For commercial property owners, energy budgeting is an involved and, in some cases, difficult project. Multifamily properties in particular are difficult to budget for as there are no nationwide programs to assist owners and facility managers.
But budgeting for energy is imperative. According to the Institute of Real Estate Management 2010 Income & Expense Survey, total utility expenses account for approximately 25 percent of all multifamily operating expenses, trailing only payroll and taxes and insurance.
Energy costs may constantly fluctuate, but owners and facility managers can use these tips to keep expenses under control and forecast what will be spent in the coming months.
First, determine if the property is located in a deregulated market. These markets are ideal for controlling energy costs: Owners can shop around for utility providers and plans that best meet their usage needs for the best price.
Many organizations plan their budgets by reviewing historical expenses, identifying a trend, and projecting it forward by adding on a guessed growth factor. Others may contact utilities to ask about projected rate increases in the coming year. While utilities often claim that no increase is expected, this just usually means that their requests to their respective oversight commissions have not been approved at the time. Again, owners may just make a guess on inflation and tack it onto the general ledger.
Both of these methods are inaccurate. Utility rates are constantly changing and are affected by factors that are uncontrollable and cannot be predicted, such as natural and human disasters, extreme weather, or political unrest.
Additionally, owners need to be aware of non-recurring expenses that might have affected the previous year’s general ledger but does not need to be incorporated into a budget, such as late fees and deposits paid to utilities. Such historical transactions should be scrubbed so they are not factored into the next year’s budget.
Another common mistake is to apply budget increases to the general ledger. For example, say that a property owner is budgeting for a 2 percent increase in gas for the next year. Some owners may apply this increase across the board for all 12 months and apply the growth assumption on a same-period basis. In other words, the budget for January 2012 is based on the January 2011 actual expenses plus 2 percent.
What’s wrong with this? Utility suppliers rarely, if ever, increase their rates right on January 1. Most suppliers will increase their rates at random times throughout the year, resulting in an off-track budget. For example, say a rate increases by 5 percent in May of this year. If you assume a 2 percent increase for 2012, the January through April 2012 budgets will be based on adding 2 percent to the old rate that was in effect during those same months in 2011, not the current rate that went into effect in May. This means that an owner is under-budgeted for the first four months of the year.
The Right Way
The most effective method is to create a budget based on actual energy usage and rates. Collect all the data from the different utility accounts and base the forecasts on this data. The assumption in this method is that usage drives cost, not vice versa. Along with usage data, you will also need to have the rate data at the utility account level.
Now it’s a simple equation of usage: x rate = $ forecast. Assumptions will need to be made regarding future rates, and inquiries to the suppliers are made with the same results as those who budget based on the general ledger.
By analyzing the usage data, areas in need of attention are identified. Portfolio candidates in need of attention are easier to discover and it is easier to forecast the return on investment for these specific projects as the account level usage and rate data are all on hand. The usage data will make it possible to benchmark, giving additional insight into a property’s performance. Forecasts will be more accurate. By identifying areas of potential savings, the forecasts can be tweaked by account and by rate.
By using the actual rates in effect at the end of the current budget period, you avoid basing any assumed increases on the old rate that was in effect during the same period last year. An analysis can be made to determine if the rates and tariffs charged by the utility provider are correct. Many times they are not, resulting in refunds or credits for overpayments along with reduced future expense. This is particularly true in Texas and Florida, where the utilities are notorious for charging incorrect rates and tariffs.
Accurate budgeting is crucial for multifamily property owners. Budget too little for utility costs and other areas of the business will suffer. Budget too much and opportunities to reinvest in your properties will be missed. Be smart about utility expense analysis and forecasting to maintain steady, healthy growth throughout your portfolio.
Howard Berends, CPM, is a senior account manager for American Utility Management and has over 20 years of experience in multifamily operations and asset management. Contact him at firstname.lastname@example.org or visit www.aum-inc.com.