Reserves Must Be Fully Funded Unless Waived

Q: Our condominium association just had a reserve study done for the first time in our twenty-year plus history. We learned that all of the funds we have set up are inadequate. The board said that to catch up the reserves would double our assessment, so they want to phase in the increase. Can they do that? Should the association have gotten a reserve study before now? (J.M., via e-mail.)

A: Although the Florida Condominium Act requires the association to obtain an insurance appraisal at least every 36 months, there is no requirement for a reserve study in the law. However, these studies are relatively inexpensive and are a good tool for boards in establishing reserve schedules, which are supposed to be updated annually based on changes in replacement cost and useful life assumptions, as well as expenditures from the fund.

Your situation is not unusual. A common mistake made by many associations is to simply use the reserve calculations inherited from the developer. In many cases, these schedules are overly optimistic on both useful life and replacement cost figures.

The board is legally obligated to prepare a budget that includes required reserves for roof replacement, pavement resurfacing, building painting, and any other item of deferred maintenance or capital replacement exceeding $10,000.00. These reserves must be “fully funded.” The board does not have the legal ability to “phase in” the full funding of reserves.

If a budget with fully funded reserves is going to impose an undue economic burden on the unit owners, the best choice for the board is to call an owners’ meeting and ask that the owners vote to “partially fund” the reserves. Certain procedures must be followed, but it is not complicated. If a majority of the owners voting at a meeting approve the partially funded reserve (which could include some “phased in catch-up” amounts if desired), that would be legally proper.

Q: Recently my condominium association board sent out notice stating that the board would be adopting a new set of rules. It was my understanding rule changes must be approved by the owners also. Is this correct? (G.B., via e-mail)

A: Not necessarily. The Florida Condominium Act grants authority to the board to adopt certain rules concerning the operation of the association. However, the statute does not specifically grant a board the authority to enact “use restrictions” regarding the condominium property. It is necessary to review the condominium documents, because these will be the source of the board’s authority.

Almost universally, the condominium documents will provide that the board has rule-making regarding common elements. Some documents grant the board the authority to make rules governing unit use, some do not.

Even if the condominium documents give the board authority to adopt rules for the “condominium property” (both units and common elements) there are limits on that authority. Case law in Florida requires that the rules adopted by the Board not conflict with rights contained within the declaration of condominium, nor rights which are “inferable” from the declaration. Also, board-made rules must be “reasonable,” whereas this is not a requirement for amendments to a declaration.

Rules must also be adopted in a procedurally correct manner. Any board meeting where rules which regulate unit use are to be considered must be noticed at least 14 days in advance to the unit owners by both delivery and posting on the condominium property.

Originally posted on floridacondohoalawblog.com. Written by Joe Adams is an attorney with Becker & Poliakoff, P.A., Fort Myers. Send questions to Joe Adams by e-mail to jadams@beckerlawyers.com

Penalties for Financial Reporting Violations

In 2018, the Florida Legislature revised a provision within the Condominium Act concerning financial reporting.  Specifically, if a condominium association fails to comply with a request from the Division of Condominiums, Timeshares and Mobile Homes (the “Division”) regarding providing a unit owner with a copy of the annual financial report, the condominium association, as a punishment, may not waive the financial reporting requirement for the fiscal year in which the owner’s request was made, or the following year.  The new law clarifies the time frame, whereas the previous version of the law did not specify how long the association was prohibited from waiving the financial reporting requirement.  Note that despite what an owner may claim, the penalty only applies when the association fails to respond to a request by the Division to provide a copy of the financial report to a unit owner.

Originally posted on floridacondohoalawblog.com. Written by David Muller

Special Assessment Leftover Funds Must Be Returned or Credited To Account

Q: Our condominium association board levied a special assessment for Hurricane Irma damage. Our insurance claim settled for more than we expected, resulting in an excess of funds due to the special assessment. What happens to this leftover money? (S.S., via e-mail)

A: Section 718.116(10) of the Florida Condominium Act provides that funds collected from a special assessment can only be used for the specific purposes for which the assessment was levied. Leftover funds are considered “common surplus” and may, at the discretion of the board, either be returned to the unit owners or applied as a credit toward future assessments.

