January 19, 2021
Commercial Utility Billing: What Property Owners Need to Know
A growing number of commercial properties are using utility billing to slash their utility expenses and improve NOI. In this post, we break down everything property owners need to know before getting started.
What Is Commercial Utility Billing?
The rising cost of utilities has placed an increasingly large fiscal strain on commercial property owners. The burden of including public utility services in rent – which can add up to tens to hundreds of thousands of dollars per year – can quickly diminish net operating income. As a result, more and more landlords are charging tenants for their utility usage separate from rent.
Unfortunately, many property aren’t able to take measurements for individual units. And thus, have no way to recover expenses.
Utility billing resolves this matter by giving the landlord the ability to charge tenants for their utility usage. This enables them to fairly allocate utility costs among commercial tenants and start recovering utility expenses.
There are two methods for accomplishing this.
Utility Billing Methods
Utility submetering allows property owners to allocate utility costs fairly among tenants by measuring each unit’s true consumption of water, gas and electricity.
You can do this by installing a meter between the master meter for the property and each tenant’s unit. This provides accurate data for every tenant’s consumption for every utility. And with precise consumption data, you can bill back tenants for exactly what they consume.
RUBS, short for ratio utility billing system, is a billing method that proportionally allocates utility costs to tenants. It’s used to bill tenants for water, gas, electric, trash, cable and other services – all weighted differently based on an industry-accepted formula.
RUBS is perfect for commercial properties that can’t use submetering either for technical or practical reasons.
The RUBS method can be managed by a landlord or property manager with pen and paper or Excel. But an easier way is to work with a utility billing company which uses software to streamline the process and make it more accurate.
RUBS is ideal for property managers who need to start recovering utility costs quickly.
What Are the Benefits of Commercial Utility Billing?
Keeps Pricing Competitive
Price per square foot is one of the most important factors for how competitive your property is relative to the market. But including utility costs in your lease inflates the price per square foot – making your property less competitive.
Utility billing turns utility expenses into a separate line item, which decreases the price per square foot of your property.
Improves NOI & Property Value
Net operating income (NOI) is a key metric for determining the financial success of a property. It measures a property’s financial performance based solely on what it costs to run it.
As an operating expense, utilities are notorious for killing bottom lines. Properties that fail to recover utility costs bleed thousands to tens of thousands of dollars per month.
NOI is important because it has a direct impact on property value as illustrated by this formula:
NOI / Market Cap Rate = Property Value
The better the utility cost recovery, the greater the net operating income. And the greater the NOI, the greater the property’s value.
Delivers Long-Term ROI
Submeters for commercial properties have a delayed, but significant, ROI. The installation has an upfront cost, but that expenditure is usually recovered quickly. Because the utility recovery is much larger for commercial properties, you can typically recover the cost in the first few months.
Most submeters last a solid 10 years. That means you’re making roughly a decade of long-term ROI from one upfront investment.
Utility billing makes managing the costs of commercial properties much easier. But to achieve the optimal result, property owners will need to implement a billing system that provides a high level of cost recovery.