How to Calculate and Increase the Cap Rate on Your Multifamily Asset

The financial market has changed in the past decade with an emphasis on less speculative valuing of investment properties and more reliance on hard numbers. Investors evaluating multifamily assets are far more conservative in valuing a potential purchase for income growth in both the short and long term.  As a result, it is critical to understand a property’s net value and continually look for areas to improve cash flow.

While market location and prospective neighborhood improvements are enticing, today’s buyer is more interested in the capitalization rate (Cap Rate) as a true measure of worth. Cap Rate is defined as the ratio of a property’s net income to its purchase price. The obvious first step in understanding a property’s value is to calculate the Cap Rate.

Let’s take this example:

A property of 300 rental apartments with a gross annual rent of $300,000

According to a 2013 NAAHQ survey, a master metered community spends about 46% of its income on operating costs. Of that amount, 13% is utilities. Conversely, a submetered or individual metered property spends about 53% of its income on operation costs with a cost of 6.2% for utilities.

A master metered property with an income of $300,000 will spend $138,000 in
operating expenses

A submetered property with an income of $300,000 will spend $158,000 in
operating expenses

The value of a property is calculated using a Gross Rent Multiplier or GRM.  If the property is in a good neighborhood with good occupancy, take the Annual Income x a Range of 9-11 multipliers to get what the property value should be.

GMR = $300,000 x 11 = $3.3 million

Now put it all together to get your Cap Rate:

Master Metered Property with a Net Operating Income of $138,000/$3,300,000 valued asset
= 4.27% Cap Rate
Or
Submetered Property with a Net Operating Income of $158,000/$3,300,000 valued asset
= 4.8% Cap Rate

8 Tips to Increase a Property’s Income and Reduce Expenses to Improve the Cap Rate:

  1. Never underestimate relentless collection actions – For example, if your residents know you will begin to call, email and send letters 5 days after the rent was due, they will know you mean business.
  2. Carefully screen all residents through a proven application process to avoid delinquent payers and property damage.
  3. Additional income opportunities, with little to no investment, such as coin operated laundry machines, paid parking for premium spots, storage, pet deposits and premium apartment locations are easy to implement on new move-ins and renewals.
  4. Utility recovery can be done two ways where allowed by law: submetering and allocation. A 300 unit community with a cost of $397 annually per unit and a $35,100 investment will recoup about $31,266 the first year, $85,737 year two and $97,387 year three assuming a 2.5% turnover and a 15% common area expense. Simply put, submetering requires an investment and measures each apartment’s utility use, allowing the owner to bill the resident back. A typical payback is 12-13 months. Allocation has no investment and is a billing method that assigns a portion of the utility expense to each apartment based on a number of possible calculations: by occupant count, square feet, number of bathrooms, etc. All residents signed up at move in and renewal would result in net income.
  5. Conservation of common areas in the area of lighting, building envelope, insulation and central system upgrades can greatly reduce utility expenses. Each likely upgrade would need to be carefully vetted to determine the payback so you would know exactly when to expect an increase in income.
  6. Reduce vacancy. Keep in mind that every day an apartment sits vacant on a rent of $1,000 per month, you are losing approximately $33. At a 5% vacant rate, that’s $495 a week and $14,850 a month. Make sure your leasing staff is dedicated, skilled and focused on leasing as a top priority. To borrow a hospitality phrase – “Heads in beds!” – is what the daily goal should be.
  7. Raise rents annually so residents expect an increase and are prepared for it. A lower, consistent annual increase is better than trying to increase rents drastically and losing residents.
  8. Property improvements: If there is an improvement you can make that you can charge for and show a payback within a reasonable period, consider it.

It’s worth taking the time to determine and understand your Cap Rate. Once you do, you can review your options for increasing income. Each property has the potential to increase its Cap Rate. The question is how will you make it happen and what’s the best way to do it?

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Illuminate Your Lighting Efficiency

Shedding the Light on Energy Savings

The EIA says 50-75% of your utility expenses are for electricity and of that, approximately   21% is just lighting. If you spend an average of $100,000 annually on one building that adds up to $21,000 just to keep the lights on! By simply making your lighting 25-50% more efficient, you could save up to $10,500 each year.