Q: I am on the board of my condominium association. Several of the directors recently had a “workshop” session to understand the details of a major construction project that is coming up. The workshop was intended to be informational only. No votes were taken. Were we required to post notice of the workshop? (S.C., via e-mail)

A: The answer to your question depends on whether a quorum of the board was present at this gathering. While the law does not specifically address “workshops,” if there was a quorum of the board present, it was a “meeting” if association business was “conducted.”

It is widely accepted that votes need not be taken for a meeting to occur. In my opinion, the activity you describe involve the conduct of association business. On the other hand, if the majority of your directors attend an educational seminar, this is not a meeting as you are not addressing the business of your association.

Therefore, assuming a quorum of the board was present at this event, notice and an agenda should have been posted at least 48 hours in advance on the condominium property, and all unit owners should have been given the right to attend and speak, subject to any reasonable rules the board may have adopted governing unit owner statements at board meetings.

Q: My wife and I co-own a condominium unit. At the last election, we both ran for the board and were elected. Now, some of the directors say we both cannot serve at the same time, and have demanded that we choose which one of us will hold the seat. Is there a precedent on this? (J.O., via e-mail).

A: Section 718.112(2)(d)2 of the Florida Condominium Act states that in a residential condominium association of more than 10 units, co-owners of a unit may not serve as members of the board of directors at the same time, unless they own more than one unit or unless there are not enough eligible candidates to fill the vacancies on the board at the time of the vacancy.

Therefore, if your condominium consists of more than 10 units, if you and your wife only own one unit, and if there was a contested election, you both cannot serve on the board at the same time. Whichever of you received the greater number of votes would be the person who was actually elected, so you can’t simply choose between you. The person who received the next highest number of votes but was not considered elected, would take one of your seats.

It is also worthwhile to note that the law requires challenges to elections to be made within 60 days through an arbitration proceeding with a state regulatory agency. If the election was more than 60 days ago, I am not sure how that would play out since seating both you and your wife was what lawyers call “void ab initio,” meaning null and void from the start.

Originally posted on floridacondohoalawblog.com and written by Joe Adams is an attorney with Becker & Poliakoff, P.A., Fort Myers. 

A Primer on Budgeting and Reserves

Few aspects of condominium and cooperative association operations are as heavily regulated as the budgeting process and yet too many boards take an informal approach to these crucial director functions.  From Section 718.504, which lists the required operating expense categories, to Section 718.112, which delineates the process and the requirements for reserve disclosures, budgeting, funding and use of reserve funds, to Section 61B-22 of the Administrative Code, which addresses even more detailed aspects of the process we can see how broadly the Florida Legislature has addressed budgeting and reserves.  Errors in the manner in which budgets and reserves are handled can subject associations to monetary penalties imposed by the State.

Budgeting is a process of estimating upcoming expenses.  On the operating side, most communities rely on prior years’ budgets and financial statements to develop the upcoming year’s budget for operating expenses.  The operating budget should be designed to meet the reasonably anticipated operating expenses.  All board members should do everything they can to deliver value to the members for their assessment dollars, but some boards make the unwise decision to keep assessments down artificially for political purposes at the expense of performing necessary maintenance.  When this occurs, the ultimate repair costs are usually higher because of the damage and deterioration that could have been avoided had repairs been done in a responsible and timely manner.  To put it simply, budgeting to properly maintain the community is, of course, a fiscal issue, and a planning issue, but it should not be a political issue. 

On the reserve side, many communities that went years or even decades without funding any reserves are finally starting to fund at some level and are considering the cash flow funding model over the component funding model, usually because the cash flow model funds a pooled reserve rather than a reserve fund in which funds are restricted for specific reserve assets rather than being available to use for any reserve asset.  For those communities without fully funded reserves, an accurate reserve study is the best defense against complaints over the inevitable special assessments needed to supplement underfunded reserves or fund projects for which the membership has voted to have no reserves. Boards that pull reserve estimates out of thin air are setting themselves up for future complaints and possible recall when the figures they chose prove wildly inaccurate.

