The Compounding Value of Technology, Part III: Utility Recovery

“What’s our recovery rate on utilities?”

Despite the direct impact on cash flows, this question often goes unanswered, especially when looking at a portfolio of assets.

Worse, the answer to the more important question: “what could we do to increase our utility recovery?” is buried in a maze of excel files.

The challenge is common and persistent. Every file is different. Seemingly innocuous variations, such as the day of the month that a meter reading was performed, can force property managers to manipulate formulas to make numbers “feel” right.

Do that enough times and mistakes are inevitable. Some lead to errors within one billing period, others become systematic.

In the previous two articles on productivity and tech consolidation, we discussed how technology’s immediate benefits also set the stage for more quantifiable sources of value.

This article on utility recovery, and all subsequent articles in this series, will focus on those quantifiable sources of value, all of which are impossible to achieve without the initial adoption discussed previously.

Eliminating Errors

The most obvious way to increase utility recovery is to eliminate underbilling that often comes with maintaining disparate excel spreadsheets.

Technology does so by:

1. Digitizing utility bills automatically so there are no potential typos in rates or tariff structures
2. Ensuring that meter reads are performed consistently, whether manually on an app, or automatically through remote meter reads
3. Performing calculations in a standardized way (while also having flexibility to account for premiums or other factors negotiated in specific leases)

In one example, the on-site team in a property in New York had always had a hunch that they were undercharging tenants for their submetered usage. Unfortunately, the spreadsheet they used had been created by staff that no longer worked at the company.

In the first month of taking over the billing, Enertiv identified that the spreadsheet was assigning either the supply or delivery charge from electric utility bills to determine the rate, instead of using a blended rate approach which incorporates both the supply and delivery charges.

Correcting for this error increased recovery by 70%. Annualized, that simple change added $100,000 to the bottom line of the property.

Optimizing Vacant Spaces

Whether tenants are billed back by landlords, or are directly metered by the utility company, the landlord is responsible for utilities consumed in vacant spaces.

Without technology, it’s simply too cumbersome to monitor the costs of these transitory utility accounts. As such, vacant spaces continue to consume energy and water, ultimately adding to thousands of unnecessary dollars spent by the property.

Fortunately, the technology here does not require complex upgrade of sensors and controls, it simply requires transparency into tenant meter consumption, a byproduct of a tenant utility billing solution, or shadow metering for ESG reporting purposes.

With this data, property teams receive real-time insights on vacant spaces consuming higher-than-necessary utilities, as well as quantifying the cost of this consumption.

Advances in Submetering Hardware

Submetering is the practice of installing individual meters for each tenant within a property, allowing landlords to bill tenants directly for their utility consumption.

While this practice has been around for some time, recent advances in metering technology have made it more affordable and accessible than ever before.

Whether it’s simplifying installation so an electrician or plumber is not required, or it’s capturing data encoded in radio frequencies, these advances are changing the return on investment equation.

Deploying submetering and transitioning away from pro rata or RUBS-based cost allocations can increase cost recovery, as well as promote fairness and transparency to tenants.

Likewise, it unlocks the vacancy insights mentioned above, speeding up the return on investment when combined with robust software solutions.

Conclusion

Across a portfolio of assets, there are bound to be assets where tenants are fairly and accurately billed for their consumption. In assets with robust processes, there may even be strategies to limit the utility costs to landlords borne by vacant spaces.

However, in aggregate, the overwhelming likelihood is that technology can deliver significant bottom line value by eliminating errors and identifying hidden costs from utilities in vacant spaces.

Of course, we are still in the early stages of how technology can build from simple productivity improvements, to actually compressing cap rates at dispositions.

More to come in future articles in The Compounding Value of Technology series.