Not your father's utility management program

  • Published March 2016

Just ask Donald Trump. Or Toby Bozzuto. Or Charles Ratner (Forest City).

Not your father

Each grew up with, and eventually stepped in to run their family's apartment business. Each took the baton and carried their multifamily enterprise into the next generation, and continues to grow their operation to accommodate this ever-changing, brave new world. These aren't just stories of tremendous growth or wealth. Simply maintaining the solvency of their businesses meant bringing processes and assets forward, while assessing the value and benefit of their business methods in present-day terms.

It's true. Their operations are some of the nation's largest and renowned in multifamily, but no one inherits timeless operations. Businesses are living and breathing things in need of constant attention. Every move, no matter how big or small, can have a serious impact on the bottom line. So how did they transcend an industry not only known for extreme economic cycles and low margins, but a rapidly changing world of regulations on everything from apartment lending and financing, to utilities and conservation?

Large or small, family business or publicly held, operational complexity and multiple levels of risk remain inherent to multifamily business. To add to the field of exposure, nearly every issue in the public forum affects the business of apartments in some way from fair housing to immigration to conservation. And if it is of public concern, it is likely that new regulations will soon follow in an attempt to stay in front of innovation, demographic trend or shift in supply. This is where the game of cash flow and asset value is the apartment owner's to win or lose as they navigate the method, risk and cost of compliance.

Most recently and as a consequence of the Administration's sweeping climate change initiative, energy and utilities have become of particular focus to apartment operators, and residents, alike.

Even before the shift in public sentiment and policy, utilities were a multi-faceted, while critical component of apartment operations, and the third highest cost to a property. The utilities function on a property, spanning everything from utility purchasing and projections, to bill handling and calculation, to benchmarking and conservation, are a facet of property management that had begun to trend away from onsite or in-house handling as field data proved greater net return on using outside, professional agencies.

Herein we explore the reasons for this continuing shift within the dynamic of property management procedure, and consider the cost-risk analysis in keeping utility billing programs in-house versus outsourcing it to a specialized agency.

Extreme changes in the regulatory climate
The topic of climate change and its place in the national conscious are unmistakable. The net effect in legislation and the social collective is pervasive. New laws and ever-broadening oversight are only the beginning of the far-reaching push of national climate change initiatives and their direct impact on the bottom line of apartment owners and developers.

"Cities are increasingly taking the lead in reducing greenhouse gas emissions," says Jane E. Montgomery, attorney and partner with Schiff Hardin. "In fact, many U.S. cities have set emissions reduction targets that are far more aggressive than federal goals. These regulations-which so far include emissions reporting requirements and building efficiency standards-may affect a wide variety of businesses in cities across the country."

In navigating this new horizon and its tangible impact on utilities, and the management of those utilities inside apartment communities, owners are concerned by three up-and-coming areas reflecting the greatest change: 1. compliance, 2. consumption and 3. conservation.

While the majority of the country's renters pay for their own utilities either through submetering or customized ratio utility billing system (RUBS)-billing methods, vacancy recovering, submetering and other integrated processes are falling under increased scrutiny by a variety of agencies, the scale of which depending on the property's location and local governances. There are many stakeholders, seen and unseen, in line with these rules and regulations spanning utility oversight.

To property owners, this nets out to an escalating cost of compliance and all that it entails, but it can also mean added layers of risk.

Such risk becomes even more meaningful as many of the new, and untested rules are challenged, not yet exacted, or owners have no way of complying due to lack of data. Even then there can remain conflicts precluding owner compliance such as when gathering the required utility consumption data clashes with privacy laws. The net take away-it's complicated and growing more so every day. A third-party provider can not only untangle the confusion more rapidly, but provides a layer of accountability away from the owner and property.

The ebb and flow of regulations is only one dimension of the matrix. Beyond legal requirements and in an ever-expanding populist culture of social media, conservation is a big topic and public shaming has become not only a means of bloggers and commentators, but a deterrent used by cities and other agencies to abate energy waste and compel conservation. The unfortunate risk to a community's brand can be harsh and far-reaching to its ability to maintain occupancy or command certain rents without both retrofits and the time necessary to gather new, improved data, and then expand it into the public view to override previously poor performance results.

In 2010, the city of New York began collecting energy data on its multifamily buildings and participation was compulsory. In 2012, New York City released its first report on the energy use of these multifamily buildings. This report was particularly remarkable because it was the first of its kind to provide a public analysis and detailed disclosure of the energy use by individual building, and specifically compared it against similar buildings, usually the building's competitors. Now residents, prospects, and anyone who cares to know can look up any building and compare its energy performance to others. Other cities have since followed New York's lead including Austin, Boston, Minneapolis, Philadelphia, San Francisco, Seattle, D.C. and the list continues to expand.

Such implied risk to a community's brand can have an immediate and long-term effect on rents and occupancy, and are a challenge to overcome.

Compliance: laws remain fluid
While attention has long been focused on energy use in the direct consumer/single-family sector, it has only recently made its way to multifamily. The irony is that the multifamily sector is the largest, single dispenser of utilities in the nation, surpassing that of single-family homes, retail and offices. Adding to its importance, the world of energy and the business of dispensing it through utilities are changing by the second.

At the end of January 2016, Congress began working on the first major energy legislation in nearly a decade. Two key goals of the bipartisan initiative are to update the nation's power grid, and to address the sweeping transformation of how power is produced in the U.S. One thing is certain: the interest in utilities will only intensify.

A new smart grid would cost as much as $476 billion according to the Electric Power Research Institute, and would monitor customers' use of utilities remotely from a central location, rather than requiring onsite monitoring from gauges at homes. Clean air regulations also continue to reshape the country's power systems as electric utilities shutter coal-fired power plants and replace them with alternative energy sources.

Through this transformation, regulators on all levels, local, state and federal, remain busy. The new number of federal regulations alone broke all records in 2015: 3,378 final rules and regulations, and 23,901 notices were added to the Federal Register. Another 2,334 proposed rules remain in various stages of deliberation. The majority of last year's federal rules are aimed at energy and the environment, and the net effect on apartment businesses are projected in the billions (some estimates have been as high as $183 billion).

Typically, the nation gets its procedural lead from the top. As such, a single, but significant example of the unsettled nature of today's regulatory environment is the Clean Power Act. This particular initiative gives life to many of the Environmental Protection Agency's (EPA's) newest regulations, contributes to energy supply and demand, and eventually impacts utility costs to owners and residents.

At the end of January, a coalition of 25 states requested that the U.S. Supreme Court stop some regulations from taking effect until certain legal challenges had been resolved. In January, Chief Justice John Roberts was asked to immediately bar the EPA from enforcing the Act set to be heard in June.

The result, no matter the final decision or continuing political climate, is that the nation's energy is in flux as are the regulatory agencies tasked with overseeing the transition. Navigating this environment is tenuous, at best. It requires expert guidance, and counsel that is current on the up-to-the-minute disposition of rules at all levels. Continuous monitoring and the need for a wide field of knowledge from legal standing at any given time to utility markets, pricing and projections, is best served through a bank of committed professionals to the individual fields of expertise versus the limited capacity of an in-house team.

Consumption: benchmarking for value, stability and leverage
In a perfect world and most logically, you can't hit a mark if you don't have a target. As such, getting