There are too many communities that do not attach an accurate reserve schedule to the proposed budget, as required by Statute.  Usually this is because these communities have not obtained a reserve study from a reliable professional or, in an even worse scenario, have a reserve study and have chosen not to disclose its contents.  All board members and managers are encouraged to remember that the purpose of a reserve study is to allow the board to make accurate disclosures of the upcoming reserve expenses.  The purpose of the disclosure is to enable the owners  to know what expenses are coming up, but does not deprive the members of the right to vote each year to waive or reduce the funding of the reserve portion of the budget.  The assets for which reserve disclosures are required by law are the roof, paving and painting, regardless of cost, and any other component for which deferred maintenance or replacement cost will exceed $10,000.00.  Assets costing less than this dollar threshold can be aggregated for the purpose of reserve budgeting and the Administrative Code allows the board to create other reserves (other than those required by Statute).  For each reserve asset, the reserve schedule must disclose its estimated total useful life, estimated remaining useful life, estimated deferred maintenance or replacement cost, and for reserves funded on the component model, the estimated balance in the reserves for that asset at the end of the current fiscal year. 

This analysis applies to both condominiums and cooperatives (the citations above are for condominiums, but there are identical requirements for cooperatives in other portions of the Statute and Administrative Code).  Homeowners association are not subject to the same requirements unless the developer (before turnover) or a majority of the members (after turnover) vote to opt into the statutory reserve structure.

Preparing your operating budget and planning for reserves each year requires thoughtful deliberation as to the needs of the community both short and long-term.

Weathering the Storm of Unexpected Community Association Financial Needs

In Florida, particularly in the summer months, a beautiful sunny day can suddenly morph into a torrential downpour. Similarly, an association with no obvious financial problems can suddenly find itself in the perfect storm that arises when restrictive financial language in governing documents, unexpected-yet-necessary repairs and a shortage of funds collide. There are various ways a community association can address these unexpected financial times as there is no one size fits all. Key however to every community is discussing the issue with its attorney, treasurer and accountant as the budget, fund availability and governing documents all come into play.

The Florida Condominium Act, Cooperative Act and Homeowner’s Association Act all address annual budgets. Generally, the annual budget should set out the estimated revenues and expenses for the year. In addition to annual operating expenses, a condominium association and a cooperative association is required to include reserve accounts for capital expenditures and deferred maintenances. These accounts must include roof replacement, building painting, and pavement resurfacing (regardless of the amount of the deferred maintenance expense or replacement cost), as well as for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The budgets for Florida homeowner’s associations may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible, depending on whether the developer originally established them and/or if the membership affirmatively elects to do so.

In any event, statutory reserve funds are protected under Florida community association law, in that they may only be used for authorized reserve expenditures. Use of reserve funds for any other purpose must be approved by the membership. Further, even if the money is needed for repairs of items that are within the items specifically reserved for, if the reserve money is insufficient to cover the expense the association must seek the rest of the money from other sources.

The need for more money may result in additional assessments. Assessments that are levied above and beyond those derived from the budget are referred to as special assessments. However, Florida community association law does not specifically state that a community association has unfettered special assessment authority. This requires turning to the governing documents of the association for guidance. Some governing documents place restrictions on the right of the association to levy special assessments in terms of the amount of the special assessment or the need for member approval. Even in cases where the Board of Directors is empowered to levy a special assessment without membership approval, the statutes (and sometimes the governing documents) impose specific notice requirements for the meetings at which these assessments will be considered and notice requirements to advise owners of what their share is and when it is due. Finding out about the restrictions, notice requirements specifications and other legal requirements too late can hamper an association’s ability to timely begin collection of necessary funds.

Another option that is sometimes considered as a solution when funds are unexpectedly needed for a repair is a loan or line of credit. As with the special assessments referenced above, some association governing documents require a particular percentage of owner or other approval to authorize the association to borrow money. Further, loan documents can be complex and extensive and have a number of requirements that the association will have to meet before closing the loan. The association should consult with its legal counsel to assist with this and make sure it is not improperly providing collateral to the bank as part of the loan.

The words “unexpected financial needs,” by their very nature indicate the association does not know about them in advance. However, this does not mean that the association cannot prepare for the possibility of unexpected financial needs in advance. It can and it should. Prior to preparing the next year’s budget, community associations should meet with their accounting and legal professionals to discuss the benefits and detriments of the varying options available to the association for funding unexpected financial needs and the approval or procedures required in order to use any one of them. It may be that a revision to the proposed budget or reserves or amendments to the governing documents can be used to make the process less frustrating. Making it easier to weather the storm when it does strike.