It sounds easy and it is. Below are some steps to get you started:

Step 1:   Determine how much you are using and spending

It’s critical to know what you are doing now so you can assess opportunities for energy savings later.  You will need 12 months of common area bills that include the building’s interior lighting.  This should include all account numbers, billing date cycles, number of days in each bill, usage in kWh and demand kW, and expense. At the end of each month, calculate the rate by dividing expense by usage. This will give you a base analysis for where you are now versus when you initiate your lighting cost avoidance program. If possible, include a hyperlink to actual bill images to be referenced later as needed.

Step 2Complete a building lighting audit

You need to know what type of lighting you have, how often it’s in use and where it’s located.  A building diagram with notes is very helpful.  It is best to do the audit both during and after business hours. Below are some examples of questions to answer:

  • Are lights off in unoccupied spaces? (Stairwells, parking levels, fitness centers, business centers, party rooms, offices, basements).  There may be opportunities for reduced or sensor lighting.
  • Are lights in the models on sensors or timers to be off when unoccupied?
  • What are the model, types, and usages for your lighting fixtures in the main hallways and business areas?
  • What are the hours when lighting is used in business areas, hallways, basements, storage, garage, fitness, and business rooms?
  • Are you installing energy efficient lighting in vacants when turned?
  • Do you have the number of fixtures, number of lamps per fixture, type/number of lamps per ballast, wattage?
  • What dates were fixtures installed and what is their condition?
  • What is the daylight availability (windows near lighting)?
  • Are the tasks performed in the space (critical or secondary)?

Step 3: Low hanging fruit: Consider where you can change lighting hours, add motion sensors, timers, light reducers and use energy saving lamp bulbs.

This is the easiest, least expensive step you can make.  You know you can’t rely on people to remember to turn off lights but for a small expense you can make sure lights not used are off or energy reduced during day light hours or evening hours. Sensors, light reducers or timers in models, business centers, fitness facilities, basements and storage areas are key energy savers.  Even in the garage and stairways, you can usually install light reducing devices that will use half the energy when not in use without violating any safety requirements. Make sure you rid every lamp of incandescent light bulbs – these not only use more energy to light the space, they put off 2-3 times the heat and last a fraction of the life of an energy efficient bulb.

Step 4Hallway lighting

Hallway lighting can easily account for a large chunk of your common area electrical bill.  By choosing the best lighting for the task you can reduce your usage by 20-50%. If the fixtures are well-maintained, it may be worthwhile to research your options for replacement bulbs that would fit and be more energy efficient. If it’s time for replacement, you may pay for the new fixtures in energy savings within a reasonable time. A simple pay back analysis can help you determine what your best option might be:

To calculate a simple payback on your investment, divide the cost of the new fixtures by the annual cost savings using current rates. You have already determined your annual usage and rates in Step 1.  Now, you can apply the energy savings by installing the new equipment to the usage once

you have that number divided by the cost of the investment.  Easy Tip: Hallways and ceilings painted in light reflective colors increase the light glow and help reduce energy usage.

Finally, once you’ve completed Steps 1-3, it’s recommended to consult with lighting experts on your findings and determine the most efficient next steps toward energy savings. You and your budget will be glad you shed some light on your energy expense!

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Water Submetering Best Practices

Preparing for a New Construction Submetering Installation

I travel quite a bit for my job and it’s a rarity when I look out the cab window on my way to a client meeting that I don’t see dirt being moved. The construction market is hot for multifamily, university and affordable housing. While some markets are seeing a slight slowdown, particularly those heavily driven by the energy industry, most are still in boom mode.

Multifamily Executive still projects 2015 new construction to rise 76 percent above the historical average to 211,000 units. This would represent the highest level of new completions in a calendar year since the 1990’s. To put it in perspective, in 2012 new completions totaled just 79,000 units.

With so many projects and tight deadlines, submetering is often overlooked in the initial planning process – even in states that require submetering on new construction such as Texas, Georgia and California. Planning early not only saves time and money but headaches for your Project Management team.

