Buildings IoT

Utility Rates for Life of Lease vs. Tenant Billing Software for Charges Based on Real Consumption

By Natalie Patton | April 19, 2018

An exploration of pros and cons for property managers

Property owners with large portfolios are faced with two tough choices when it comes to utility billing – establish a set rate for utilities at the outset of a lease agreement or bill by real consumption on an agreed-upon cycle. Each option has its pros and cons for property owners of all kinds from CBRE and JLL to GGP, Macerich and Westfield. Here we’ll offer details on what to consider as you explore the best way to bill your tenants for utility consumption from our experience working with multi-tenant, mixed use buildings across the country.

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Option 1: Establish a set rate at the outset of a lease agreement

Prior to a glut of tenant billing software options entering the buildings market, property managers’ only choice for utility cost sharing was to roll up their sleeves and do some math. When a new tenant signed on, they’d take the total utility bill for the whole property, consider a historical reference of previous tenants with comparable space utilization needs or business operations, take the square footage of that tenant space and divide it by the total property square footage to come up with a diligent though approximate number.

While this is laborious and ultimately a “best guess” situation, just because there are other options available now doesn’t automatically make those new options better. So let’s set aside the historical precedent and any new-is-better ideologies to do some real side-by-side comparing. First, delving into Option 1: Establish a set rate at the outset of a lease agreement.

Pro Forecasting. It’s true that real energy consumption fluctuates so having a set tenant utility bill for each month or year is good for budgeting purposes.

Con – Squaring up the books. Although you have an agreed upon utility cost for the tenant, you’re still required to track the real utility usage of each tenant space. You’ll need to pay the tenants back for any overages charged throughout the year.

Pro – If it’s not broken, don’t fix it. Sometimes it’s easier and more cost-effective to stick with what’s working now. If your tenants aren’t asking for a different utility billing system then maybe the way you’re doing things doesn’t need to be reexamined.

Con – Getting left behind. We’ve seen software disrupt countless industries. Especially in the retail space, competition is fierce and tenants are getting used to incentives to keep or sign long-term leases. Small differentiation could make a big difference for anchor tenants or new prospects.

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Option 2: Use tenant billing software to charge based on real utility consumption

To reiterate, new doesn’t necessarily mean better. There is a fair bit of risk associated with changing your existing workflow and tenant lease agreements are fragile enough as it is. But property managers are finding value in new software products that plug into their existing building management systems so it’s worth taking a thoughtful look at the options available and what situations they might be used for. Here’s our pro/con list for Option 2: Use tenant billing software to charge based on real utility consumption.

Pro The numbers are real. As we already established, it’s reasonable to assume that energy consumption will fluctuate in tenant spaces. Maybe not by a lot, but then again maybe significantly. You have to track the information retroactively to square up any discrepancies at the end of each calendar year, so why not do it in real time?

Con – The numbers are real. The difficulties that accompany change can’t be understated. There is a real fear that charging based on real consumption will tighten belts for landlords in situations where every penny counts. And while this is a valid conversation to have, it should be weighed carefully with the following entry in the “pro” column…

Pro – Transparency. Tenants are asking for this, so by offering tenant billing based on real consumption at the outset of a lease agreement, your credibility as a landlord goes way up. Everyone is weary of a black box these days because software has opened up so many avenues for transparency. Your tenants are consumers too and they know that big data has made it possible to track a lot of information in near-real time.

Con – So. Many. Options. The software game is jam-packed with competition in any industry and tenant billing applications are no different. Entrepreneurs are seeking to disrupt anything they can get their hands on so it’s possible that you could settle on a tenant billing software from a hot new start-up that runs out of funding and stops working for you in a few short years. It’s hard to know which system will be around for the long haul even though everyone runs around promising the moon. As we mentioned in the previous section, it’s no small task to change the way your property management business operates or the details of what’s in a long-term lease agreement.

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One way to help sort all this out is to contact your systems integrator. They’re familiar with your existing system and if they’re good, they should be aware of the different products on the market. Your MSI can guide you through the pros and cons outlined here with an eye toward what will work with the system they’ve helped you build. For what it’s worth, OTI is having a lot of success with a tried-and-true tenant billing software application for Niagara Systems called TenantEye. We’ve been using it since it was part of a different brand and now we’re implementing the newly released Niagara 4 version. We could tell you more about why we like it, but that’s a story for a different day. You have enough to chew on.

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