Water Submetering Keeps Profits From Pouring Down The Drain

Utility costs are one of the highest monthly expenditures for multihousing property owners, so perhaps it was inevitable that water costs, too - like electricity and gas - would be passed to residents. Submetering is one way of reallocating those costs to capture a greater piece of the operating budget; it is a trend moving into the industry with the momentum of a tidal wave.

Some say water submetering was sparked by the 1996 Clean Water Act which ultimately passes improved water quality costs to the public. Others point to the REITs as the driving force, as they look to increase ROI for stockholders by recouping these expenses. Others say that until now, water - which costs owners an average of $21 per unit per month - was the only utility not being fairly and equitably passed back to residents. With 25 million potential units in the residential apartment industry, the forces behind water submetering have propelled it to the forefront today.

Submetering is not about profit; it's simply an issue of getting back what you paid for. Explains Edwin H. Moore, president of Electric Metering Co. of Arlington Heights, Ill., which provides a broad range of utility management services (including water, electric and gas) for property management companies around the country, "Water submetering provides owners with an accurate means of allocating costs to the appropriate cost center. Tenants pay no more than if the utility company were billing for the same usage. But the revenue generated from redistribution of utilities can contribute to increasing the return per sq. ft. of leased area in a building," says Moore.

Michael Weintraub, senior vice president of National Water & Power Inc., of Irvine, Calif. - a utility management and billing company that specializes in the multitenant real estate industry - notes that in 1980, virtually all apartment property owners provided electricity for residents aspart of the base rent, while today almost all residents pay for that electricity. "We see a similar trend in water: Only 5% of residents now pay for water, but in the next decade we expect that number to increase to 95%."

Weintraub says that in 1997 the average property owner paid over $21 - and as high as $30 - per unit per month for water and wastewater (according to the Raftelis 1998 Water and Wastewater Rate Survey). In a typical 250-unit building, this represents an expense of $63,000 to $90,000 per year. Depending on the size of the portfolio, savings from a water reallocation program can be from hundreds to millions of dollars.

Even with figures as clear as these, many owners are reluctant to reallocate water expenses, most likely because they may be fearful of losing tenants. Residents suddenly faced with paying for their own water bills easily can sail down the street where water is part of the rent.

Confirms Alan Parks, president of American Water & Energy Savers Inc., a water conservation and submetering company based in Miami, "Initially you can expect that tenants may resent the submetering process. But tenants are smart: They know their rent pays for common area costs and other amenities, as well as water. When tenants realize that with submetering they'll pay only for their own water usage - not for the family's next door - they are more open to paying their own water bills." Parks adds that they also have a tendency to use less water.

States Dell Keehn, president of Master Meter Integrated Submetering Technologies (IST), a new division of Bellevue, Wash.-based Master Meter Inc., which is also a builder of multifamily properties, "The typical apartment resident consumes approximately 60,000 gallons of water annually. Resident accountability and conservation encouraged by submetering can reduce usage between 25% and 40%.

"In today's market, on a typical project in Seattle with 250 units, with normal escalations in water and sewer, having a submetering system in place for about two years will make the property worth an additional $1 million, using a nine cap rate," reports Keehn.

Water submetering activities are indeed bursting forth, underscored by the number of companies diving into the market. Reports Ron Horstman, sales manager for U.S. Water Works Inc., of Elmhurst, Ill., a utility conservation specialist, "At the annual National Apartment Association [NAA] convention in Las Vegas this past June, there were more water submetering companies than any other single vendor activity."

The Debate Over Reallocation Not all properties can be submetered physically (see box, page 22), and some states are submerged in rules and regulations that almost prohibit any water submetering activities. Thus, in cases where a property cannot be submetered, or where a property owner is unwilling to embrace it, a general allocation to residents of a property's water expenses is done using a mathematical equation most commonly known as RUBS. The formula typically factors in square footage, number of occupants, and/or number of bathrooms to determine a per unit rate.