If you are a contractor, your goal is to complete the project on time and on budget. If you are an owner or management company, your goal is to recover utility expenses that otherwise hit your bottom line. With rising water costs and shortages nationwide, water meters are becoming a standard fixture in new construction. One of the biggest pitfalls for not planning that impacts both parties is the costs involved when the plumber has to go back and install tubes and couplings in each unit after he’s already completed the initial work.

Best Practices for a Seamless and Cost Effective Submetering Project

Plan Early
Don’t wait until the building is framed. The best case scenario is to include the request for submeters in the architectural plans. Also, make sure to identify which contract the submetering installation will be under – General Contractor, Mechanical Engineer or Plumber contract. You will then want to work closely with them to select the best meters for your project.

Choose Wisely
When selecting meters, make sure they are designed for horizontal installation. Work with your project team to insure sufficient room has been provided for the meter so read accuracy is not effected.  Another critical component is the AMR system. Always choose a non-proprietary AMR system to avoid technical and financial challenges as your system ages.

Central Boiler Systems
Are you installing a central boiler system? If yes, each unit must have a single entry point for both cold water and hot water with shut off valves. If you are not installing a central system, you will only need a single meter for each unit. Make sure the meter is easily accessible. Typically, next to or above the hot water tank is the best location for optimal performance.

If you are using gas to heat the boiler, make sure you meter everything so the owner can recapture gas costs associated with the water systems.

Valve Location
Valves must be in an accessible area. Preferably, valves are located outside the wall in an accessible area so the system can be maintained. If they are in the wall, access panels must be able to open. Otherwise, if valves are completely inaccessible, the building must be shut down to perform maintenance.

Tubes and Couplings
Don’t forget tubes and couplings need to be installed by a plumber during rough plumbing. These are sent by your submetering provider to the plumber or GC. It is their responsibility to install during rough in.

Timing is Everything
Do not put in a meter right before the plumber flushes out the lines. Lines get flushed when they are ready for their certificate of occupancy.

Hold the Phone
Make sure you have an Ethernet connection. Analog phone lines are being phased out and you don’t want to find yourself with an outdated connection.

Start Planning for Submetering Early in the Project
The sooner you plan, the better chances for a seamless installation. There is no financial benefit to having your plumber install a submeter versus your submetering provider. It is best to have your submetering provider manage the installation since they will need to install the transmitter and calibrate each meter to the appropriate transmitter. Properly commissioning the system to insure the transmitter is connected to the assigned unit is imperative to make sure the owner is billing the correct unit.

Be prepared to bring in reliable partners to help you select the highest quality and most cost effective submetering solution. They will also determine the best configuration for your building type. The payoff is well worth the effort – greatly increasing revenue and property value while also encouraging conservation.

                                                                                                                                                                   

Phil Neeves
National Director of Multifamily Solutions
719.304.4111   pneeves@minolusa.com

Phil Neeves, a 20-year veteran of the submetering industry, is regarded as one of the leading industry experts in heating and cooling cost allocation systems.

Prior to joining Minol, Neeves served as Vice President of Central Region for ista North America. His experience includes 16 years in the submetering industry and 14 years as an owner/partner of a full-service real estate company specializing in syndicating multifamily apartment communities nationwide. Neeves extensive expertise in submetering and energy allocation has allowed him to successfully guide clients through utility metering conversions for both conventional financed and HUD insured properties. He served three years on the Board of Directors for the National Submetering and Utility Allocation Association (NSUAA) and is a Lifetime Member of the America’s Registry of Outstanding Professionals.

Meter Point of Use Solutions

What to Do When Traditional Submetering is NOT an Option
Stacked and older plumbing doesn’t have to prevent you from measuring resident consumption

You have seen the statistics and let’s face it you don’t need statistics to validate what you already know.

A study conducted by the National Multi-Housing Council (NMHC) and the National Apartment Association (NAA) found an 18 to 39 percent reduction in water consumption in submetered dwellings compared to units that include water expenses in their rent.