Originally posted on floridacondohoalawblog.com and written by Lilliana Farinas-Sabogal

Year End Surplus Treatment in Board’s Hands

Q:        What must be done with a condominium association’s operating surplus at the end of the year? Is it true that it must be returned to the owners in the form of payment or a credit to next year’s budget or assessment? (J.S. via e-mail)

A:        Condominium associations levy assessments against the unit owners for their individual share of funds required to pay for “common expenses.” When all of the receipts or revenues, including assessments, rents, or profits collected by an association exceed the common expenses, this is referred to as the “common surplus.”

The Florida Condominium Act generally provides that funds for the payment of common expenses are allocated in the percentages set forth in the declaration of condominium. For condominiums created after January 1, 1996, the Act provides that each unit will have identical shares for sharing common expenses and owning common surplus.

However, the statute does not state what associations must do with the common surplus (including year-end operating surplus), nor does it require associations to refund surplus operating funds to the owners (and few, if any, associations do so). In my opinion, the proper treatment of the surplus operating funds is to accrue them as revenue for the next fiscal year, and apply the revenue to offset expense items contained in the budget. This does not necessarily mean that the money has to be spent, as a reasonable accumulation of working capital is a proper budget line item.

Although only applicable in somewhat limited tax reporting situations, there is an IRS Revenue Ruling that requires a vote of the owners to authorize the “rollover” of surplus funds to avoid taxation of excess operating income. An appropriate accounting professional should determine if a particular association is subject to the IRS Revenue Ruling (most aren’t), and assist with the manner in which the “rolled over” funds are accounted for in such situations.

Q:        How are “voting interests” defined? (J.R. via e-mail)

A:        Voting interests are the voting rights distributed to the association members, which are described in the governing documents of the association.

Most frequently, each assessable unit or parcel is assigned one voting interest, no matter how many people actually own the property (sometimes called “one door – one vote”). Occasionally, particularly in older condominiums where the sharing of assessments is weighted based on unit size, the voting interests may also be weighted.

Q:        At a recent meeting of my condominium association’s board, there was discussion about voting down an audit. Is this allowed?  (O.A. via e-mail)

A:        Condominium associations with revenue in excess of $500,000 are required to prepare an annual audit. Associations with revenues between $300,000 but less than $500,000 must prepare reviewed financial statements annually. Associations with more than $150,000, but less than $300,000, in revenue must prepare an annual compiled financial statement. Associations with less than $150,000 in revenue are only required to prepare a report of cash receipts and disbursements. Owners can vote to “waive” these requirements by majority approval.

Effective July 1, 2017, the legislature made a few of changes to this law. There is now no limitation on the number of times an association may waive the statutory financial reporting requirements (it used to be limited to three consecutive years). The statute also removed the exemption for associations with less than 50 units. Now, the statutory financial reporting requirement applies regardless of the size of the community, and solely based on revenue. Although found in different statutes, these rules apply to both condominium and homeowners’ associations.

 

Written by Joe Adams and originally posted on FL Condo HOA Law Blog

Associations Should Prepare for Disaster in Advance

We are now over a month past Hurricane Irma.  While it certainly could have been significantly worse for Southwest Florida, many community associations are still working  through a variety of difficult issues, including processing insurance claims, continuing clean-up, and property restoration. While immediate attention must be paid to those issues, now is also a good time for associations to work on developing disaster preparedness and response plans for the future, or refining current plans based on what has been learned from this hurricane.

The steps that community associations can take to prepare for major casualties such as hurricanes, tornados, and fires, include review of what coverage is actually provided by your insurance policies, consideration of having flood insurance, and preparation of disaster preparedness and response plans. Now is the time. I have found that when years go by with no major hurricanes, people tend to lose focus on the importance of good planning. Human nature, I guess.

Section 718.111(11)(d) of the Florida Condominium Act requires a condominium association to use its best efforts to obtain and maintain “adequate insurance” to protect the association, the association property, the common elements, and the condominium property. The condominium statute does not specifically require flood insurance.  In fact, the law states that a condominium association “may also obtain … flood insurance,” implying that flood insurance is permissive, rather than legally required.

