The times are a changing. Landlords have gone through a three-year period of not being able to increase rents as their expenses have been increasing and their cash flow has been decreasing. The demand by investors for apartment properties has been supercharged.

During these last few years -- while interest rates were low and the demand from condo converters was high, sellers were able to sell their properties for significantly increased prices and low CAP rates. In our market, CAP (capitalization) rates have plummeted from 8 to 6.5 percent over the past four years as prices have increased.

Maintaining high prices and low CAP rates has become more difficult as interest rates have increased and buyers remain resistant to properties that have a negative cash flow. This change in the marketplace is motivating more landlords to consider utility bill-backs for their multifamily properties.

Utility bill backs have been around for over 10 years.* Early adaptors of utility bill-backs were national investors and REITs (Real Estate Investment Trusts), and were focused on larger properties of 100 units and more. Now most developers are installing sub-metering devices in apartment properties being currently developed.

You might ask, "What is the difference between sub-meters and meters delivered by a local utility?" The answer is cost. You can install a sub-meter for as little as $200 per unit in new construction and $400 to $500 in retrofit situations. A new meter from a municipality will cost you in excess of $500, and system development fees for the meters are stupendous. See the example below for the City of Kent, Washington.

Water Meter Fees (2005)

The following charts indicate base fees for City of Kent services as found on their website. They do not include variable fees that may be required for development, such as charge in lieu of assessment, latecomer's fees, or road mitigation fees.

As interest rates go up and fewer people can afford to buy a house, the demand for apartments increases. In our marketplace we are looking at 4 percent vacancy rates. This gives the owner of smaller properties (under 100 units) the ability to increase rents or to pass on utility costs -- or both for that matter.

Owners have been able to break out power and heat with separate electric meters for a long time. Now the push is on to bill-back water expenses (and sewer since in many cases they are combined bills) as well as gas, garbage and HVAC expenses.

Of course the most effective way to do this is to sub-meter. Historically people have been dispatched to read meters. Technology has now developed to the point where sub-meters can be read electronically with digitalized signals sent via radio frequency at the 900 MHZ level to a monitoring station that receives the data.

The other option is the Resident Utility Billing System, or RUBS option, where by you or a company divide the water bill out. Normally 80 to 90 percent of the bill is divided and the rest is allocated to common area expenses. The allotment can be done many ways: by size of unit, by number of tenants, or by a formula using both of these. You will never recapture all of your expenses, but you will recover the vast majority of the utility expense. Companies that provide these services usually charge $4 to $8 per unit to help organize and then generate a bill for your tenants. In most states these charges cannot be passed on to the tenant. As an owner you will need to research the legislation in your state.

Your onsite manager plays a key roll here. Information needs to be accurate, taking into account vacant units, the number of tenants, and the regular move-ins and outs of the tenants. Some companies use a web-based system which enables the onsite manager to update information on a regular basis. In a conversion to RUBS, most owners first phase in the cost for new tenants then convert existing tenants over a 12-24 month period.

The other benefit of sub-metering or RUBS, is that national apartment association studies have shown a reduction of close to 30 percent in the amount of water that is used. This means that installing such systems helps our environment as well as helping the landlord reduce operating costs.

There are many companies offering these services. Having recently completed a series of calls, it is clear that companies do not provide equal quality of customer service. It is important to check references and ascertain who delivers the best service in your local marketplace.

Is there a down side and where does this leave you? If you do not manage the process properly you can have an exodus of tenants. You need to be fair, considerate and consistent. You also need to develop reasonable but firm policies if tenants do not pay their utility bills. You must be willing to evict a tenant over nonpayment of utility bill-backs.

The time is fast-approaching where many of your competitors will be charging back for their utilities and tenants will be faced with no other choice but to pay utilities. In subsidized housing buildings you may find that federal or state regulations may not allow bill-backs. In our marketplace we are seeing more and more property management firms, REITs, and individual owners adopting this method to recapture costs.

Commercial owners have been very successful in billing back utility costs (common area expenses/triple net costs) in retail and industrial buildings for a long time. We are seeing a national movement toward this practice in office buildings also.

As an investor / building owner you have no choice but to maximize the return on your investment. The mandates for clean water will continue to push these expenses higher and tenants need to be held responsible and to help pay the bills. They do pay these bills when they rent a house, so the leap to paying for them when they are renting apartments is not all that great. Yes, the times they are changing.

* (reference study by Dupre and Scott, Puget Sound Apartment advisors)