Tenant billing is… complicated. Almost every building seems to do it a little bit differently, and the potential for human error in most processes is enormous. And that’s a problem; mistakes in the bill-back process make your tenants angry, and angry tenants make your life miserable.
The best bet for avoiding that problem is to understand the tenant billing process from end to end, including the problem areas where errors tend to find their way in. Aquicore has your back with our latest Commercial Property Manager’s Cheat Sheet on Tenant Billing.
Depending on the resource in question and the utility provider, bills tend to arrive on either a monthly or quarterly basis. With very few exceptions in commercial real estate, bills arrive for the entire building and it’s up to the property manager to recover the cost from their tenants.
Reading your bill, the most important number is obviously the total cost. For most resources - water, gas, steam - this is based on simple volume. For electricity, things get a bit more complicated. For those bills, the next most important numbers are total consumption and peak load, both of which are measured in kilowatt-hours (kWh).
Total consumption is an intuitive measure - it’s simply the total amount of electricity consumed during the billing period. The only important distinction is that the time when energy was consumed may affect the cost per kWh. During peak hours - often in the afternoon during the summer and the morning and evening during the winter - electricity is in high demand. Electricity companies charge more during these hours to encourage customers to shift their consumption patterns. Conversely, electricity is often discounted during the low demand hours overnight.
Peak load is less intuitive. Electricity isn’t like water; you can’t store it in a tank when you aren’t using it, you have to generate it and use it at the same time. (There are ways of storing energy, but they’re inefficient, slow, and expensive.) This is important because, when you look at a graph of your building’s energy use over the course of a day, you’re likely to find small “spikes.” During these periods, your energy use was much higher than the average, but perhaps only for a few minutes. That spike may have not consumed many kWh, but it required a large current (kW) from the grid.
The utility companies have a clear motive to cut down on consumption spikes. A steadier demand means that electricity companies can better plan their operations, but a spikier one - especially if spikes come around the same time - may mean that peaking power plants have to be flipped on, which costs more money.
They discourage spikes with peak load charges. In addition the cost per kWh, customers are also charged for the highest level of current that they drew during the billing period. As a result, building engineers work not just to reduce the total energy being consumed in a building, but also to keep the spikes - or “peak load” - down to a minimum.
Depending on your state and a few other factors, bills may also come with a few other, generally small fees. These cover things like the cost of administration or maintaining infrastructure.
Once you’ve paid your bills, it’s time to recover expenses from tenants, assuming your leasing structure allows you to do so. As we said above, tenant billing varies a bit in every building. Below, we’ve outlined the typical process in most modern buildings.
Once again, electricity is the odd man out. Because of peak load charges, electricity bills tend to be much larger than the rate per kWh would suggest. Bills for water, gas or steam may be only a little bit higher than the price per volume would suggest, thanks to infrastructure fees.
Regardless, calculating the blended rate is simple: Simply take the total cost of the bill and divide it by the unit that you plan to use to apportion the bills. Buildings without submeters on tenant spaces may use square feet as a reasonable analog. Buildings that do submeter their tenants tend to use the unit of consumption, be it kWh, cubic feet, or gallons.
If your building submeters tenant spaces, someone will need to collect the data from them each billing period. In most buildings, this means remembering where each meter is, physically walking to it and noting down figures on a clipboard for comparison to last billing period’s figures.
It’s clear how inefficient this process is - having a salaried employee spend several hours travelling to every meter in a large building and recording numbers is borderline absurd in this digital age - but most buildings don’t come equipped with the technology to do things any other way. It’s also error prone. An engineer might misread a number, record the wrong number, or simply record the right number with poor handwriting. With dozens or hundreds of numbers being recorded every billing period, the odds that one will be wrong are fairly high.
The next step is to calculate bills using the blended rate and either tenant floor space or the submeter data recorded in the previous step.
Calculating up from floor space is fairly simple - simply multiply the blended rate for floor space by the floor space occupied by each tenant. If the lease allows for recovery of utilities for common spaces, this should also be folded in. The process is similar for submetered billing; for electricity, for example, multiply the blended rate for kWh by the number of kWh consumed by each tenant.
In reading recorded submeter data, it is important to keep multipliers in mind. Utility meters measure a set unit, but they often display consumption of that unit in smaller figures for which a multiplier is necessary. For example, your main electricity meter might read 100,000 one month and 100,100 the next. Unless your building is improbably small or efficient, it isn’t likely to have used only 100 kWh. With a multiplier of 100x, that becomes 100,000 kWh - far more plausible.
One of the difficulties here is that, not only do different meters often have different multipliers, but the same meter may change multiplier when it reaches a certain figure. A meter may reach a predetermined value - 999,999, say - and change from it’s 10x multiplier to a 100x multiplier, making the next value not 1,000,000 (for which it wouldn’t have enough digits) but 100,000. Missing this changeover is an extremely common cause of under-billing that can go on for a long time before someone takes a close look at the numbers.
