Many properties utilize meters for individual tenant spaces to collect data around electricity and water use, and bill each tenant for their share of total building consumption. Often, a third party reads the meters and sends the invoices on behalf of the owner or property management company.
In recent years, meters capable of real-time collection have enabled owners and property managers to digitize and automate their tenant submetering process.
Naturally, the question of whether to upgrade has boiled down to return on investment.
Tenant submetering is increasingly becoming common practice around the country, and even mandatory in places like New York City due to regulations such as Local Law 88. As such, landlords and property managers are looking for hard numbers around waste associated with manual meter readings and outdated services.
The first hard cost is the time and labor involved in collecting meter readings. A survey of property managers who handle meter reading internally found that it costs $33 per meter per month.
This may seem small, but multiplied across all tenants for each month adds up to many thousands of dollars a year just to read meters. These expenses can be completely removed with digital, cloud-connected meters.
In addition, this cost does not account for inaccuracies associated with manual meter readings. While there are no hard numbers available for this cost, the frustration and lost productivity due to fixing errors is not an insignificant source of waste.
The process of reading meters, transcribing data, allocating costs, printing and sending invoices, and collecting payments can take between 30-45 days from the end of the billing period. Because of this, the landlords usually pay the utility company first and waits to get reimbursed from tenants.
Landlords can’t wait until the last tenant covers their bill before paying the utility company, so they are forced to have a large stock pile of cash each month.
This means that they must forego other uses of that cash. Assuming a building pays $20,000 in utility costs per month, they are essentially foregoing the interest on $240,000 every year to front tenants’ utility bills. The interest from this money could add up to nearly $10,000 per year.
Alternatively, instead of interest, these cost outlays could be put towards productive investments if they were recovered quickly after the billing period through automation. The stockpile of cash that could be put towards renovations to command higher market prices, capital expenditures to upgrade equipment (and save operating costs), or a multitude of other ways. The opportunity cost of slow cost outlay recovery is a major source of waste in tenant submetering.
Whether submetering is performed in-house or through a third-party vendor, and whether the vendor uses analog meters or outdated digital meters, there are accounting costs associated with submetering.
Most estimates put the time it takes for an in-house accountant to perform all the functions related to tenant submetering at 10% of their total time.
This includes transcribing cost data from the third-party vendor into the accounting systems, generating invoices, and organizing invoices for record-keeping purposes.
If an in-house accountant makes $50,000 a year, this could cost an organization $5,000 a year in unnecessary labor spent on tenant submetering. Instead, a digital submetering service that is integrated with the accounting system to push data automatically can eliminate this cost, or replace it with more value-add accounting activities.
If there is a mid-month move-in and move-out, landlords can’t provide the bill to the tenant on the day of the move-out if readings are manually read. There is a cost associated with collecting payment from tenants that have move out.
In addition, because there is no dependable way to split the bill based on the day of the move-out, the landlord must make estimations, opening themselves up to more disputes, or potentially not collecting the full costs.
With a continuous data stream, the day the tenant moves out, costs can be accurately split up between the two tenants and invoiced on the day of the move-out.
The costs of the additional reading and collection time can add up to $3,000 per move out. While this is not a major cost on the balance sheet, it is unnecessary and frustrating.
Disputes with tenants over invoices are frustrating and costly. If tenants think they have been metered incorrectly, records will need to be covered, and time spent resolving the issue. While this generally only happens with larger tenants, disputes of any size can become disruptive to business.
If there is a suspicion that tenants have paid too much for utilities because metering was set up incorrectly, they may sue for the difference. Again, this is an extreme scenario, but it does happen.
While there is no data for the difference paid to tenants who dispute bills, or the average legal fees involved in commercial utility cost dispute, most businesses know to avoid legal fees at all costs.
Disputes can be completely avoided with modern submetering infrastructures. Because readings are taken in real-time and uploaded to the cloud continuously, any dispute can be quickly resolved by going to the data. In addition, more advanced submetering solutions provide tenants with their own portal, so they can view their own consumption in real time, and do not even need to request data from the landlord.
There is certainly an upfront cost for upgrading the submetering infrastructure. However, when all the hard costs are added together, the payback period can be very short.
Adding the costs associated with collection, long cost outlay recovery, disputes, accounting and adjustments, an average commercial property can realize a payback period of around one year by switching over to an advanced submetering solution, with the added benefit of avoiding costly legal disputes and collection costs chasing down tenants who have moved-out.
Beyond the hard costs, the soft costs associated with funds being freed up for productive investments, as well as tenant satisfaction engagement opportunities should be factored into the decision-making process.
The soft costs may have an even larger effect on net operating income than the hard costs. Creating a premium experience for tenants not only commands higher market rates, it reduces the chances of vacancies, which keeps a property sustainably profitable.
If you're looking to avoid these costs in your tenant submetering process, Enertiv provides a turnkey Automatic Tenant Billing solution. Schedule a demo today!