dallas-based Riverstone Residential Group, which manages more than 170,000 units across the country. “Some markets have the ability to actually charge back pest control and other common-area fees.”
But when you consider introducing a new fee, the real trick is figuring out whether it will increase resident satisfaction. Addison, Texas–based Pinnacle, one of the nation’s largest management firms, with approximately 200,000 units, tries to take a thoughtful approach to communicating fees to tenants.
“Ultimately, the last thing we want is to have residents upset about a great new service that was intended to create higher satisfaction,” says Woody Stone, Pinnacle’s senior vice president of operations. “If we fail to understand and provide the services that have a clear value proposition to the resident, they will undoubtedly feel ‘nickeled-and-dimed,’ which means they won’t stick around.”
A Win-Win
For Pinnacle, basic laundry, cable, and utility contracts have always driven income to its properties. But the firm is exploring other options, such as Shop24, a vending machine filled with a wide range of items that essentially serves as a virtual on-site convenience store. Though the costs of Shop24 are high up front for the owner, such an amenity can become a selling point, particularly in student or urban properties, says Stone.
Another lucrative ancillary product is valet trash service. At Dallas-based Lincoln Property Co., which manages more than 140,000 units nationwide, valet trash service has been implemented at about 75 percent of its portfolio. For a 300-unit community, the program can rake in as much as $20,500 annually.
Other methods, such as pest control services, can yield a $10,250 yearly income on a sample 300-unit property.
Lincoln also serves as a medium between the tenant and Appliance Warehouse of America. Renters looking for a washer and dryer, for instance, would be referred to that retailer, for which Lincoln receives financial considerations. But the story doesn’t end there. Lincoln then offers a one-time, $15 setup fee, which can rake in upward of $750 annually on a sample 300-unit property, depending on turnover rates and resident interest.
And then there’s Lincoln’s convergent billing strategy, employed at 75 percent of the properties in its portfolio. The company charges residents an administration fee of up to $5 a month to combine utilities on one statement.
“This fee helps offset the cost of the billing program,” says Theresa Kaiser-White, vice president at Lincoln. “These programs are designed for water/trash billing, and most are fully integrated into software systems such as Yardi’s.”
Lincoln also charges for storage space, rents out guest suites for visitors, and offers clubroom rentals, as well as concierge services similar to those of a hotel.
But, sometimes it’s not about direct financial gain—some opportunities don’t bring in much money at all, and instead offer indirect value. For host Pinnacle, food truck events and wine and cheese events are similar sorts of ancillary income strategies—while the payoff is minimal, such events can create a stronger sense of community, bolstering renewal rates.
“These things tend to have a bigger impact than the obvious direct income-producing programs,” Stone says. “There are many opportunities where the revenue share is low or not at all but the effective execution drives leasing velocity and rents.”
One of the most fruitful programs enlisted at Riverstone-managed properties is the bulk telecom program, which bundles together television, Internet, and phone services. The bundle is presented as a separate fee to the tenant, as an addendum to the lease—but its benefit makes it an easy sell. The package is priced at about a 30 percent to 40 percent discount over the market’s primary telecom providers.
“It’s very lucrative to properties; it’s very lucrative to residents,” says Rees. “If you’re going to pay $140 for high-speed Internet and television services, I can sell it to you for $75. So would you rather pay $75 for the exact same product? Sure.”
He also suggests that operators follow through with less-direct methods of making money, such as renter’s insurance.
“Don’t dismiss renter’s insurance,” Rees says. “There might not be a lot of ancillary income in renter’s insurance, but the amount of money a property can save by having a loss paid for by the resident’s property insurance is a huge factor.”
Demographic Determination
Your community’s submarket, and the type of tenant base you’re serving, goes a long way in determining how far a property can go to generate ancillary income.
Markets in states like Idaho, New Mexico, and Arizona, for example, are not as proactive on utility billing and renter’s insurance programs, whereas in the Northeast, most buildings will have some version of one or both of these programs in place.
“This tends to be very market-driven, and even asset-specific,” Stone says.
Class A product will have a higher-profile demographic to support a higher standard of living, reflecting a greater level of disposable income. Class B and C properties will find it more of a challenge to get tenant buy-in: Charging too many fees can, of course, easily backfire.
Meanwhile, urban locations will offer different fee opportunities versus low-density suburban assets. A package-handling service in a downtown San Francisco Pinnacle property, for example, would be much more successful and meaningful than if it were installed at a property in the Dallas suburbs, which may not have as much use for the service.
This, and the quality and price of the apartment, matters when determining what additional fees to charge. If you’re trying to rent a unit that’s priced significantly above the prevailing market because of high-end upgrades and finishes, you may have less wiggle room to tack on more charges.
