Submetering: Going with the Flow
Landlords, what if you could make a tax-deductible investment in your
property that would increase its value and net operating income (NOI),
reduce operational expenses, eliminate a major uncontrollable cost, give
you a return on investment (ROI) in 14 to 18 months, and demonstrate to
your tenants and community your concern for the environment and
Traditionally, utility companies provided water, gas and electricity to an
apartment building through master meters and billed the property a monthly
lump sum. In this model, each tenant paid approximately the same amount
for utilities, most often water, as a part of the unit’s rent. It
didn’t matter if one unit housed a family of six, including two newborns
and a dating teenager, while another was rented by a bachelor airline
pilot who was rarely home.
With no accounting for heavy and light users, you’ve probably noticed
how difficult it is to increase rents fast enough to keep pace with rising
utility costs. Utility expenses have certainly been in the news lately and
grown far faster than inflation in recent years, especially for properties
with master metering.
Submetering simply means measuring each unit’s utility consumption and
making the bill the tenant’s—not your—responsibility. A property
owner undertaking submetering typically hires a company that installs the
submeters in each unit, reads them, and bills residents for monthly
utility and sewer usage, plus a service charge. That company then writes
one monthly check, less its own service fees, to the property owner or
management company, which pays the utility. Management companies can also
handle meter reading themselves and have residents pay the property
For new properties, the necessary meters are best installed when the
property is built. New residents then understand when they move in that
they’ll be paying for their utilities themselves. Owners of existing,
occupied properties face the dual challenges of retrofitting the meters
for older plumbing or wiring and “retrofitting tenants” to the idea of
paying for their own utilities.
Meter installation is not a lengthy process, but may vary depending
on how easy it is to access lines and meters. Installing a new meter takes
about 20 minutes, while a retrofit can average 30 minutes or more per
meter system should you buy?
Meter products for the multi-unit housing industry are evolving apace with
communications technologies. Costs are going down as capabilities are
In earlier days, a human (some more than others) reader had to read the
dial on the meter. Now there are touch pads for reading entire buildings
from one place, electronic systems for polling meters by telephone, and
radio transmitters that send consumption data to a meter reader in a truck
or to a central computer. There are pluses and minuses for each, depending
on your own circumstances.
Property owners or managers considering utility submetering should be
aware and beware. For water, look for meters approved by the American
Water Works Association (AWWA), the association that sets the standards
for all utilities throughout the U.S. Their particular standards are
recognized by all utilities and essentially guarantee accuracy in
This is a burgeoning industry with many newcomers. Some companies both
sell and install the meters; others do the selling but hire out the
installation. In new construction, plumbers usually install the devices
and a submetering company connects them. It’s not an off-the-rack
proposition—every situation is different. Beware of inexperienced
vendors who might be grabbing units off shelves and trying to put systems
When evaluating submetering companies, favor those that have been around a
few years. You need to know they will be available in the future if
problems arise. Ask your CAA colleagues about their experiences and get
Milton DiGregorio, president of Denver-based Master Tek International and
a founding member and president of the National Utility Allocation
Association, recommends that you ask questions. For example, is a
prospective vendor willing to help you present the change to tenants? Will
the vendor supply literature and attend meetings to answer residents’
questions? Are permits required? Is the company licensed to perform this
kind of work? Does the company know and observe local regulations on
A submetering company that includes billing in its services greatly
simplifies your role as a utility provider. They’ll organize the data,
calculate charges, produce statements that comply with all regulations,
and stay current with the latest rate changes, allowance schedules for
low-income tenants, and local taxes. Professional statement preparation by
the experts will improve tenant relations and reduce the number of
complaints about utilities.
Companies like Master Tek that specialize in submetering, billing and
collection usually will provide the best overall value in the long run. To
paraphrase a rusty old saw, an ounce of prevention is worth a gallon of
can I convince my tenants?
An important concern of property owners and managers is tenant reaction to
the submetering program. Selling the program effectively to your residents
should be an important aspect of the vendor’s proposal. A knowledgeable
vendor will guide you, your on-site staff, and your residents through the
transition period with the least disruption to anyone and, most important,
to your property’s cash flow.
Once you have decided to submeter, inform your tenants in writing about
the reasons why. Make sure they are fully informed about your current
average costs per unit and the average charges they will pay. Remind them
about how local government and public utilities have worked hard to
encourage conservation. Submetering usually reduces a property’s utility
consumption by 25 to 35 percent, a compelling argument in areas where
there are shortages.
most liquid asset…
utility consumption is no different than paying for one’s own
telephone or cable TV. If tenants are conservative, they’ll have a
small bill. If they use a lot of energy and water, the bill will be
high. Chances are, most tenants would be amazed to learn how much
energy and water they consume. For example, an apartment dweller
uses 80 gallons of water a day on average, 60 of which is for the
bathroom. Leaving the faucet off while brushing teeth saves three
gallons a brush. Cutting the number of dishwasher and laundry loads
could save 75 to 200 gallons a week. Installing a low-flow shower
head saves between 500 and 800 gallons a month. Toilets use a lot of
water to flush. Putting a spacer into the toilet tank to lower the
amount of water can save eight to 20 gallons per person per day.
Fixing a leaky toilet could save 200 gallons a month, and a dripping
faucet up to 600 gallons a month. Cutting only one minute from each
shower, which typically consumes 35 gallons, would save an
additional 700 gallons a month!
Most submetering companies provide sample letters to send to your tenants,
suggested lease language, and brochures explaining what submetering is,
how it can help them conserve energy resources, and how they can be more
sensible in their utility use by reporting problems. One way to soften the
impact of the change for tenants is to send them a grace bill that shows
them how much water, gas and electricity they used that month. The
property owner pays the grace bill, but tenants are told to be careful
about their usage in the future because “next month it will be for
note: If your property is subject to rent control, be sure to
consult a lawyer to find out if conversion to submetering might constitute
an increase in the burdens of tenancy amounting to a “rent increase”
under the ordinance.]
As tenants become more sophisticated and informed, they’ll realize they
would prefer to pay for only their own utility consumption, not their
neighbors.’ Submetering gives the tenant better control of living
expenses—the less they use, the less they pay—and doesn’t penalize
the landlord or tenants for someone else’s high consumption habits.
Alert tenants to the fact that if they rent at a “utilities paid”
property, they’re actually paying for everyone else’s usage in their
To sweeten the deal, some property owners help residents keep their
utility bills down by putting water-saving devices on toilets and showers
when meters are installed and promise immediate attention to leaky
fixtures. Encourage residents to report drips and leaks immediately, since
they’re paying for the lost water.
NOI and ROI for moi?
The benefits of submetering can be tremendous. One of the most obvious is
the property’s increase in net operating income. For example, a 200-unit
property with an average water bill of $40 per unit per month could
increase the property’s NOI by $96,000 per year or more, depending upon
local utility and sewage rates. The cost of the conversions may also be
tax-deductible when treated as a capital improvement.
This dramatic increase in your properties’ value based on the NOI for
our example would add nearly one million dollars in value when factored on
a reasonable multiple of 10 times earnings. Not a bad investment! Of
course, the figure will vary depending on the current valuations of real
estate in your area.
And how many investments do you know of that benefit everybody—the
landlord, the tenant, and the environment?
Bradley is a marketing communications consultant and “word wrangler”
with several clients, one of whom is Southwest Water Company. He
handles an assortment of writing, design, media and web assignments.
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