Point-of-Use-Meters2

  • Measures individual consumption.
  • Controls utility expenses.
  • Increases property value.
  • Improves NOI.
  • Identifies potential leaks.
  • Promotes conservation.

The reality is for many portfolios with older properties, submetering is cost prohibitive due to older or stacked riser plumbing. You want to recover your property’s water expenses but due to regulatory restrictions – no individual consumption measurement, no recovery – you will find yourself out of compliance and in hot water with your regulatory commissions.

Water Conservation strategies such as modifying resident usage through conservation tips and rebuilding your existing water fixtures with more efficient models reduce your water expenses but what can you do if you want to bill back for actual water consumed?

Option #1: Do nothing and continue to hope somewhat will invent a new submeter for old plumbing.

Option #2: Re-pipe your entire building which is intrusive to residents and very expensive.

Option #3 – Invest in your assets by installing Point of Use Meters and start recovering your utility expenses.

Massachusetts properties spend an average of $850-$1,000 per unit/annually on water expenses.
Installing MPUs can yield a payback in less than 24 months.
Point-of-Use-Meters

The i-meter from MeterLogix allows for point of use metering while maintaining aesthetics. The meters are small and easy to install out of view. A custom designed interface card sums up input from up to eight i-meters.

An MPU or “point of use” water submeter can be used in any building regardless of their plumbing style. The difference between an MPU and a traditional submeter is that an MPU is installed on every water point in the unit (toilet, dishwasher, bathtub, shower, etc). MPU meters are permitted in states such as Massachusetts and Connecticut where submetering laws are stricter.

The rising cost associated with water is now in line with electricity and gas consumption. The result is a heavier burden on a property’s budget and more importantly profitability. Today, more and more portfolios are making the decision to bill back water consumption which results in a healthier NOI and environment.


Top 10 EASY Ways to Save Energy in Common Areas

Preparing for another winter is not something we want to think about while basking in the last days of summer, but it pays to plan! The Farmer’s Almanac forecast was spot on last winter and it looks like a cold winter is in store for many of us in 2014. Preparing for colder temperatures is essential to avoid budget busting utility bills for your common areas such as hallways, gyms, lobbies and business centers.

  1.  Sealing the building envelope (windows, doors, entrance ways and ceilings) is essential to energy and cost savings. Lack of proper insulation is a significant factor in common area heating and cooling loss. winter-outlookAn easy thing to overlook is proper insulation. This can often be done in-house very inexpensively by rolling out new insulation in ceiling spaces. Proper ceiling insulation can save as much as 20% on your heating and cooling bills.
  2. Maintaining central systems is critical. Because heating and cooling accounts for up to 56% of your building’s energy cost, make sure the HVAC is running at peak form BEFORE winter hits. Even if you need to pay an expert to do a winter checkup, it will be well worth the expense in energy savings and verifying your system can handle the upcoming chill. Tips for HVAC preventative maintenance.
  3. The Environmental Protection Agency (EPA) estimates that windows account for up to 25% of a building’s energy loss. The proper use of awnings, blinds, insulated curtains, UV window tinting in southern exposures with large expanses of glass, as well as the sealing of air gaps can have a significant impact on energy loss through windows. While windows with an Energy Star rating is ideal and can have a huge impact on your bills, it is often cost prohibitive for properties without proper budgeting.
  4. The Energy Information Administration (EPI) estimates that 21% of electric bills are related to lighting. Upgrading lighting to energy efficient bulbs is something to consider before the darker days of winter are here. There are many ways to do this inexpensively without resorting to a “capital improvement” level expense. Tips for maximizing lighting efficiency.
  5. Motion sensors are probably the lowest cost and easiest, instant energy saver in common area spaces. Why leave a light on in the model unit, gym or storage areas if no one is in there? Investing just a few hundred dollars in these devices can give you a rapid return on investment.
  6. Resealing doors with new weather stripping and capping unused power outlets are another way to stop the cold from sneaking in. Another place to address in common areas is any vent that central fans or unused air conditioning vents that meet the exterior of the building. When closing the vent is not enough, install shutter seals on the inside of the vent and make a note to remove them in spring.
  7. Phantom power or vampire load refers to energy used by equipment and appliances that are idle. Large appliances, office equipment rarely used and computers left plugged in overnight can account for as much 10% of your electric use. Conservation-TipSimply unplug rarely used items. You cannot find an easier, cheaper way to save energy!
  8. Replace appliances in common areas and offices that are more than 5 years old with Energy Star rated products. That old refrigerator may still work but it is costing you more in electricity annually than a newer, more efficient model. The same holds true for that gargantuan office copier from the 90’s in your leasing office.
  9. Programmable thermostats are AMAZING! These Wi-Fi thermostats can be easily installed, set up and programmed from anywhere. Program them to turn down the heat or A/C during evening hours. You can save as much as 10% or more in HVAC usage.
  10. Water conservation/leak detection is a commonly overlooked opportunity to save as much as 25% or more in water waste.  For example, after 5 years a toilet that was a 1.6 gallon per flush creeps to a 2+ gallon flush!  Have an experienced technician or plumber recalibrate the flush mechanisms. Also, faulty/cheap toilet flappers degrade quickly and leak over time. Replace them at least annually and use a better grade of product.  Lastly, replace old faucet washers that cause drips and aerators with low flow devices.

