Typically, a multi-residential building has a bulk or master meter and the landlord is responsible for the entire utility bill. Suite metering, sometimes called sub-metering, allows property owners that supply utilities to account for tenants’ energy usage. Each tenant’s electricity consumption, rated in kilowatt-hours, is monitored by a separate meter. Tenants are then fairly billed for, and responsible for paying, their utility costs.
Sounds like a win-win, right?
Other than a few complications, it is.
Higher energy costs are hurting landlords
As energy costs continue to rise, landlords are looking for ways to offset these expenses. In some cases, time-of-use pricing has added to the energy consumption costs of a building, while Ontario’s 13 per cent HST levied on energy services, which cannot be passed on to tenants, has had a huge impact on many landlords. The coup de grace blow was delivered in 2011, with the provincial government’s 0.7 per cent maximum rent increase. Landlords have been reeling from the devastating impact of these green movement and economic/social policies and reforms.
The way it was
Before the scares of energy shortages in the early ’80s, many apartment buildings were designed with a single meter. A landlord either factored the utility costs into the building rent or prorated the single bill among all tenants. In the former case, landlords wound up absorbing rising energy costs since rent controls and the Ontario Residential Tenancies Act prevented (and still prevents) landlords and property owners from passing on increased utility expenses to tenants, except in an extreme situation. In the latter case, a single retiree could pay the same utility bill as a five-member family. In both cases, there was inequity.
Working with utility companies
Since then, the escalating costs of utilities, especially electricity, combined with the rapid growth in energy conservation awareness have fuelled incentive programs and cost-cutting measures. Unfortunately, there are implementation challenges and pains that have arisen between government agencies, which are driven by certain mandates that do not always align with the practical business costs of implementing such programs, and the utility companies that manage the end user relationships, provide the service of delivering energy and are tasked with finding practical business approaches to implement a government’s program.
Consider an average 11-plex apartment building that is converted to suite metering. Individual metering requires the utility company to install 12 new meters (11 suite meters and one house meter), create 12 separate business accounts, check credit references, sometimes collect and be accountable for deposits, bill each client separately, collect and process 12 separate payments, provide individual support and maintenance for each new account, and take on a notable relative increase in the risk of payment delays and defaults.
Until utility companies are legislated to take on this extra administrative and operational burden, there is little incentive for them to incur these additional costs for virtually no directly correlated profit. Nevertheless, in Ontario, these issues are being worked out and progress is being made. It takes time to overcome the challenges that are part of the process of suite meter conversion.
Once a landlord has the cooperation of a utility company, there remains the issue of converting tenants. A landlord must notify tenants in writing about a conversion and prepare them for a full day’s power outage. Once the suite meters are installed, tenants do not have to start paying their own utility costs. Existing tenants must be empowered by the landlord to make an informed decision about how they are charged for electricity. If consent is provided, the landlord must lower the tenants’ rent according to a prescribed formula.
The best time for a landlord to make the billing conversion is when an existing tenant moves out. Under Ontario’s Residential Tenancies Act, a landlord can negotiate the terms it would like in a new rental agreement, provided it does not “contract out” existing legislation.
The business case for suite metering
Despite the potential long tenant turnover timeframe, from a return on investment perspective, converting to suite meters could possibly be the best investment a landlord ever makes in a property.
For an average 11-plex apartment building that is converted to suite metering:
- The total cost, including HST, to install 11 suite meters and one house meter is $11,550 (approximately $960 per meter installed).
- The average annual electricity bill is $14,000.
- The cost reduction strategic objective is to convert eight of 11 units (or 73 per cent of the building) to suite meters within three years so that most tenants are paying their own electricity bills.
- The cost reduction financial objective is $10,220 – the average annual electricity bill ($14,000) multiplied by the cost reduction strategic objective (73 per cent).
One of the principal techniques for determining the value of an income-generating investment property is cap rate. Multi-residential properties are currently trading in large cities like Toronto between a five and six per cent cap rate. This means:
- The cost reduction financial objective ($10,220) divided by a five per cent cap rate will add $204,400 to a property.
- The cost reduction financial objective ($10,220) divided by a six per cent cap rate will add $170,330 to a property.
Landlords also need to factor in common area costs and deduct whatever rent decrease adjustment is given to new tenants, if any. Regardless, the total return on the value of the investment is substantial.
Chris Seepe is a commercial real estate broker and broker of record at Aztech Realty Inc., Brokerage in Toronto, which specializes in income-generating and multi-residential investment properties, retail plazas, science and technology-related specialty uses, and tenant mandates. He can be reached at 416.525.1558 or [email protected].