For condominiums located within designated flood hazard areas, flood insurance could be considered mandatory by the “adequate” insurance requirement of the statute. If flood damage occurs, not only the structure of the building may be damaged, but the electrical system, plumbing, and other utilities may have to be replaced in their entirety. In a high rise condominium building, unit owners on higher floors often forget that they also own a share of the lower floors. Further, windstorm insurance does not cover damage due to flooding, and vice versa. This could result in associations being underinsured in the event of damage due to both wind and flood. Further, a high percentage of flood claims occur outside of flood zones, so every association should take a hard look at this issue.

The Florida Homeowners’ Association Act, Chapter 720 of the Florida Statutes, imposes almost no insurance requirements on homeowners’ associations. The scope of required coverage and types of insurance required will be dictated solely by the governing documents. For attached structures, such as townhouses or villas, the difference between good and bad documents can mean the difference between financial success and disaster. Talk to your insurance agent and attorney to make sure the documents actually say what you want them to say, and are consistent with how you are insuring.

Associations should develop guidelines as to what actions will be done both before and after a disaster occurs. Before a disaster, associations should ensure that important documents such as insurance policies and association records are secured in a safe place, including having such documents on-line, designating an out of state contact for the association, and taking photographs and videos to document property conditions for insurance purposes.

After a disaster occurs, associations should rely on established relationships with contractors to perform emergency repairs. Associations should assemble a list of post-disaster contacts such as board members, management, attorneys, engineers, insurance agents, insurance adjusters, and so forth. There are, unfortunately, some opportunists and charlatans who chase these storms.

Associations should develop a program to keep owners informed regarding the status of association matters, for instance by email updates or posting on a website. Many association-owner disputes arise from these events. Some could be avoided with a little communication.

Hopefully, it will be a long time before we have to deal with these issues again. However, we certainly cannot count on it and should let Irma serve as a wake-up call that an ounce of prevention is often worth a pound of cure.

Written by Joe Adams and originally posted on FL Condo HOA Law Blog

The All-In-One or Best-of-Breed Dilemma: Which Technology is Best for Your Property Management Company?

In the property management industry, there is a technology to solve almost every problem.  From paying rent online to managing packages, the industry is bursting with solutions that tackle all the tedious aspects of being a property manager. But first, you have to find the vendor that’s right for your company, and that can be a tough task.

The best way to whittle down your choice of vendors is to determine if you want to use an all-in-one or a best-in-breed solution. You may not be sure which one is the best fit for your business, so we’re here to give you all the pros and cons.

First, let’s take a look at all-in-one solutions. All-in-one providers catering to the property management industry offer a combination of management, investment, marketing, leasing, and resident tools.

All-In-One Pros

An all-in-one solution can be an easy sell for some property management companies. The idea of a single platform being able to solve multiple challenges at once sounds very appealing, especially if you have limited internal resources. The IT requirements required to use an all-in-one provider may be reduced when a single vendor is used because there are fewer programs to maintain.

If your team is not particularly tech savvy, only having to learn one platform can help avoid confusion among users of the software and shorten the learning curve. Plus, users will only need a single login to manage each application.

Only having one technology vendor to juggle can be convenient, too. You’ll only have one vendor to make payments to, and call when problems arise.

All-In-One Cons

One suite, one purchase, one vendor to work with. It’s a powerful case, so what are the drawbacks?

The most widespread complaint property managers have about all-in-one solutions is that each product in the suite lacks in-depth functionality needed to do a particular job well.  Essentially a Swiss Army knife for property managers, you’ll get several tools compiled into one offering, most of which have limited capabilities compared to a standalone version of that service.

If you’d like to enhance the functionality that’s offered, don’t count on being able to customize features with an all-in-one solution.  All-in-one solutions tend to be more rigid in the functionality, and therefore offer little to no ability for customization. If you have specific requirements, you are probably better off with a best-in-breed solution.

You’ll likely also have access to tools you don’t need or don’t want, and in most cases, this makes all-in-one providers more expensive. Software to manage your business shouldn’t always come down to price. But when you compare dollar for dollar what you get out of an all-in-one solution and the adaptability it has, some find it hard to justify the cost for what you get back.

You may also find that components of an all-in-one solution don’t integrate as seamlessly as you’d expect. That’s because all-in-one providers often fill gaps in their product offerings by acquiring companies, then rebranding those products as their own. Getting the two components to “talk” to each other can be just as challenging as selecting software from different vendors.