By taking time out this fall to do this energy savings work you may have a different conversation with your owners when it’s time to review the financial statement.  Instead of facing the heat of “Why are you over budget in utilities”? You will have the opportunity to explain how you achieved such great savings. And that would be a far cooler conversation by far!

Practical Tips for Writing a New Construction Budget

Let’s face it, writing a utility budget for the first time can seem like throwing darts in a dark room hoping you hit the target. You may get close to the bull’s eye but chances are you’ll miss.  Writing a utility budget for a multifamily community is complex but starting with the essentials is a step toward success.

Below is key information you need to begin building an accurate utility budget:

  • Property fundamentals:  Number of units, floor plan mix, common area features such as pool, clubhouse and other significant water features.
  • A current rate schedule from the water provider (which is typically available online). Call and ask the provider what rate would apply to your size community. This will vary by provider so don’t assume and make sure you verify. You will also be noting any fixed charges not based on consumption such as monthly maintenance fees, sewer capacity charges and meter size charges that may apply. Note the frequency of fixed charges which may vary from the provider consumption based charges and adjust formulas accordingly.
  • Find out if there are sewer taxes in addition to your sewer charges on the provider bill.  Check both state and county tax bills. Look for hidden sewer charges, storm water, bay fees, etc.  Again, address frequency as these may hit on a different schedule than other charges.

Click here for the complete article which includes a sample budget template.

By Kate Forsyth, Director of Energy Management for Minol

Water Rates Poised to Rise Further as Utility Debt Grows

Water rates, which for some U.S. customers have more than doubled since 2000, are probably going to increase in the short term as companies struggle with rising debt and the need to spend on infrastructure, according to a Columbia University report.

Utility debt increased on average 33 percent from 2000 to 2010, while water rates rose 23 percent, a report by Columbia’s Water Center concluded. For a third of the more than 1,000 utilities surveyed by the American Water Works Association, debt and rates gained more than 100 percent in the time period.

“The problem of escalating debt and rising rates is not a problem limited to a handful of poorly managed utilities, but includes many well-run utilities,” Ed Pinero, head of sustainability for North America at Veolia Environnement SA (VIE), said in a statement today. “Many of today’s water managers are operating in an old framework that needs to be re-examined for the 21st century.”

Water infrastructure in the U.S. needs at least $1 trillion in investment to repair and replace systems, according to a report released in March by the American Society of Civil Engineers. The group gave U.S water infrastructure a barely passing D grade, citing almost 240,000 water main breaks annually and an average reservoir age of 52 years.

The report suggests companies should improve operational efficiency, focus on environmentally sustainable water sources and explore alternative rate structures.

Veolia Environnement, Europe’s largest water company, is one of several companies and organizations that fund the Water Center.

By Peter Ward – October 14, 2013

Bloomberg