Why utility costs matter

The smart folks at GalleyEco Capital were kind enough to highlight the prior post about real estate tax appeals. Inspired by their use of the phrase “everyday financial strategies”, it occurred to me that I haven’t written much about the messages I deliver to my management companies each and every month (and twice during budgets).

If you look at the typical income statement or pro forma, revenues represent your optimistic forecasts, admin and marketing represent your ‘we can do it for that’ hopefulness, and payroll, insurance, taxes, and utilities become your ‘fixed costs’ that no one touches.

In many respects, payroll is fixed. While I’m a believer in the 1 FT position per 100 units rule of thumb, that’s not always feasible. Both LIHTC and market rate have their own reasons for falling below that ratio. So when savings are realized, it is usually because of a personnel change or a change in ownership philosophy. There is not usually a way to show year over year reductions in payroll cost.

Insurance can vary a little bit by changing the total coverage, the deductible, placing it in a pool, taking it out of a pool, or shopping it around. Additional savings are feasible in exchange for capital improvements (trip hazards, lighting upgrades, fencing, e.g.) but those are not ongoing savings.

Taxes were covered in an earlier post, but are certainly the most ‘fixed’ of the fixed costs. Furthermore, in the current environment, with budgets beyond repair and everyone clamoring for holding the line against service cutbacks, expecting a major reduction in taxes is not a sure thing.

Which brings me to utilities and why this site spends so much time on efficiency and sustainability. Efficient utility use is the one area where we can reduce material costs, improve the resident experience, cut down on routine maintenance, and achieve important community goals.

There are plenty of easy tasks that can have a measurable effect on At a property in Texas we installed solar shades on the western exposures of the clubhouse. During the summer it resulted in a 5F reduction in temperatures, reducing the use of our air conditioners and the house electric meter. At a 400-unit property with dark interior courtyards, the service team spent one afternoon a week replacing light bulbs. By converting to CFL we not only reduced the workload, we reduced consumption by 80% (2x75w bulbs replaced by 2x15w CFL). Most successfully, we completed a 330-unit plumbing upgrade in 6 weeks for $90,000. Initial results suggest that we reduced water consumption by 50%, hot water energy consumption by 60%, and monthly water bills by $9500. This allowed us to push through refinements to the RUBS.

The 2009 budgets have revealed scheduled utility increases of 8-30%. Squaring away the small, easy tasks can mitigate or reduce these increases, reduce the amount of work required by the service teams, and reduce the wear and tear on the asset.

Reducing utility costs are the easiest way to reduce your ‘fixed’ costs and highly recommended for projects during the long winter months.