Estoppel Certificates

Some associations are still not complying with the new laws on Estoppel Certificates which is required of condominiums, cooperatives, and homeowners associations. Prior to July 1, 2017, you only had to provide the prospective purchaser with information about the monies owed to the association attributable to the unit being purchased.  Now you must provide a certificate with a considerable amount of additional information as described below.  If the information is prepared incorrectly you may be estopped (barred or precluded) from later going back to that individual for the funds or the violations that were omitted from the certificate.  My recommendation is that you have your attorney prepare the initial certificate and provide that certificate to your manager or management company as some of the information requires a review and analysis of your governing documents.

There is a long list of information which is required to be in the estoppel certificate found in Sections 718.116 (Condo), 719.108 (Coop), 720.30851(HOA), Florida Statutes which includes (by way of example only and not as a complete list):

  • parking or space number, as reflected in the books and records of the association;
  • attorney’s name and contact information if the account is delinquent and has been turned over to an attorney for collection;
  • an itemized list of all assessments, special assessments, and other moneys owed;
  • an itemized list of any additional assessments, special assessments, and other moneys that are scheduled to become due for each day after the date of issuance for the effective period of the estoppel certificate is provided.

The statute then requires you to provide:

  • whether there are any open violations of rules or regulations noticed to the unit owner in the association official records;
  • whether the rules and regulations of the association applicable to the unit require approval by the board of directors of the association for the transfer of the unit and if so, whether the board has approved the transfer of the unit;
  • whether there is a right of first refusal provided to the members or the association, and if there is if the members of the association have exercised that right of first refusal.

In addition, you are also required to provide a list of, and contact information for, all other associations of which the unit is a member, provide contact information for all insurance maintained by the association, and provide the signature of an officer or authorized agent of the association.

For some of you, your manager has handled this certificate when it was just a matter of filling in the amounts owed, because they took care of the accounting for the association.  However, reviewing and analyzing your documents to answer the questions on rights of first refusal and other questions should be handled by your association attorney and then provided to management for future use thereafter.  Further, if the management contract does not provide for charging for estoppel certificates the Board will need to approve a resolution in order to do so.

Originally posted on floridacondohoalawblog.com. Written by Mark D. Friedman

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.

The Association Foreclosed On A Delinquent Owner. Is The Mortgagee Entitled To The Rental Income?

Condominium and Homeowner Associations are never anxious to take on properties abandoned by owners.  Yet with the mortgage crisis many properties were left vacant for years.  In the interim, unpaid assessments continued to accrue and the properties were ripe for vagrants and were left to deteriorate, risking damage to the common elements or adjoining property owners.  As a result, many associations were compelled to foreclose, and, in many cases, had to take possession of the property.

 

For the Association, hiring a law firm to handle the foreclosure is often the easiest first step; however, once title transfers to the Association the real work begins for the Board.  While the Association is not financially responsible to the bank for the mortgage payments, the mortgage will continue to encumber the property and prevent the Association from selling the property free and clear of the first mortgage.  As a result, the Association is left with two choices upon taking title: sell the property to an investor “as is” or rent the property.

 

If the Association chooses to retain title and rent the property can it be compelled to turn over the rental income to the bank holding the mortgage before the bank forecloses on its loan?

 

Recently, the Third District Court of Appeal considered just this issue.  See UV Cite III, LLC v. Deutsche Bank National Trust Co., No. 3D16-2341 (Fla. 3d DCA 2017).  In UV Cite III the original borrower had defaulted on the mortgage and abandoned the property in 2008.  The bank filed suit in January of 2016 seeking to foreclose the mortgage.  In the interim, the condominium association had foreclosed on the property for nonpayment of assessments and deeded the property to an investor, UV Cite III, LLC in 2015 who rented the property.

 

Within a few months of filing for foreclosure, the bank filed a Motion to Sequester Rents alleging the owner failed to pay property taxes and that it would be unjust to allow the current owner to continue to collect rents and thereby profit from litigating (i.e., fighting) the bank’s foreclosure action.  The lower court granted the bank’s Motion to Sequester Rents and ordered the tenant to pay its rent directly to the court registry with the money eventually being paid to the bank at the end of its case.  This order was appealed.