Bear in mind that this is another easy place to make simple errors that can have drastic impacts on the numbers generated. A careful, systematic approach will help you cut down on human errors before you send out your bills.
Once your bills go out, it is important to promptly send all tenant bill back data on to your accounting department or firm. This is usually fairly simple, depending on the format in which accounting expects to receive information, but it is another area where human error can find its way into the tenant billing process. Here, too, you should proceed carefully and methodically.
There are a number of factors specific to each building and lease that may affect how the tenant billing process will be conducted. The most common - lease structure, shared spaces, and metering - are addressed below.
As we’ve explored in past blog posts, there are a few types of commercial lease with regard to utility billing. A gross lease is one in which the landlord pays all utility bills and recovers costs indirectly through rent. In this situation, no tenant billing occurs.
The second most common lease structure is a triple-net lease. Under this paradigm, tenants are responsible for paying all utilities. Virtually every scenario in between is also possible, with names like “net of electric”.
Finally, some landlords and tenants make use of what’s known as a green lease, which may fall under any of the above categories. Green leases are unique in that they include language designed to facilitate collaboration between stakeholders to reduce bills and carbon footprints. That might include provisions for day cleaning, joint investments in new equipment, or even just a shared commitment to reducing utility consumption.
In some cases, different tenants in the same building may have different lease structures or provisions to consider.
Another, sometimes devilishly complex wrinkle in tenant billing comes from shared spaces. Different commercial real estate verticals may have more or less floor space devoted to shared spaces - a mall, for example, will have a lot more shared space than an office - but almost every piece of real estate will have some. These shared spaces use utility resources as well, and must be factored into the tenant billing process.
Under some leases, tenants assume some responsibility for the utilities used by shared spaces. Generally, this comes up in situations where tenants benefit in some tangible way from the upkeep of these spaces. If this is the case, the utility costs from these spaces will be allocated according to the lease.
More commonly, building owners pay for the utilities used by shared spaces. In this scenario, the shared space can be thought of as another tenant, one whose bill is calculated, but not sent. Following the same process - floor space or operating unit multiplied by blended rate - you should arrive at the cost of utilities from any given shared space.
It might seem like a waste of time to calculate the “bill” for these spaces, but the tracking will help you to stay on top of how much each space is costing you. When it comes time to invest in more efficient equipment or pursue certifications like LEED, this information will be invaluable.
As we’ve mentioned several times already, the way you calculate tenant bills will depend on whether tenant spaces are submetered or not; submetered spaces can be billed based on actual use. What is less immediately intuitive is the way that this affects overall consumption of utilities in the long run.
When property managers divide their building-level bills according to floor space, they are making the assumption that each tenant behaves in roughly the same way with respect to utility use. This assumption is basically operable in most commercial buildings, but any seasoned property manager knows that it isn’t accurate. In reality, the restaurants in your mixed-use are using far more water than the office tenants above them, or the tech company on the third floor is using tons of electricity to power its servers while the accounting firm on the fourth is pretty much just powering its lights.
What happens in the absence of submetering is that tenants who don’t use a lot of a utility are subsidizing those that do. As a result, no one has a strong motivation to cut their utility use - why would you spend time and money doing so when the gains from those efforts are just going to be distributed among your neighbors?
Submetered billing lets tenants reap the rewards of their efforts. Even tenants who aren’t dedicated to lowering their bills or saving the environment often find that they use less once their consumption is tracked and made available to them.
Aquicore and a few of the companies like it offer yet another way to do tenant billing. We’re admittedly biased, but we think Aquicore does it the best.
Here’s how it works: First, Internet of Things (IoT) sensors are attached to utility meters throughout the building. These meters interpret the pulses that utility meters can be configured to send and send utility consumption data through a 4G gateway to the cloud. If that sounds a little technical, don’t worry - the important thing is that, instead of a building engineer traversing the building with a clipboard to gather data once a month, utility data appears in a platform in real time. This means that accurate data is instantly available for use in making tenant bills.
The Aquicore platform can also keep track of most of the other variables involved with tenant billing, meaning that it can generate accurate tenant bills with little more than the input of a building-level bill. Those bills can be sent out to tenants and copied to accounting with a few clicks of a button.
The most obvious advantage here is the time savings; no more wandering halls, no more deciphering questionable handwriting, and no more calculating bills by hand. Another, even more important advantage is the reduction in human errors that can find their way into legacy tenant billing processes. Using legacy processes, it isn’t uncommon for numbers to be written down wrong, multipliers to be missed, or blended rates to be miscalculated. The results are invariably angry tenants or lost money, depending on in whose favor the error skews.
Another advantage of this approach is that detailed logging of each tenant’s utility consumption comes in handy during disputes about bills. Being able to show a tenant how his or her utility use was broken down throughout the month - or better still, alerting a tenant to unusual consumption in real time - is a powerful tool for keeping tenants satisfied and reducing churn.
Tenant billing is complicated, but with a measured approach and plenty of double-checking, it isn’t hard to do right. Or you can take the easy way out and let us do the heavy lifting: