UTILITY MANAGEMENT: IT'S NOT A GLAMOROUS JOB, BUT SOMEONE'S GOTTA DO IT!
For years, landlords have struggled to manage their vast inventory of utility accounts. Kimco had this challenge as well, up until about six years ago when we decided to get our arms around this beast and implement a more efficient utility management system.
You see, utilities are one of those “nuisances” in a property manager’s job that generally gets ignored. As long as the power is on and the water’s flowing, most take an “out of sight, out of mind” approach to managing utility accounts. However, Kimco made a strategic decision back in 2011 to more effectively manage utilities, reduce wasteful spending and consumption, and start reporting its carbon footprint. But before we could do that, we needed to take inventory of all our accounts and really understand what they serviced.
This sounds pretty straightforward, right? How complicated could it be to match an electric meter to a space, or figure out what water meter feeds the irrigation system? Well, as we found out, this task was like climbing Mount Everest in a blizzard, wearing flip flops!
Kimco embarked on a multi-year journey that entailed the physical tracing of all utility lines and meters to the spaces and/or common area facilities that they serviced (irrigation systems, fire lines, etc.). In total, this project affected approximately 8,400 accounts that Kimco managed (no, this isn’t a typo!). This task was mission-critical in determining which accounts should be coded entirely to common area maintenance (CAM) and which should be billed to tenants or some combination of both. Teams spent months mapping this equipment and developing billing templates for each site that would eventually be used to code and pay all utility expenses across the country.
Things were humming right along until we hit a speed bump — a little thing called pro-rata expense allocation.
For example, when water service for a group of tenants all comes from one central water meter, the landlord has to allocate a portion of the water bill to each tenant. While this sounds simple, it’s actually very complicated. Leases are very specific about how landlords can allocate and bill tenants for utilities. The most simple and common way is when the utility company directly meters the tenant’s store, and bills them for their consumption each month. This is probably how you pay for utilities at home, and it doesn’t involve the landlord at all. If, however, the space isn’t metered by the utility company, and the tenant’s business shares a utility meter with one or more other tenants, then the landlord has to pay the invoice each month and subsequently allocate and bill the tenants based on some acceptable method that’s defined in the lease. One of the methods generally prescribed in leases is known as “pro-rata share” or “gross leasable area allocation.” This is generally a simple formula that calculates each tenant’s share, in percentage form, relative to all the tenants that share in that utility. So, if there are four tenants that all get their water from the same meter, and each are of equal size, their pro-rata share of the utility is 25 percent each.
Unfortunately, when this language was created long ago, the attorneys at the time never imagined the consequence of coffee shops, laundromats, or even restaurants and the huge volume of water they consume. If your business is selling cell phones and you operate out of a 1,500-square-foot space, and you share a water meter with your neighbor, who happens to be Starbucks or another like-minded store, you don’t want to pay a pro-rata share of that water bill. Why? Because Starbucks is selling coffee, and it consumes an enormous amount of water in a space that’s about the same size as the cell phone store. If each tenant is billed on a pro-rata share basis, then the cell phone store is going to pay a disproportionately high share of that bill. While the billing method is perfectly legitimate, and is very fair for most common area expenses, the result for water charges doesn’t always work out fairly for all tenants.
Spurred by advances in property management technology, Kimco found a more equitable and efficient approach to addressing this issue: We made the decision to install water submeters in almost all of our properties that had shared water meters — something we believe no other retail landlord had done before at this scale. Most of you are probably thinking, “That makes a lot of sense, why didn’t Kimco do this years ago?” Well, while it sounds like an easy fix, it meant that we needed to install thousands of water submeters — a multi-million dollar investment into the infrastructure of the national portfolio. In addition, we had to determine how we were going to collect the meter readings every month so that we could bill the tenants. And finally, we had to build a computer system that could collect this data and turn it into billable charges in Kimco’s accounting system.
After doing a great deal of homework on the matter, we decided to install a submeter system that communicated the water consumption data electronically, multiple times per day. Kimco now collects this data daily on thousands of water submeters and businesses at our sites across the country, which we use to bill tenants each month. We’ve even taken things a step further and are now doing a flat monthly billing for most tenants, which gets reconciled at the end of the year with the actual charges. Many utility companies offer this to homeowners and businesses for ease of budgeting and payment.
Since installing the water submeters, Kimco’s disputes for water charges have virtually gone away. Tenants can now see exactly what their water consumption is, and tie it to the utility rate from the local water authority — something they could never do before. In the future, we expect that tenants will be able to log into a secure web portal and see their daily water consumption, a capability that many tenants have asked for, and a great way to identify leaks in the water supply or unusual water consumption in the business.
This project has been a true testament to the integrity of Kimco and our commitment to doing the best thing for our tenants. As I mentioned in the beginning, to our knowledge, no other retail real estate owner the size of Kimco has done anything like this with utility submetering. The results are proving to be well worth the effort and investment, as tenants now have confidence in knowing that they’re only paying for their store’s water consumption. Utility bills are coded and paid automatically each month, we have a utilities help desk that opens and closes service across the country for our properties, and tenant water is now metered electronically, providing necessary data for billing each month. All of this has given Kimco the foundation to set targeted goals for reducing its consumption of utilities and has also provided the critical information for reporting in industry-wide and international reporting platforms.