There is a huge debate in the industry over the use of RUBS. Those open to the practice say it is an effective and inexpensive option, while those opposed say, because it is not based on actual use, RUBS creates inequities and resident discontent, and does nothing to encourage conservation.

Chuck Wright, executive vice president of Enviro-Check Inc., a utility management company based in Orlando, Fla., states, "RUBS is an inexpensive decision for owners, but there's less resident satisfaction. Submetering is more equitable, but it can be expensive to implement. Both methods are viable and effective. We are a water conservation company; our goal is to help properties conserve water as well as increase net operating income, and we support either of the methods our clients choose to achieve that goal."

Wright reports that through demand side management alone (with RUBS or submetering), Enviro-Check can save 20% to 40% of a property's water bill. He estimatesthat at the end of 1997, 400,000 resident units nationwide had taken the plunge into water reallocation (through RUBS or submetering), a number that grew to 700,000 by May 1998. That number will almost double by 1999, he says. "Within five years, we'll see virtually all apartments reallocating water expenses, much like we saw with electricity in the early 1980s," asserts Wright.

Keehn of Master Meter IST strongly opposes RUBS. He explains, "From our perspective, and from the Attorneys General in several states like North Carolina where RUBS has been ruled illegal, we believe RUBS is inherently unethical. When people go on vacation for a month and come back to a $30 charge that purports to be a water bill for that period, they're not happy. In addition, I believe RUBS does nothing to encourage water conservation." Keehn adds that as long as RUBS are in effect, water and sewage bills will continue to escalate across the country. States Horstman of U.S. Water Works, "As the debate between RUBS and submetering continues, I believe there will be a turn away from RUBS to today's new water submetering systems and technology."

Hardwired and Wireless Submetering Approaches The new submetering systems and technologies pouring into the market were summarized into three categories by Mike Clemmons - national technical manager for Raab Karcher Energy Services of New York, a German-based leader in utility management services - in his recent presentation at the annual NAA conference: The three categories are direct read, semi-automated and fully automated.

The direct read method utilizes only a hardwired system, while the semi-automated and fully automated approaches may be hardwired or wireless.

Hardwired systems require that each apartment be wired to a meter and then to a common room where readings may be read or transmitted to a central office. Today's wireless systems are called RF for the radio frequency method they use, and consist of a series of collectors and transmitters that are placed around a property, eliminating the need for wires. Keehn of Master Meter IST reports that the cost of retrofitting a large property with RF, inclusive of installation, is normally under $260 per unit, an investment that is recovered in about nine months in the Seattle market.

Some submetering professionals, like Michael McDonald of Digital Metering Inc. (DMI), a Redmond, Wash.-based manufacturer and distributor of automated utility submetering systems, feel that hardwire systems have matured in the past few years to the point where they offer a reliable and cost-efficient means of implementing submetering. During new construction, the installation of hardwire is fairly simple and inexpensive, he says. But for a retrofit, installing hardwire is too invasive and often cost prohibitive for an existing property. In this case, wireless has the upper hand, though DMI "has not been quick to jump on that bandwagon," reveals McDonald. "There are learning curves to every new technology. Wireless is still in its infancy stage."

Potential downfalls of RF include interference with the millions of cordless phones operating in the same 900-and-up megahertz range as RF submetering systems. Another possible disruption is that the frequency range could become completely drowned with transmission traffic. To keep their heads above water, some companies are building foresight into the technology by having their systems send signals over several different frequencies, so if one frequency is blocked the others will get through.

Choosing Your Provider Weintraub of National Water & Power contends that as technology is improved and refined, eventually everyone will end up with similar systems, so the real issue in choosing a water submetering supplier comes down to service. "The key for owners is, first: 'Who will install my system in the most efficient and effective way?' And second: 'Once that's done, who will read the meters regularly?' For example, a big issue in the industry is spotting problems, such as leaks, and we do that by reading meters daily. Today we're trying to set the standard for service, not necessarily technology." Weintraub adds that his company has invested heavily on a service infrastructure that continuously supplies clients with the information they need.