 

The Appellate Court reversed holding that “absent an agreement between the parties to assign rents or some form of injunctive relief, a trial court has no authority to order a deposit of money into the registry of the court if the money was not the subject of the litigation.” Id (internal citations omitted).  The Court explained that Deutsche Bank’s foreclosure complaint failed to seek a judgment for rent collected, there was no evidence of an assignment of rents provision in the mortgage, and the bank failed to seek injunctive relief, i.e. seek a receiver of the property.  Note that even if there were an assignment of rents provision, it is likely that the assignment would be limited to rental income received by or on behalf of the borrower and not a new owner of the property who has no contractual relationship with the bank as it pertains to the delinquent mortgage.

 

Although banks tend to learn from their prior judicial missteps only time will tell whether they revise the standard contractual language that makes up the mortgage documents and/or their foreclosure complaints to add additional counts in an effort to divert rental income from the property to their benefit.  Even then, the equities favor the Association more than the bank.  For instance, the Association is essentially preserving the value of the property and the community itself by collecting funds to address the Association’s maintenance repair and replacement of obligations which are both statutory and contractual in nature.  Additionally, the Association as a subordinate lien holder to the first mortgagee is attempting to reduce not just the amounts owed in unpaid maintenance but also in interest, late fees, legal fees, and costs that would otherwise be written off and cripple the Association’s ability to meet its financial obligations. Simply put, the Association is not profiting from the rental income, but rather mitigating its damages and ultimately helping the bank out.

Written by Candace C. Solis and originally posted to the FL Condo HOA Law Blog

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

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

3 Foolproof Ways to Drive Online Rent Payment Utilization

Once you see the light and begin processing payments with an online payment provider, you start to realize that receiving less physical checks and money orders means less manual work for you and your staff. You wonder how you can get more tenants or homeowners to start making payments online. Maybe you strive to be as efficient as Rainey Realty who collects 100% of their resident payments online, and no longer pays a bookkeeper to process rent checks. If you want to start seeing more (or all) of your payments in your accounting software in real-time, may we suggest the following three foolproof ways to drive utilization…

Step one; start incurring the transaction fees.

Whether you’re using PayLease or a different online payment provider, absorbing the fees on behalf of your residents is the number one way to increase utilization, trust us! If it’s free for the tenant, you will see a majority of your residents switch and ditch their checkbooks. You may be worried that the cost to incur will exceed the cost to process manually. Yes, you are adding a cost by paying the convenience fees, but you are deleting a much higher cost to manually process a paper check. We encourage you to do some research on your end and find out how much it’s costing you to process a check manually, and then compare that to the cost to incur the fee on an e-payment. Roy Rainey of Rainey Realty did the math, and decided it was worth it; “we decided to incur the costs of e-checks, which is a nominal cost. We probably pay around $300 per month in the e-check processing fees. But since everyone pays online now, we are not paying a bookkeeper to process rent. The tradeoff is worth it, especially because our system is 100% accurate and we can see all of our payments in real-time.”

Step two; implement a system like CashPay, so that those who are unbanked have a quick, secure payment option.

With CashPay, residents can pay their rent using cash from over 25,000 CheckFreePay® retail locations which include major retailers like Walmart and Kmart, as well as smaller supermarket chains and mom and pop shops. This way, payments will automatically appear in your accounting software, and you never have to see or deposit a money order. Allison Treadwell of Franklin Management expressed to us that “each month, the number of CashPay transactions [they] receive increases and the number of money orders decreases. Residents have expressed their satisfaction with the convenience and the security of this payment option.” She also stated that their “managers are extremely happy with CashPay too, since the reduction in money orders has saved them a tremendous amount of time each month.“

Step three; get the word out!

Make sure your residents or homeowners know they have the option to make their payments online. After all, no one will use the system if they don’t know about it, so it’s important that you use the right marketing tools to notify your residents. A good payment provider will offer you free materials to help communicate your new payment feature. Email blasts, for instance, are a quick and effective way to make announcements, or drop a custom door hanger on the doorknob of each unit on your daily walk throughs or site visits if you manage multifamily properties. Have your payment provider create custom flyers for you to display in your property’s on-site office, business center, gym, pool, common areas etc. Get creative and use e-payment fliers and counter top stands to make eye-catching displays. Do you currently mail statements, notices, newsletters, etc. to your residents? If so, custom inserts are an easy way to include e-payment information in the mailings you already send out. For single family portfolios, direct mailers are a proven method of communication to residents and/or homeowners.