Adding new products through acquisition also affects the support you receive. Support teams for all-in-one platforms won’t have as much in-depth knowledge about each specific part of their offering like best-of-breed providers have. The result of this is that it could in fact take more, not less time to identify and resolve the issue.

Now let’s take a look at best-in-breed providers for property management companies. They eat, live, and breathe their area of expertise and only focus on a handful of specialized services.

Best-in-Breed Pros

Companies opt for best-of-breed solutions because they offer power-packed systems that address a specific issue. The features offered are more extensive than what is offered through an all-in-one, but can also usually be tailored to the client’s needs. While assembling a best-of-breed technology stack means dealing with several providers, it also means upgrades are much easier, and the company has a unique system that is at the top of its industry.

If your goal is to reduce costs, choosing best-of-breed solutions will be the way to go. Because you can pick and choose which solutions your company needs, you are able to save by opting for best-of-breed software versus unified solutions.

Another advantage of using a best-of-breed over an all-in-one, is that it prevents companies from “putting all their eggs in one basket.” Using numerous products from a single vendor tightly locks you into their system. Breaking away from a unified solution can be a painful transition, something most all-in-one providers count on. If you become unsatisfied with a best-of-breed platform, there’s more leverage to negotiate a solution to the problem. And if you choose to move to another vendor, the transition will be less complicated without several aspects of your business tied to one provider.

Best-of-breed vendors usually deliver a shorter implementation time, particularly if you are using a web-based solution. With faster implementation and ease of adoption, you can achieve a quicker ROI by selecting a best-in-breed solution.

Best-In-Breed Cons

As you’d expect, picking best-of-breed solutions means you have more vendor relationships to manage.

While best-of-breed vendors work tirelessly to strengthen their integrations, some may not provide a flawless experience. If you choose vendors who do not have strong partnerships with one another, integration with your property management software may not always be the best.

Best-of-breed solutions are not a one-size-fits-all technology. Therefore, you will need to have a good idea about the kinds of features you want, and be vocal about your needs. The end result will be a solution that is tailored to your business’ specific needs.

At the end of the day, implementing any kind of technology is meant to help you streamline your processes, better run daily operations and make your team’s job easier. All-in-one and best-in-breed solutions each have their own unique value propositions so it’s important to evaluate your company’s needs, not only today, but as you will grow in the future.

 

Written by Jennifer Stahlman and originally posted on PayLease

Let Them Pay For Their Own Long Hot Showers: How Property Manager’s are Lowering Their Property’s Utility Expenses

Do you include utilities in your rent? Whether you do or you don’t, the million dollar question is why? Why not include it?

The answer is rent growth. To elaborate, operators are realizing that with rapid rent growth comes a growth in supply. However, coupled with stagnant wage growth, there is a hesitancy these days as operators are starting to wonder if the good times are coming to an end. If they are, how do you as an operator grow your property’s NOI if raising the price of rent is no longer an option?

Sadly, rent growth is no longer moving up and to the right. Over the entire country we are now starting to see rent growth decrease. Hopefully this is not a trend that continues, but it is scary to compare the supply hitting the market with the fact that wage growth has not increased in quite a while. We all know that you typically look for three times the amount of monthly rent in an applicant’s income. Therefore if incomes don’t rise, and supply continues to grow, it will be tough to continue lean on rent revenue to increase NOI.

Don’t fret! There is another way to recoup costs that is currently being overlooked by management companies all over the country. Why not turn your focus on expense management? Think of it this way, when early engineers built the Transcontinental Railroad or dug the tunnel for the English Channel, they didn’t start from one point without considering the other end. They worked from both sides and met in the middle.

In the past decade we’ve seen a huge focus on the revenue side of property management, particularly when you consider revenue management systems like The Rainmaker Group or YieldStar. Obviously, the revenue side of the house is the primary concern, but the expense side is curiously out of focus. It’s not that operators don’t recognize the importance of expense management, it’s just that the revenue side is more… sexy. The expense side is like Marla Hooch from A League of Their Own. She’s overlooked because she’s not pretty, which (in this case) makes PayLease Geena Davis. We are calling Marla (expense management) out and saying ‘hey, this girl can actually play ball!’

In other words, let’s focus on expense and revenue if we’re trying to drive NOI.

