Did you ever watch a rom-com from the 1990’s? Invariably some super popular hot ultra cool guy is given a dollar to date some bookish, plain-Jane with a ponytail and glasses. At some point in the formulaic film, someone lets down the girl’s ponytail, takes off her glasses and suddenly she is the prettiest girl in the room. Gack. Yet, as an industry, we need to do a double take, especially as the topic of rent control comes up again and again and again.
I agree with you, rent control is stress-inducing as it affects the revenue that a property can earn and thereby affects its cap rate and asset value. We focus a lot of our attention on the rent. We forget to look at what rent control does to our operating costs, specifically the cost of utilities.
Historically our industry has treated utilities, such as waste, water and, in some instances, natural gas, as costs that we really did not need to worry about. This is because we recaptured them through our bill back programs such as ratio utility billing system (RUBS). We were comfortable thinking of these expenses as uncontrollable because their consumption is based on resident behaviors. So, we focused on creating rent premiums and rent growth and thought happy thoughts that we were capturing back what we were spending in utilities as ancillary income. We were OK with a 10% rate increase in water rates, because the residents were ultimately going to reimburse us for that water. We paid the water bill, and the residents paid their allocation of that bill.
Well, rent control affects that reimbursement too.
For example, the City of Mountain View, California enacted a rent control measure called Measure V in 2016. In December 2023, the Mountain View Rental Housing Committee clarified that their rent control measure requires that RUBS charges be included in the total rent for the unit.
What is frustrating about this to landlords is that the rate of the rent increases permitted under Measure V (tied to CPI) is less than the average year-over-year rates of utility increases charged by the City of Mountain View (who is the municipal provider for water, sewer and waste), which are nearly double the CPI. This means that, if you have a long-term resident in a unit, RUBS recovery for that unit decreases over time as less and less of the utility cost can be billed back to the resident.
The Rental Housing Committee also ruled that, for all new move-ins to rent controlled units effective March 1, 2024, RUBS is not permissible. Rent control not only affects rent, but it can affect how much of your utility expenses you recover too.
So how is this a rom-com? Well, it is time to take off the glasses and undo the ponytail because sustainability is about to become the prettiest girl in the room. If you are affected by rent control and you want to decrease your costs for water by 30%, install low flow fixtures in the units. I once did a water conservation project at a mid-rise podium 200+ unit property in Los Angeles and saw the water consumption drop by 60% when compared to year-earlier levels.
You want to protect your profitability, your cap rate and your assessed value? Stop overlooking sustainability.
Prettiest. Girl. In. The. Room.
