Masters of Disaster

The Bright Side of Vacancies

written by Emily Landes

Find out the connection between turnovers and lower utility costs.

 

With people working, cooking, and largely spending their days at home, and with home schooling a reality for the fall and beyond, utility bills nationwide are on the rise. In California, year-over-year residential energy use is 15 to 20 percent higher since shelter-in-place restrictions went into place, according to the California Public Utilities Commission.

At the same time, rents are flattening or decreasing in many locations across the state. Listing service Zumper shows that rents are down about 11% in San Francisco as a whole, but that decline could be closer to 20% depending on the neighborhood, with the downtown core being hit hardest by fleeing young tech workers.

With over 7 million in California filing jobless claims since businesses began closing in March, many are moving in with loved ones to save money or leaving the state altogether. This trend could lead to an even bigger drop in demand in the months ahead.

It’s safe to say that many owners may be feeling the squeeze of dropping rents and rising vacancies. It might be tempting to include utilities in the monthly rent in an effort to attract renters. But that short-sighted plan could cost owners A LOT in the long run.

Instead, to combat rising costs during a time of flattening rents, consider adding a ratio utility billing system (RUBS). RUBS is an inexpensive and easy way to make tenants financially responsible for their usage and incentivize conservation. These software solutions do not require an onerous submetering system, and they easily, legally, and affordably allow owners to shed up to 90 percent of ever-rising utility costs.

Communication Is Key
Although RUBS have many benefits, owners are often concerned about how to best institute the program in their buildings, especially given the need to be sensitive to tenants currently in economic crisis. It has never been more important to have a clear communication strategy that explains the goals of the program to residents.

The idea is to make residents aware of the costs of water, power, and other precious natural resources, and provide incentive to conserve. Additionally, clarification should be made that the program passes through the costs of the utilities actually used by residents. It is not a profit center for a landlord.

Plus, owners can bill back as much—or as little—as they want to during these uncertain times. That could mean a temporary “goodwill deduction” for struggling residents. Even tenants who are charged a small percentage of the overall bill tend to lower their utility usage. Simply being aware of how much they are using can actually lower that usage by 15 percent.

RUBS in Rent Control
Some property owners are also concerned about the legality of instituting a utility billback program. However, barring a few municipalities, RUBS is legal throughout California—even in rent-controlled jurisdictions and even with the rental increase limits imposed by the state legislature last fall. (San Jose, Richmond, and Santa Monica all have restrictions on RUBS and the program cannot be instituted there.)

In rent-controlled jurisdictions, RUBS must be instituted on turnover. A recent SFAA survey shows that the vacancy rate among member properties is now 11.5%, four times what it was prior to the pandemic. While an increase in vacancies is not typically thought of as a positive trend, increased turnover does allow for new opportunities to begin a RUBS program in your building. Remember, owners will not have this ability again during the course of the tenancy.

Even upon turnover, when RUBS is implemented the fluctuation of costs must be capped to avoid violating any restriction on the number of rent increases in a 12-month period and any increases over the permitted amount. This cap should be reasonably related to the actual costs. It should be clearly communicated that the point of the cap is to benefit residents by passing on savings when costs are lower than the cap.

Owners may also need to consult applicable federal and state laws and applicable regulatory agreements for any specific project or concern. (For specific legal advice, always consult an attorney.)

Rely on an Experienced Team
Because of the legal complexities, property owners should consult with a RUBS provider knowledgeable of the regulatory landscape in their area. When the owner has a clear goal and works with the vendor to put together a program and then properly document the mechanics of the program, there is less chance that costly mistakes will be made.

If owners attempt to put a billback system in place by using generic forms and without notifying and educating tenants properly, the results can be disastrous. Tenant pushback and refusal to pay are both common outcomes of this scenario.

Choosing a trustworthy, experienced utility management provider will assist greatly in this regard. In the end, there will be a functional RUBS program that starts adding value to the property immediately without undue stress for the owner or residents.

Remember, utilities are not fixed costs. In fact, they tend to just go higher and higher over time. So, including utilities in the rent is a losing proposition in the long term. This is especially true in rent-controlled markets where owners may not unilaterally change the terms of the lease after it has begun. If utilities are included at the start of the lease, they can never be made the tenant’s responsibility no matter how long the tenant stays in the unit. This long-term losing trend is compounded while there are more people in more apartments all day long, using precious resources like water, creating more garbage and recycling, and constantly charging their devices.

Don’t lose out on the opportunity to make utilities a new resident’s responsibility. Including utilities in a new lease is a short-sighted incentive to attract tenants. What seems like giving a little right now will quickly turn into a lot down the line.

If you want to learn more about how to make tenants more responsible for their usage, now is the time to reach out to SFAA Associate Member Livable. This RUBS company has been operating in San Francisco for over a decade and can help you get on the path towards saving up to 90 percent on your utility bills while also motivating tenants to develop more sustainable practices in their utility use.

Emily Landes is the content director for Livable and the former editor of SF Apartment Magazine. For over a decade, Livable has been helping multifamily owners recover utility costs and increase the value of their investments through conservation. For more information, check out livable.com or call 877-789-6027.