It’s also critical to have a well-trained staff equipped to sell services and convince potential tenants that the benefits outweigh the costs. It’s less about giving prospects the hard sell, and more about helping them understand that for every convenience there’s an associated price.
“With the advancement of Internet and mobile technology, more people are shopping online and seeing that service fees and delivery fees apply,” says Lincoln’s Kaiser-White. “For convenience and services, there is a price to pay.”
Your Ad Here
Renters are by now no strangers to all of the creative services being pitched at them to add a little extra to their base rents. But what services work best for property managers?
One creative way to boost revenue is selling advertising space. Many apartment firms are beginning to see the revenue potential in blank spaces, in areas ranging from elevators to common rooms to on-site facilities—even on the sides of buildings.
Carie Powell, president of Pleasant Hill, Calif.–based Aeris Properties, believes this can be a good source of revenue, but it’s a delicate balance between optimizing ad space and preserving a certain level of decorum.
Most renters will get annoyed if their homes become a series of billboards. So Aeris tries to keep advertising in places it’s least likely to offend residents, such as underground garages.
Powell is also bullish on the opportunities that exist in charging for pet amenities. Since many people view their pets as extended members of their family, they are usually more than willing to shell out extra cash to ensure their pet can be accommodated.
At many Aeris communities, the company hosts a cocktail hour that’s gone to the dogs, literally. The company’s “yappy hours” aren’t just about mixing and mingling, though. The retailer Petco is on site for the events offering pet grooming services, for which Aeris receives a piece of the action.
Negotiating the Best Deal
It’s important to remember that not everyone defines ancillary services the same way.
The more commonly thought of and widely spread ancillary services, however, include tenant-focused revenue boosters like renter’s insurance, pet deposits, telecom services, and parking fees. But no matter how your company defines it, any one of these ancillary services can prove to be a cash cow.
Managing these services, though, can be a different story altogether. According to Andrew Smith, president of Fairfax Station, Va.–based Ancillary Services Management (ASM), the right negotiation skills can yield an even larger return on these add-on services, if you know what you’re doing.
ASM works as a third-party broker on behalf of multifamily companies to negotiate ancillary services that offer the best returns. The company also can manage the implementation of the services on behalf of the property owner.
Smith says the most popular services his company is contracted to negotiate and manage are telecom services. Voice, video, and data reign in an era when tenants want to watch videos and stream data on a variety of mobile devices.
“We just negotiated various telecom agreements for one client that increased the revenue for their properties by 551 percent, 229 percent, 225 percent, 102 percent, 100 percent, 90 percent, 84 percent, and 61 percent, respectively,” says Smith.
Tech-Hungry
Renters are increasingly demanding community-wide Wi-Fi because they want to be mobile and don’t want to see their connectivity drop if they move from one area of the property to another.
And yet, sometimes one type of technology undermines another. Some new green building measures, for example, are beginning to show their downside, with issues surrounding wireless services cropping up. Certain environmentally friendly features have been known to cause disruptions in Wi-Fi signals within some units, says Smith, which is why community-wide service is becoming so important.
“Technology has always been the biggest driver,” says Smith, who sees technology-based amenities as the greatest area for revenue opportunities. And some new service offerings from telecom vendors are expected to become very popular in the coming months, he adds.
“A lot of the broadband companies are starting to offer alarm monitoring; Verizon is starting to promote that, Comcast is starting to promote that,” Smith says. “It’s just another add-on service that they are currently testing. Once they are out there, they’re going to become hot tickets.”
Smith also can’t stress enough the importance of revenue that can be derived from everyday necessities, like laundry services. He recently helped a client increase its laundry revenues by 25 percent by simply restructuring the revenue-share percentage with the existing service provider.
And, of course, there are the less-than-sexy services, such as waste removal, which proves that one person’s trash really can be another’s treasure. ASM says it recently saved a client $105,000 per year on its waste-hauling costs by renegotiating its contracts and choosing the right provider.
Always Evolving
In a sense, the opportunities to generate more revenue from ancillary services are limited only by the imagination.
And companies have gotten pretty darned creative in their search for additional revenue. Some firms have rented rooftop space for cell-phone towers, while others, in oil-rich locales, have even rented the space underneath their buildings for horizontal slant drilling. Other, less esoteric strategies include leasing out undeveloped land to be used for parking, especially in metro locations where space is always at a premium.
No matter which service you feel is right for your community, the bottom line is, the bottom line could always be bigger.
But a delicate balance exists when determining a pricing structure for ancillary services. That balance basically straddles the line between leaving money on the table by pricing too low and driving tenants away by hiking rates too high.
“Simply having an ancillary service in place does not guarantee success,” says Riverstone’s Rees. “But a strategically implemented and managed ancillary service may have a major impact and continue to drive higher NOI.”
