A.CRE

Ratio Utility Billing System (RUBS)

A method of calculating a resident’s utility bill based on specific factors such as occupancy rate or apartment square footage and then billing the tenant for their share of utility use. It is often used when the installation of sub meters is not financially feasible (due to the large up front capital investment) or economically feasible (due to a poorly designed utility configuration). The practice is becoming increasingly common as landlords seek ways to increase revenue and limit their cost inflation risk.

Putting ‘Ratio Utility Billing System (RUBS)’ in Context

The Scenario

Lone Star Residential Partners, a real estate investment firm specializing in core-plus multifamily acquisitions, has recently acquired The Riverbend Flats, a 150-unit market-rate apartment community located in Austin, Texas. The property was built in 2008 and offers a mix of one, two, and three-bedroom units, ranging from 650 to 1,200 square feet. The community includes modern amenities such as a fitness center, a swimming pool, and communal grilling stations.

The Problem

When reviewing operational expenses, Lone Star Residential Partners identified that utility costs (for water, sewer, and trash) were having a significant impact on the property’s net operating income (NOI). Currently, utilities are included in the rent, and tenants have no financial responsibility for their usage. This structure not only inflates expenses for the owner but also creates a “tragedy of the commons” scenario where residents have little incentive to conserve water or reduce waste.

While installing individual sub-meters for each unit would be the most precise way to bill residents for utilities, the cost of retrofitting 150 units with sub-meters is estimated at $120,000 (about $800 per unit). Given this steep capital investment, the ownership team decides to implement a Ratio Utility Billing System (RUBS) as a cost-effective alternative.

The Solution: Implementing RUBS

Instead of incurring the high cost of installing sub-meters, Lone Star Residential Partners adopts a RUBS model. Under this model, each tenant’s utility bill is calculated using a ratio based on the following factors:

  • Apartment Square Footage: Larger units consume more water, sewer, and trash services.
  • Occupancy: More occupants in a unit typically use more utilities than a single resident.

Lone Star decides to use a weighted formula that allocates 70% of the utility cost based on the unit’s square footage and 30% based on the number of occupants.

The Calculation

The total monthly utility bill for The Riverbend Flats (including water, sewer, and trash) is $15,000 per month. Here’s an example of how the RUBS calculation might work for a 2-bedroom, 1,000-square-foot unit with 2 occupants.

  • Step 1: Determine property-wide totals
    • Total square footage of all units = 120,000 SF
    • Total occupants across all 150 units = 240 occupants
  • Step 2: Calculate the percentage of utility cost assigned to this unit
    • Unit square footage = 1,000 SF
    • Number of occupants = 2
    • Square footage ratio = 1,000 SF / 120,000 SF = 0.833% of the total square footage
    • Occupant ratio = 2 occupants / 240 occupants = 0.833% of total occupants
  • Step 3: Apply weightings for the RUBS allocation
    • 70% of the cost is based on square footage, and 30% is based on occupancy:
    • Square footage share = 0.833% x 70% = 0.583%
    • Occupancy share = 0.833% x 30% = 0.25%
    • Total share of utility cost = 0.583% + 0.25% = 0.833%
  • Step 4: Calculate the tenant’s utility bill
    • Monthly utility cost for the property = $15,000
    • Share of utility cost for this unit = 0.833% x $15,000
    • Tenant’s utility bill = $124.95 per month

The Result

By implementing RUBS, Lone Star Residential Partners shifts a portion of the utility cost to tenants, directly reducing operating expenses and increasing NOI. If the firm successfully shifts even 80% of the $15,000 monthly utility bill to tenants, it will save $12,000 per month, or $144,000 annually. This has a direct impact on the value of the property.

Increase in Property Value Calculation

  • Annual savings: $144,000
  • Capitalization rate: 5% (0.05)
  • Increase in property value = $144,000 / 0.05 = $2.88 million

Why This Matters

For an investor like Lone Star Residential Partners, the decision to use RUBS instead of sub-meters not only avoids a large upfront capital outlay but also generates immediate, ongoing NOI growth. The use of a RUBS system aligns tenant incentives with utility conservation, potentially reducing utility usage across the property. From a valuation perspective, the $2.88 million increase in property value can be leveraged to refinance debt, distribute returns to investors, or enhance the exit value of the property.

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