PayLease provides these marketing materials and more to our clients for free, so be sure to take advantage of these effective marketing tools if you are a current client. Contact your client account rep or email marketingsupport@paylease.com for more info. We’ll send you sample mock-ups using your logo and URL for approval and then fulfill, and ship the order to the address(s) you request. Letting residents and homeowners know the good news has never been easier!

There you have it; incur transaction fees, implement CashPay, and get the word out with custom and effective marketing materials, and you will be sure to see an increase in utilization and a decrease in manual payment processing. Become as efficient as Rainey Realty who told us they “don’t have to employ as many people as [they] did before using PayLease, so [they] are actually saving money. Needless to say the benefits have been tremendous for [their] company.”

Written by Victoria Rees 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

 

Utility Meters 101: How Your Property Management Company Can Recoup Utility Expenses

One of the top questions a prospective resident wants to know when they are interested in your property is, “Will I have to put any utilities in my name?”

The answer is largely determined by how your property is metered, and ultimately, how you can recoup those utility expenses from residents. There are several ways a property manager can recoup utility expenses, so let me give you a breakdown of all the scenarios that are possible.

In order to calculate what is owed for each utility, a reading must be obtained from your community’s applicable utility meter. Your property is metered in one of two ways:

Direct metered: This means that there is one meter per utility type, per residential unit. Each meter is read by the utility provider. The utility provider is responsible for calculating those usage charges and billing them directly to your resident. In most cases, the property management company is only responsible for utility charges when the unit is vacant.

Master metered: In master metered communities, there is one meter per utility type, per building. The utility charges for that community are billed directly to the property owner by the utility provider. From there, it is up to the property owner to determine how they wish to recoup those costs. Here’s how that can be done:

  • Submeter Reads: In this instance, individual meters for each residential unit are installed behind the master meter. Those meters are monitored by the owners or the submeter vendor rather than the utility provider. The readings obtained from submeters show precisely the utility consumption for each unit. Either the property management company or a third-party billing provider invoices residents for what they owe.
  • RUBS: RUBS stands for Ratio Utility Billing System. It is a method of calculating a resident’s utility charges that is proportionately based on the number of occupants per unit, square footage or other factors. Either the property management company or a third-party billing company performs the RUBS calculations and bills the corresponding charges to residents.
  • Utilities Included: Some property owners inflate the price of rent to account for monthly utility costs. With this method, property managers must factor in the possibility of rising utility rates, variance of utility usage per season, and local rental rates.

If your community is master metered, you may be wondering which of the above options is best for recouping utility expenses. Our answer: Submeters, if it is structurally and economically feasible for your property. Submeters are a win-win for both the resident and the property owner. Residents benefit because submetering provides them with a precise picture of their utility usage, enabling them to have more control over their future consumption, and if they wish, save money by conserving. Submetering also protects property owners from unbudgeted utility expenses, giving them higher net operating margins. Also, by effectively reducing property expenses, property managers can increase their property value.

When submetering is not a practical option, RUBS is great and fair alternative for calculating utility consumption. The drawback can be the process of making the calculations. This can be complex and time consuming for a property management company, which is why some prefer to outsource this task, along with billing residents, to a third party.

Lastly, there’s including utilities in the price of rent. We recommend avoiding this practice like the plague. For one, you’ll either end up undercharging your residents (meaning you have to pay the difference every month) or overcharging them, which is illegal in some states. Including utilities in the rent also means that your property’s utility bills are going to be much higher than if the residents were paying it themselves. When residents are not the ones held responsible for paying the bill, they tend to consume more. Pair that with having to charge a higher price for rent in an already competitive market, and a “utilities included” model can be quite damaging to a property manager’s bottom line.

If you need any guidance about the best way for your property to recoup its utility expenses, feel free to contact us. We’ll evaluate your current meter setup and go over some personalized options for you to effectively recoup your properties’ utility expenses.

Written by Jennifer Stahlman and originally posted on PayLease