Can you relate to this next scenario? You’re traveling for work, and the first thing you do once you enter your hotel room is crank the AC because (guess what?) you’re not paying the electric bill. While you’re at it, you go ahead and take a nice long shower because you’re not paying for the water bill either. Which brings us to an important question – why do properties include utilities in the price of rent?

One reason, some might say, is the cost of water. Why not include it? After all, water is not that expensive compared to gas and electricity, except that in recent years the cost of water has been drastically rising. This may be obvious in states like California where we experienced that biblical drought that had us swapping our green grassy lawns for desert rocks and cacti.

What’s surprising though, is that we’re also seeing a 130% increase in the cost of water over the past four years in states like Georgia where there’s no hint of a drought.

Moral of the story is, even if your property is in a state with an abundance of readily available cheap water, if you’re including it in your rent, then we can guarantee your residents are using more than they should. Hello! That means it’s affecting your bottom line.

Including utilities in the rent is like giving your residents access to an all-you-can-eat buffet. It is wise to consider switching to a consumption-based billing method instead. You might be thinking, ‘but residents prefer the all-you-can-eat method, I’ll lose them if I switch.’ For many years this was true, but recently consumers’ mindsets have started to shift. Every year, more and more organizations are adopting these sustainable strategies not only to reduce expenses, but because consumers are aligning themselves with products and services that have adopted such initiatives.

Just look at the following stats from SolarCity:

  • 72% consumers want to learn more about corporate sustainability initiatives
  • 75% of consumers would be more likely to buy a product or service if the company is making an effort to be sustainable
  • 82% of consumers are more likely to purchase a product that represents Corporate Social Responsibility than one that does not
  • 93% of Americans have done something to conserve energy in the past two years

What does all this mean? It means sustainability is the tie-breaker. They won’t choose your property because you’re conserving, but if a potential tenant is debating between two properties that are very similar except for the fact that one is ‘green’ and the other is not, conservation will win the battle.

From an NOI standpoint, it makes more sense to separate the utilities so that you can use more of your rent revenue towards the bottom line of your property as opposed to paying off high utility bills.

Let’s say property ‘A’ includes water in the rent price, and the residents of this property have a leaky faucet, or their toilet is running. They decide not to report it because, why would they? They’re not paying for the wasted water, they don’t want the maintenance guy coming into their apartment, and they don’t own this property, so they just don’t care. Because of that, property ‘A’ is giving (on average) an extra $100 a month from their rent revenue to the water company. To make up for some of the cost, property ‘A’ decides to increase the rent by $50.

Property ‘B’ installs sub-meters and decides to charge each unit for their individual usage. So instead of increasing the rent, they keep the rent price as is and charge the resident back for the utilities they actually use. Because the residents in property ‘B’ are now conscious of this, they start using less water, gas, and electricity and pay around $50 a month out of their own pocket for their personal utility bills.

Because of the $50 rent increase at property ‘A’ and the $50 utility charges at property ‘B,’ the total out-of-pocket expense for both residents is about the same. However, the owner of property ‘A’ is still handing money over to the water company every month, while the manager at property ‘B’ is using those recouped costs to increase their NOI.

When you take the utilities out of the rent and don’t increase the rent price, three things happen. One, the resident will use less electricity, less gas, and less water, saving the planet little by little. Two, the resident will be happy their rent was not raised, and will consider this when the time comes to renew their lease again. Make your property sticky, people! Three, you are no longer paying the utility bills, which will result in a higher NOI for your property. It’s a win-win-win!

Hopefully now you are at least entertaining the idea of billing back your utilities to your residents, and if that’s the case, then the next question is, ‘how do I get started?’

Click here to learn the two different ways you can bill back utilities to your residents, and find out which is right for your property.

 

Written by Victoria Ress and originally posted on PayLease

Infographic: Fun Facts about Recouping Rent, HOA Dues and Utilities

We’re so excited about the upcoming release of our annual Market Survey, that we couldn’t keep quiet about the results. This year, 1,300 HOA, multifamily and single family firms participated in our survey, answering questions about resident payments, utility billing, utility expense management, and Accounts Payable. We’ll soon be releasing the results in a white paper called, A Property Manager’s Guide to Payments, Billing and Utility Management.

Until then, we rounded up some juicy tidbits from the survey that you can see in this infographic.

 

Written by Jennifer Stahlman and originally posted on PayLease