Service is one of the factors that differentiates Raab Karcher, says Robert Fincher, vice president of marketing for the firm, whose goal is to deliver water submetering services to most major multifamily housing markets in the nation by year-end. "One of the most important services we offer is a property analysis to make sure the proper solution is provided in each specific case. There are many factors to consider when implementing a water submetering system, including environmental and structural issues."

Keehn of Master Meter IST claims that when owners evaluate submetering companies, they should look for the capabilities to support the system after it goes in. "Any system should do a good job of metering, but after the system is in, how the call-backs are handled is paramount. The beauty of an integrated company is that when there's a problem, you don't have the meter manufacturer pointing at the electronics manufacturer, who is pointing at the installer. Providing the complete service, in addition to education and training, is the telling marks of a good operation," asserts Keehn.

A slightly different approach is suggested by Andy Drenick, vice president of marketing and sales for Inovonics of Boulder, Colo., a developer, manufacturer and marketer of wireless submetering systems. Says Drenick, "There are many models in the world where manufacturers sell to quality intermediaries that are better positioned to support the ultimate customer. We as manufacturers are good at developing and producing the product and supporting a reseller. We're not good at traveling around the U.S. understanding each property owner's specific needs and servicing them quickly ... but our resellers are. We concentrate on manufacturing great products and use the finest possible service providers who focus on what they do best."

The ability to supply good training is an extremely important consideration in selecting a service provider, maintains Suzanne Perry, owner of MTR Utility Operations Inc., a full-service water submetering service provider based in Dallas. Perry states that she came from the development side of the business, and after 12 years in it saw a great void in providing good service to property owners, which is why she founded MTR.

Perry says training is the fastest, most efficient way of reaching a level of understanding between owner and service provider, confirming that both entities are headed for the same goal and assuring that clients get the full benefit of any submetering technology. "Without detailed training, a client would be wasting money on the technology and services we sell. Training is crucial. Owners as well as property managers and staff have to be technology-literate to manage a property efficiently," Perry adds.

Besides the how-tos of a system, MTR's trainers explain to owner personnel how various laws, regulations, fees and the "legal-eeze" in the community's lease will be affected by the new technology. Documents are provided that help leasing agents convince prospective residents that a submetered apartment can actually save them money. The customized and comprehensive training session also includes a full analysis of a utility bill as well as MTR's bill, because, says Perry, "Extensive training puts clients at ease with the entire submetering process .... It's all worth our going the extra mile."

Parks of American Water & Energy Savers says billing experience and the accuracy of a company's billing system should be examined before choosing a service provider. "More important than the meter itself is the accuracy of the bill. A company may install the meter proficiently but not read or bill from it correctly. For example, we took over one property where a tenant's meter read 4,000 gallons ... but when he got the bill he was charged for 40,000 gallons. Errors like these come from either the reading or billing equipment."

The Future While the newest rage in water submetering is RF, the future may be cellular, with meters transmitting to satellite dishes and back down to receivers. One of the advantages of cellular over RF is speed: A meter could be read dozens of times a day, if necessary. It also may be cheaper than RF in the future, because it wouldn't require a series of collectors and transmitters on a property, just one unit at the meter.

Horstman of U.S. Water Works says that the REITs' interests may also help push submetering legislation in the various states that are slow to yield.

As water expenditures continue to rise and a flood of submetering opportunities flow into the market to help properties recapture costs in a fair and equitable manner, owners will have to decide, "Do I want to sink or swim?"

In order to be submetered, a property must have one of several configurations:

A) a single water feed to each apartment;

B) a single hot water feed in each apartment, usually from a water heater; or

C) a single cold water feed to each apartment and a common hot water supply.

In general, apartments with individual hot water heaters or apartments built to typical condominium specifications can be submetered.

{Source: National Water & Power Inc., Irvine, Calif.}

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