Definition
Utilities are the essential services required to operate a property—such as water/sewer, electricity, natural gas, and trash. In underwriting, “utilities†refers to the expense line item (or sometimes a recovered pass-through) that can materially impact NOI.
What Utilities Commonly Include
- Water & sewer: domestic water, sewer charges, stormwater fees (market dependent).
- Electric: common-area power (hallways, exterior lighting, clubhouse) and/or unit power if master-metered.
- Gas: heating, hot water, cooking, and sometimes laundry.
- Trash: hauling, dumpsters/compact, recycling, valet trash (if offered).
- Other (sometimes): irrigation, propane, oil heat, geothermal service fees.
Who Pays Utilities?
Utility responsibility depends on property type and metering:
- Tenant-paid (direct metering): tenants have individual meters and pay the provider directly.
- Owner-paid (master-metered): the owner pays one bill and may or may not recover it from tenants.
- Shared/recovered: owner pays, then bills tenants via a recovery method (common in multifamily and commercial).
Utility Recovery Methods
Multifamily (common structures)
- RUBS: Ratio Utility Billing System (allocates costs based on unit size, occupants, or other formula).
- Submetering: measures usage per unit, allowing more precise billing.
- Flat fees: fixed monthly utility charges (simple, but may misprice usage).
- Bill-backs: separate line items such as “water/sewer bill-back†or “trash bill-back.â€
Commercial (typical structures)
- NNN / expense pass-throughs: tenants reimburse operating expenses (including utilities) per the lease.
- CAM: common-area utilities often recovered through CAM charges for multi-tenant properties.
Why Utilities Matter
- NOI sensitivity: utilities can be a large, inflation-sensitive operating expense.
- Behavioral impact: when tenants pay their own usage, consumption often declines.
- Operational leverage: conservation and metering upgrades can drive durable NOI growth.
- Risk management: leaks, aging infrastructure, and billing errors can create surprise expenses.
How Investors Underwrite Utilities
- Use trailing history: review 12–24 months of bills for seasonality and anomalies.
- Normalize for occupancy: utilities scale with occupied units; vacancy periods can distort averages.
- Check billing structure: confirm what is owner-paid vs. tenant-paid vs. recovered.
- Model increases: utilities often rise faster than general inflation in some markets.
- Plan improvements: submeters, low-flow fixtures, leak detection, and irrigation controls.
Example
A 100-unit property is master-metered for water/sewer. The owner pays $120,000/year for water and sewer but bills back $80,000/year via RUBS. In the model:
- Utilities expense (water/sewer): $120,000
- Other income (water/sewer bill-back): $80,000
- Net utility burden to NOI: $40,000
If the owner converts to submetering and improves recovery to $105,000/year (with usage reductions), NOI improves by $25,000 (before considering installation costs).
Common Pitfalls
- Double counting: treating bill-backs as “free money†without matching the underlying expense.
- Ignoring leaks: chronic leaks can destroy the utility line item and signal deferred maintenance.
- Misreading the lease: commercial pass-through language varies; confirm what’s reimbursable.
- Seasonality blind spots: a single month’s bill can be misleading (heating/cooling cycles).
- Assuming recoveries are stable: vacancy, delinquency, and policy changes can impact collections.