Utility billing risk assessment—scary or not?

Utility expense management for multifamily operators is about managing the balance between recovering resident utility costs and the regulatory requirements (including consumer protection provisions) that exist in different jurisdictions. Utility billing service providers endeavor to mitigate risk while maximizing recovery. Here are some of the considerations we face in today’s legal and regulatory environments and how to best manage uncertainty with utility billing programs.

A vitally important first step, regardless of where the property is located, is getting utility billing lease disclosures correct. The lease is a contract between multifamily operators and residents. Proper lease language obligates residents to pay for utilities separate from rent. It discloses the billing methodologies in plain language, the sources of costs that may be included in resident bills, and any administrative fees. It complies with state and local requirements regarding lease language.

Should a resident have questions about a bill, apartment operators should offer to review the lease, detailing their obligation to pay separately. This should also include methods and/or fees contained in the lease disclosure.

Multifamily operators should work with their landlord-tenant counsel to ensure that the lease language allows for modifications to billing methods and administrative fees, if allowed by law.

Affordable housing sector
The affordable housing sector presents additional, potentially “scary” scenarios for utility billing programs. Low income and tax credit properties (Low Income Housing Tax Credits or LIHTC) have numerous restrictions on rents, utility allowances, lease language requirements and reporting obligations.

However, the Internal Revenue Service granted LIHTC operators the ability to bill residents for submetered water and sewer service in 2010. The IRS promulgated a rule that can allow for submetered water and sewer to be treated as if the low-income resident were signing up with the water provider itself for service. Providers are encouraged to check with their counsel for more specifics on the rule and how this rule applies to their properties.

Get to know your utility
Once an operator has their billing programs in full swing, a good relationship with its utility billing service provider will ensure a high quality end product to its residents. The resident bills should be accurate and contain all required information. Residents should have access to all pieces of information that they need to determine whether their bills were calculated properly.

This information may include the property’s utility bills, property tax statements or other sources of utility costs, rent roll information, such as the total number of occupants or total occupied square footage of the property, submeter read information, and any required submeter testing or certification information.

The multifamily operator has continuing obligations to provide utility bills, updated rent rolls and other pieces of information to ensure that the billing program works as intended. A great relationship with the service provider can ensure that bills are timely and accurate, which benefits the residents and operators and creates resident trust in the program.

Multifamily operators and their utility billing service providers must be cognizant of state and local laws, rules, regulations, and ordinances during set-up of their billing program and during the continued operation of the program.

Many jurisdictions require registration and/or reporting by multifamily operators. Some states have detailed rules around lease language, billing methodologies, restrictions on costs and fees, and dispute resolution mechanisms.

Other jurisdictions do not regulate these practices on the state level, but their local authorities do. Other jurisdictions regulate the utility providing the service.

The ever-moving business of utility billing
All of this highlights a dynamic regulatory landscape around utility billing. Multifamily operators that proceed in good faith to comply with regulations or best practices may receive lenience from regulators for good faith unintentional violations. The State of Texas, for example, has punitive penalties for noncompliance (three times any overcharge and one month’s rent) but allows for a waiver of one month’s rent portion of the penalty if the owner can prove the violation was a good faith unintentional error.

Managing a utility billing program does not have to be a frightening endeavor. A good working relationship between multifamily operators and billing service providers can go a long way toward smoothing out operational hiccups. Strong and detailed lease language is of paramount importance to ensure a robust billing program.

The lease language will be the operator’s first line of defense if there are challenges to the billing program. Residents can and should refer to their lease language to determine whether they are being billed properly. These steps can turn potential uncertainty for operators and residents into a trusted and certain monthly process that obtains desired utility recovery results.