Can You Afford to Keep Utilities Included in Your Rent?

By Adam Cook, President of Commonwealth Real Estate Services Part 1 of 2 For better than two decades, one of the most significant and unpredictable factors influencing the bottom line of multifamily housing properties has been rising utility costs. This doesn't cause quite as much heartburn for property owners who have wisely passed such utilities through to the residents to pay in addition to their rent. However, for the overwhelming majority of properties, particularly those which were developed prior to the 90's, the rent charged typically includes any combination of utilities including water, sewer, garbage, and to a lesser percentage electricity, natural gas, cable television/satellite, and internet services. From one year to the next, the only certainty one can realistically expect is that rents will need to be adjusted just to keep pace with the utility increases that are coming one's way from the various providers. The annual questions are always, how much will they collectively go up, will they increase more than I am comfortable with recouping from my community residents, and will there be room to also keep up with inflation on my other increased operating costs? Double digit percentage rate increases aren't just exclusive to medical insurance companies. We have witnessed year-over-year, +20% increases with one sewer treatment provider alone and have seen huge increases from just about every utility with the possible exception of phone services. Another concern about utility costs is the timing of when rates increase which do not necessarily coincide with the implementation of your next rental adjustment, leaving communities absorbing increased costs until the following year. Couple that with each and every time you try to recover these utility costs whereby you look like the quintessential greedy landlord, but in reality, you're just trying to maintain your margin. This should lead owners to question whether they can afford to continue to keep any utilities included in their rent. A perfect illustration of a utility you should be proactive about is water, which is also normally the driving factor behind the sewer expense. You have probably heard that certain municipalities have increased their water rates despite a reduction in overall consumption. This has happened, in part, due to a need to fill a budgetary hole created by less revenue generated as a result of reduced consumption. Rates are high now and will continue to rise. A factor to consider is that over time, the EPA will have even greater scrutiny over water districts, increased regulation and testing requirements, and reduced maximum contaminant levels (MCLs) which will require better and more expensive treatment facilities. All this translates to more expense which will ultimately be passed on to the consumer. One thing is for certain - you don't want to be the last one in your service district to get out from under this payment responsibility. You need to be aware that your business is under attack. Municipalities have grown to be creative in expanding their reach into your pocket by creating new sources of revenue by the addition of new fees and charges. As an example, the City of Oregon City has the following line item charges on its utility invoice: 1. Water Treatment, 2. Water Distribution, 3. Stormwater Management (aka surface water), 4. Pavement Maintenance (aka street sweeping), 5. Wastewater Collection, and 6. Wastewater Treatment. This is just one example, but this is not an exhaustive list. The City of Gresham has added what it claims to be a temporary police, fire, and park and recreation fee to their utility invoicing. The City of Everett has a charge on their utility bill for landfill fees. Tri Cities and Moses Lake have an emergency services charge on their utility billing. The City of Salem recently attempted to add street lighting and street maintenance to its list of fees and charges, but backed down under pressure from Commonwealth, MHCO, community owners, and community residents who protested their newly proposed fees which some considered to be a "tax". I'm sure there are also other examples which I have yet to learn about, but rest assured, new fees and charges are appearing with great regularity. The point is that we are under fire from the local municipalities which are attempting to circumvent the law by creating the equivalent of new taxes without them being referred to the voters as required by Oregon and Washington Law. Many of the newer communities that were developed in the late 80's and early 90's opened their communities with utility charges separate from the rent while still paying the master bill and collecting the individual consumption charges from the residents in addition to their rent. Since then, there has been a growing trend for communities which have recognized this better model to pass through utilities to the residents over time to get out from under the burden of playing "catch up". This is more equitable to your residents, promotes conservation, and will more clearly show your valued community residents exactly what these municipalities are charging and how quickly their charges are increasing. Perhaps then, the residents may direct their ire to the appropriate party and focus their concerns in the direction it belongs with the goal of helping influence the cities or at least making them think twice before adding new fees and charges. One final important point to consider, for decades residents and resident advocacy groups have lobbied for rent control in our states. We have successfully dodged those bullets each and every time, yet rent control bills surface every legislative session in one form or another. Imagine your state government passing legislation which restricts how much you can charge for the already affordable housing services you provide. Consider how much your utilities have increased over time and what would happen to your cash flow and the value of your community from not being able to recover 100% of this expense. Having utilities separate from the rent is a transparent pass through from the provider to the consumer, rather than a rent increase which would be restricted in some form, likely requiring justification with a potential review board. If you have any utilities which are included in your rent, I strongly recommend that you consider passing this expense through to your residents. Commonwealth has a solution for accomplishing all of this with minimal cost to you. Please stay tuned for more information about our recommended solution to help you protect the investment you have made in your business in next week's follow up article. If you have any questions or would like to discuss this, please feel free to contact me at 503.718.0622, Christy Mays - Washington Vice President at 425.952.2750, and/or Tom Petitt - Oregon Vice President at 503.718.0620 Article provided by Adam Cook, President of Commonwealth Real Estate Services. Adam joined Commonwealth in 1992 and has been particularly effective in utilizing his years of experience to improve the services we offer to our clients. During the past fourteen years, he has served as a board member in the Oregon community owner's trade association, Manufactured Housing Communities of Oregon (MHCO), helping to shape legislative efforts in Oregon. He served two years as the association's president.