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I’ve written thousands of utility budgets for water/waste water, electric, and gas during my career in the utility management business. First, I wrote them on the multifamily side for a large REIT and then later on the vendor service side. I’ve narrowed it down to a concise, meaningful process that’s proven to be successful for my clients over the years and I’d like to share that method with you.

One Size Does Not Fit All

The best way to approach a budget is to realize that it’s far from accurate to simply use a comparable operational property adding on a potential increase in rates for new construction. Each existing property has its own utility history and new construction sites include different building scenarios, unit profiles, and utility providers. One size or percent increase does not fit all, any more than one size of jeans will fit the average customer. You must do the research and the math.

New Construction Basic Research:

1.)    Find out who the utility providers are for each service and download the rate sheets. Keep in mind that there may be different providers for each service, as well as separate state or county tax bills that may contain charges (i.e., sewer). Charges may occur monthly, bi-monthly, quarterly, annually, or any combination thereof. There are also fixed reoccurring charges that you may need to include, in addition to usage charges. Break these charges out in a spreadsheet by charge type and frequency. After you’ve done that, create a combined rate of all charges that you can apply to usage. Note: Water can be measured in cubic feet or gallonsbe sure to get that right or you’ll vastly over or underestimate your expense!

2)    Interior usage can be estimated based on the size and mix of each unit type x’s the total number of units using average use costs. Research for the latest monthly use estimates online. You can also check with comparable units in your existing portfolio but be careful not to rely too heavily on this data. Anomalies occur in fully operational sites that can skew results for new properties. While the EIA provides average electric use by state, I’d be sure to use the current rate charge of your provider vs. the rates on this site as they may be outdated. Rates go up constantly, whereas use is relatively stable unless you have a locked in rate with a procurement contract.

Here are some helpful links for usage estimates based on apartment size:

Electric Usage: https://www.eia.gov/electricity/sales_revenue_price/pdf/table5_a.pdf

Water Usage: https://www.smeng.com/wp-content/uploads/2017/09/Rules_of_Thumb2-1.pdf

Gas use is very specific and harder to estimate. It’s important to consider what is powered by gas. Is it just the gas stove or fireplace? Is gas used for heat in winter months? It’s best to do an estimate by unit type.

An excellent Gas Usage Estimator: http://www.energydepot.com/residentialenergycalculator/

3)    Common area usage is an estimate. You can try to calculate the usage based on the size pool you have, how often you think you’d refill it, irrigation, clubhouse usage, etc. but you’ll need to call in your mechanical engineer to be accurate. If the property has very complicated water features, such as lagoons, you’ll need the engineer to give you an estimate of common area use. Otherwise, I use an estimated percentage, such as 5% for a pool, 5% for a clubhouse with a full gym, 5% for irrigation, etc. Then, I take the calculated interior use expense / % interior use to get the common area use. If the common area use is 10% for a pool and clubhouse, I take total interior expense $37,933/.90 = $42,148, or, $4,215 common area annual expense.

4)    Trying to estimate electric and gas in common areas can be approached similarly by taking the common area total square feet and dividing it into the total projects square feet for a percentage (see your architectural plans). Then apply that percentage x the rate. I.e., 2,500 common area square feet/15,000 square feet = 16.7%. Then take the interior electric expense $90,000/.833 = $108,043 total electric. $108,043 – $90,000 = $18,043 in common electric expense. This will give a reasonable estimate of HVAC, plugs, and lights.

5)    Rate increases are far more important than most folks give attention to for new construction budgets. Remember that rates don’t necessarily remain the same during a lease-up. By getting this wrong, you can grossly over or underestimate your utility expenses and the blame always falls on the budget author. Unless you have a procurement contract (applies to electric/gas only), it’s critical you know what rate increases to expect and what month these will occur. I’ve found that the best way to research for expected or proposed rate increases for the budget year is online. Follow up with a phone call to the business line of the provider to verify your findings.

You can also look at EIA expected rate increases for electric and gas if you can’t find the rate increase data online or from the provider. If you can get a definite rate increase expected, and the month in which it’ll occur, that’s ideal. Then you can apply the rate increase to only the commodity increasing, on the month it’s scheduled to increase and forward. This is far better than the common practice I’ve seen of a flat % on last year’s actual utility expenses. For example, if the water rate is increasing 3.5% beginning in July of a calendar year budget, only apply the rate increase from July to December.

6)    New construction utility expenses are not less than stabilized property utility expenses. It takes a lot of water, electric, and sometimes gas to build a property. If you will only be responsible for paying the accepted units or vacant units, and construction will pay the unfinished units, you can apply your lease-up schedule to the full expense. For example, if the expense for water/sewer is $3,161 per month in your budget, you can multiply this x .15% accepted units to get your estimated monthly utility expense of $474.17. Be aware that if the lease-up schedule changes, and units are delayed or available sooner, your budget will be off and need to be adjusted if possible. You can then back out occupied units as those come into play.

Putting It All Together:

It’s important to show the unit breakdown, the acceptance schedule by month or Certificate of Occupancy schedule, the interior expense, and the common area expense in your budget. Be sure to include notes on sources and calculations for the scrutiny that’s sure to follow. Once you have a draft budget, do compare it to a similar project if possible, but don’t cave in to second-guessing facts. Just because it’s less or more doesn’t mean your budget is wrong!

For example, an operational property may have had a big water leak driving up water and sewer. You don’t want to pad or leach off budget because of a variance to a comparable site. If you’ve done your homework on the usage and rates, you should be as close as possible in a new construction budget. After all, so many factors can sway the outcome, from unit acceptance to the weather. Stand by your research and realize that this is an educated guess. Your aim should be to do the math to try and limit a big miss in the numbers.


Kate Forsyth serves as the National Sales Executive for WaterWatch Corporation, where she is responsible for shaping and implementing the WaterWatch sales agenda across all company platforms. She has previously served as the Northeastern Representative for Minol USA and as a Utility Asset Manager with AvalonBay Communities

Feel free to reach out to Kate via email at kforsyth@WaterWatchCorp.com and by phone at 585-448-2420.

 

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