Think Ancillary Services; Improve NOI

Net operating income drives the search for ancillary income. How can the wealth of services out there benefit your company? By increasing levels of customer service and financial performance.

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Ancillary income opportunities are a great way to get that financial edge. What is ancillary income?

Ancillary income has grown into a property management catch phrase, yet it is still new idea. Ancillary income is non-rent revenue, additional income generated from sources other than the traditional non-rent income, such as laundry or vending machines. Ancillary services evolved from the increased level of customer service that today’s renter expects, and from the property management industry’s desire to improve income opportunities. Real Estate Investment Trusts (REITs) and larger management companies first pursued such opportunities with a focus on improving the bottom line. It’s estimated this income will continue to grow to account for an even higher percentage of gross revenue.

Unfortunately, it’s difficult to know where to begin when considering adding such services and there’s not a lot of research available.

Traditionally, REITs and larger companies hire professionals to handle this aspect of their business while smaller companies rarely have the resources to start such programs on their own. If it’s not possible to establish these programs in-house, consider hiring seasoned professionals in the business of negotiating contracts and managing such programs for multifamily.

There are a number of new companies geared toward assisting property owners in establishing and managing ancillary service programs. Before deciding to add ancillary services, research state and local laws governing various programs. Talk with several companies and your legal counsel before proceeding. Community size, location and demographics may determine whether or not a property will be a good match for the available programs.

Getting started
Seek reputable providers with a history of longevity and high standards of service. Often, these are providers already servicing your communities. Today’s renters place value on convenience and “one-stop shopping.” Successful programs are centered on transactional products associated with a resident’s decision to move: local and long distance phone service, cable TV, digital cable TV or satellite, Internet capabilities, insurance, moving and storage services, or even basic consumer needs such as newspapers and bottled water. These are generally set up to provide a convenience and a service for the resident, while also creating an additional income stream for the property.

In addition to providing valuable options for your residents, some programs have other benefit. Providing renters’ insurance through the leasing office reduces claims against your property’s policy, and helps recover some of the repair costs from accidental damage caused by residents. Residents typically only select insurance coverage when it’s presented as part of the leasing process. Renters’ insurance is a great way to protect both your property and your residents.

Plan ahead
Be competitive by offering attractive amenities including telecom options. But know this, there will come a time when these options will no longer be amenities, and your residents will expect and demand technology and connectivity. Stay ahead of the game by establishing relationships now with telecom companies and by investing in the infrastructure that will very soon be taken for granted.

You can’t sign away the residents’ right to choose
You may be asked to sign an exclusive contract with some providers. This does not, however, limit residents in their choices. They remain free to choose whatever service provider they choose. Exclusivity simply means your onsite staff promotes the designated provider, thus increasing the number of customers with that company, and as a result, increasing the revenue shared with your community. It’s a partnership, and as the leasing staff builds relationships with new residents, they share the community’s choice of service providers.

It goes back to assuming the sale. When it comes to services such as telecommunications (phone, long distance, cable or Internet) most need at least one at the time they move. When onsite staff facilitates the process, handling everything from the office, it becomes a service for the resident and ensures their move goes smoothly. It’s another part of the leasing process.

Office staff should know all there is to know about the extra services available. Successful leasing professionals inform residents of everything that is offered, just as they point out expansive closet space or a sparkling swimming pool. This is the key to a successful program.

Telecommunications: a sleeping giant
Ancillary income opportunities in the area of telecommunications came about with the Telecommunications Act of 1996. This fostered the promotion of competitive networks in local telecommunications markets. Companies traditionally unable to offer telephone service (cable companies, for example) are now providing such options. Some telephone companies now offer video alternatives as well as their standard local and long distance service plans. Recently, with the merger of a long distance and cable company, they now offer both video and telephone options. Another cable company partnered with a popular Internet service provider.

Telecommunications is evolving. Both telephone and cable are now able to provide high-speed access to the Internet over existing wiring. When the FCC opened the market for competition, these companies positioned themselves to remain competitive in the face of new rivals. As a result, these companies are willing to pay a portion of their revenue to property owners for marketing their services onsite and helping them maintain a competitive edge.

Bundling services
Residents benefit from selecting a bundled package; the more services the resident chooses from a given provider, the better the discount. Income for these revenue-generating programs is based on penetration levels at the properties. Telephone and cable will have the highest penetration rates. High speed internet access is currently lower, but penetration will grow in the years ahead. High-speed Internet solutions are offered via telephone or cable companies. Given the history of some high-speed Internet access companies who crashed and burned, this may be the safest alternative to ensure residents connectivity. Wireless onsite Internet is the next service to watch. We will see if they can make the business model succeed where others have failed.

Recover expenses through utilities
Another NOI (net operating income) source is passing through to residents their utility usage. Many companies have jumped on this bandwagon due to the fact that water and sewer bills have risen dramatically over the past decade and remain difficult to project and control. In 1995, the average apartment property owner paid $21/month/apartment in water and sewer charges (Raftelis 1996 Water and Waste-water Survey). Now, in many areas of the U.S., water and sewer costs exceed $30/month/apartment. These costs are projected to rise faster than inflation and average rent increases.

In combination with a recent upsurge in the cost of utilities, we realize usage is impacted by conservation; those who conserve on utilities those who pay the bills.
There are basically two ways to reallocate these costs back to residents. The first is through sub-metering. Most new apartments are now built with individual water meters or sub-meters for each apartment. Other communities are also being retrofitted with various sub-meters and measuring devices. Many apartments, however, cannot be metered due to plumbing constraints. In this instance a general allocation program (sometimes referred to as Ratio Utility Billing Service or RUBS) can be implemented. General allocation programs use the property’s water bill and, through a series of calculations, determine each resident’s portion of the bill. This program approximates real consumption, and subtracts out an amount for common area usage.

The nation’s water resource is dwindling. To improve conservation on your property and recover owner expense, the time has come to reallocate the cost of water to those who use it: residents. Residents are less likely to report fixture leaks and conserve water when they don’t pay the bill. The importance of water conservation is the main emphasis of such a program, and is one of the most important reasons for billing residents for their usage. Where allowed by law, property management companies are charging residents for water.

Competitive positioning: Seize the opportunity
To remain competitive, communities must decrease expenses and increase income. Ancillary services do that. Opportunities for many sources of additional income exist. Telecommunications packages, renters’ insurance, charging residents for their utility usage contribute to the bottom line.

As you consider adding ancillary programs, keep in mind that these programs already exist in the market, and may soon be a renter’s expectation rather than a bonus. Providing the best service to residents, while maintaining your company’s best interest, keeps your company on top today and at par tomorrow.

Author: Valerie Sargent