RUBS Income in Commercial Real Estate – A Landlord’s Guide
August 13, 2019
A Ratio Utility Billing System (or RUBS) is an important resource for landlords who want to allocate utility costs to their tenants. In this article, we’ll describe how RUBS income works and weigh its advantages and disadvantages. Also, we’ll explain how to implement RUBS in your multifamily property and review the ratio utility billing system formula. Finally, we’ll review some ratio utility billing system legal issues and answer a few FAQs about RUBS income.
For more articles related to being a landlord, check out our Complete Guide to Multifamily Financing and our Complete Guide to Master Lease Agreements.
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What is a Ratio Utility Billing System?
Many properties have utility hookups with only a single meter on the property. That is, there aren’t any submeters for the property’s tenants. Typically, the landlord pays the monthly utility bill and recoups the cost from the tenants. The question then becomes how to ensure that each tenant pays its fair share for utility usage. This includes utility items such as water/sewer, electricity, trash, and gas.
RUBS utility billing is a method to allocate utility costs to tenants without the expense of installing and setting up submeters. Basically, the concept is to set up usage ratios for each tenant. That is, each tenant pays a certain ratio of each month’s utilities bills using one or more metrics. Explicitly, the metrics might include square feet of leased space, the number of unit occupants, and possibly other criteria. Or it may include some combination thereof. Interestingly, many utilities will implement a RUBS for real estate to bill tenants directly.
Advantages of RUBS
The advantages of a RUBS for real estate landlords include:
- Improved Revenues: The landlord no longer has to pay out of its own pocket for utilities. RUBS income allows landlords to receive reimbursement from tenants for utility expenses.
- Reduced Capital Costs: Adopting a RUBS means you don’t have to pay any costs for submeter installation. In fact, you don’t need to make capital expenditures to initiate a RUBS program. Clearly, this makes RUBS a highly attractive alternative to submetering, which does engender potentially exorbitant capital costs.
- Conservation: Typically, usage drops when tenants have to pay for their utilities, no big surprise there. According to Eric Odum a Commercial Real Estate Broker from Tampa, Florida: “You just divvy up the water bill 10 ways….watch water usage drop.” Apparently, nothing motivates resource conservation like having to pay for resource utilization. This is human nature at its finest.
- Forced Appreciation: A RUBS program transfers utility costs from the landlord to the tenants. The landlord benefits from forced appreciation equal to the cost savings divided by the cap ratio.
Disadvantages of RUBS
Unfortunately, RUBS can present some disadvantages as well:
- Resistance from Existing Tenants: Old tenants may object to having to pay for their own utility usage. In fact, you may even lose a tenant or two, though this may be a blessing in disguise.
- Noncompliance: Some tenants may refuse to pay their RUBS bill. Naturally, you can’t turn off service to the whole building just because of one noncompliant deadbeat. Therefore, you must then decide whether to evict the tenant or perhaps install submetering.
- Competition: Many tenants prefer submetering to a RUBS because they can exercise more control over their expenses. Therefore, if you offer RUBS instead of metering, you might be at a disadvantage to competing properties. In fact, one comment left on a forum stated that: “Not having individual meters is simply unprofessional. A smart tenant will avoid a property setup like this. It really is not hard to install submeters in most cases.”
- Small Cost Savings: Submetering prices have come down in recent years and hooking up a building may not be that expensive. Therefore, landlords face reduced incentive to use a RUBS instead of submetering.
How to Implement RUBS for Your Multifamily Property
You should consider the following steps to implement a RUBS for your multifamily property:
- Prepare a study of the needs and goals for a RUBS at your property.
- Make arrangements with the local utility company to reimburse your master payments with payments from tenants.
- Issue a notice to all tenants about the program to establish a RUBS. Include a start date for the new system.
- Update your billing system to confirm that you have all the facts you need to calculate the proper ratios.
- Review recent master utility bills and add them to your billing system.
- Verify that the billing system generates the right utility bills according to the ratios you’ve chosen.
- Create and distribute the first month’s utility bills to tenants. Instruct the tenants to send their payments to the utility companies.
- Receive monthly reimbursement RUBS income checks from the utilities involved in the RUBS.
As you can see, it’s preferable to go through a third party than to accept the utility checks directly. Hopefully, this helps remove suspicion about any dishonest dealings regarding RUBS income.
How to Calculate RUBS Income
The goal of a RUBS is to equitably divide up a master utility bill between all of your tenants. Accordingly, you must develop an allocation formula that reasonably correlates to utility usage. For example, we’ll concentrate for a moment on water usage. The ratio utility billing system formula might include factors such as:
- Square footage of each unit
- Number of occupants in each unit
- Number of bathrooms and water fixtures
- Presence of washing machines and dishwashers
Note that each specific utility will require its own unique formula. For example, a gas utility bill might reflect presence of gas stoves, gas HVAC, and gas fireplaces. Conversely, electrical utility usage would reflect the number and type of light fixtures, electrical appliances, and electrical systems.
Based on various factors, you assign a percentage of the total master bill to every tenant. For example, suppose your RUBS assigns a factor of 10 percent to Tenant A within an 8-unit multifamily property. Thus, if the master water bill is $500 for the month, you would bill Tenant A $50 ($500 x 10% = $50).
Ratio Utility Billing System — Legal Issues
The predominant legal issue for RUBS deals with the equitable allocation of the master bill. California leaves legal issues involving RUBS up to local municipalities. For example, landlords in Santa Monica sued the city for permission to charge RUBS amounts without referencing rent controls. The court disagreed, however, declaring that RUBS is rent in California. It recommended the landlords consider submetering instead. Without a doubt, you’ll find similar cases arising in New York, Utah, New Jersey, Georgia, and many other states. Therefore, it makes sense to get a competent legal opinion before instituting any RUBS program.
RUBS Income FAQs
Is a ratio utility billing system right for me?
It could be if you have a property without submetering. It works best if all the tenants are new. Adding a RUBS might meet resistance from existing tenants, so be careful introducing the program. It should seem fair to all parties involved.
What does the future of RUBS programs look like?
More and more, utilities and third-party companies are offering to administer a RUBS for a fee. In the future, more landlords might turn to third-party management of RUBS. The third parties will likely include property managers.
What does RUBS mean in real estate?
RUBS stands for Ratio Utility Billing System. This system allocates utility bills using factors like square footage and the number of occupants. It is an alternative to submetering that landlords can introduce with little to no capital expenditures. Truly, it offers a mix of advantages and disadvantages for you to consider.
Where can I find state-specific info on landlord-tenant law?
Here you can find overviews of landlord-tenant law for these states:
If your state is not listed above, you may use this state-by-state guide to landlord-tenant legislation.