Utility Budgeting Made Easier
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.
budgeting for energy is imperative. According to theInstitute 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.
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
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.
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.
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.
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
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.
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 Right Way
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.
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.
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.
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.
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 email@example.com or visit www.aum-inc.com.