SF Apartment : April 2017

FEATURE

Paying Through the Tap

On September 26, 2016, Governor Jerry Brown signed a landmark measure (SB 7) by Senator Lois Wolk (D-Davis) to encourage responsible water use and conservation. Individual water meters and sub-meters will now be required in all new multifamily apartments and in other multifamily residential buildings.

“When a large part of our population—renters—do not receive a water bill, there is no incentive on their part to conserve. SB 7 will change that by mandating water sub-meters in all new apartment units, which will also help renters and property owners lower their water bills through reduced unnecessary water use,” said Debra Carlton with the California Apartment Association, one of the bill’s supporters.

“Eighty percent of the 15.6 million Californians living in apartments or other multifamily buildings are not billed for their water use, meaning nearly a third of the state’s population doesn’t know how much water they’re using or how much they are charged based on their use,” said Wolk. “Given the extent of the drought and the need for greater water conservation in California, all of the state’s residents should be armed with the knowledge of how much water they’re using to help them reduce their water waste.”

This bill is a positive step for new construction and it makes perfect sense in the long run for a state that, while currently under threat of flood, generally has more demand for water than supply.

Right now the bill applies only to new construction. But what about the thousands of existing buildings in a city like San Francisco? There are approximately 172,000 units under rent control in 13,000 buildings in San Francisco that were built prior to 1979. Almost all of these buildings were built at a time when water was inexpensive, so only one water meter was installed to measure how much water each building used. The owner of the building would typically pay the water bill each month and tenants had no idea how much water they used or how much it cost. As Debora Colton noted, “No direct water bill equals no incentive to conserve on the part of tenants. This not only encourages waste, it results in high water bills for the owner.”

Options for San Francisco Property Owners
While some options are more realistic than others, San Francisco property owners—even those with older buildings—have a few options.

SFPUC Sub-Meters
One option for locals is to put in separate San Francisco Public Utilities Commission (SFPUC) water meters for each unit in a building. According to J.J. Panzer of the Real Management Company, “It’s been a long time since we last did this, but my dad converted two of our properties to separate water meters many years ago. The fees have skyrocketed since then; I think it costs over $10,000 per meter in fees, and then you have to pay your plumber and you have to excavate the street and sidewalk to install the pipes.” I called the SFPUC to verify the cost and found out that meter conversion is not usually done for older buildings, but the cost could potentially be $9,380 per meter leading to the building. That means converting a 10-unit building to individual meters, including the new service costs, would be prohibitively expensive—almost $100,000.

The average water bill for a 10-unit apartment building of mostly studios in San Francisco is about $8,000 per year ($66 per month per tenant) as of 2016. It would take more than 10 years to recover the cost of converting a building of that size to individual water meters for the owner.

To complicate things further, even if a building were converted to separate physical individual water meters, the conversion could only be activated as tenants vacate their units over time. Once a unit eventually turns over, the new leases can be written where the tenant pays for their own water on this separate meter system. Long-term tenants who have had their water paid by the owner would continue to get their water for free until they move out, but with the new meters in place, at least the owner would know how much they were using. It would take many years before 100% of the tenants would be responsible for paying for the water they use.

A further barrier to setting up separate meters is that this type of conversion is unlikely to be reimbursed to the owner through the Capital Improvement Passthrough process. It would likely be denied by the rent board as a capital improvement passthrough due to the fact that it is an improvement that moves the cost of consumption over time from owner to the tenant.

In these two different return-on-investment analysis scenarios for SFPUC meters and Capital Improvement Passthrough reimbursement, it’s pretty clear it will take so long to return the cost of conversion that no one would think of pursuing this strategy.

Now the SFPUC has undertaken a number of needed, but expensive, water system improvements to be completed in the next few years. The rate increase for water service for these improvements is projected to be 100% over the next seven years. So, that average rate per tenant of $66 per month mentioned above will double to about $132 per month. This will further motivate owners to try to move the cost of actual water consumption to the actual users of the water. See adjacent sidebar for information on Water Bond Passthroughs.

Wireless Sub-meters
Another solution is to install non-SFPUC meters and bill back their use to the tenants. In a phone interview with Paul Mazza, National Sales Manager of Delta Utility Solutions in Acworth, Georgia, I learned that it is possible to have less expensive meters installed and this is done throughout the country in older buildings much like those in San Francisco.

In this scenario, the owner installs individual wireless sub-meters at a cost of roughly $250 to $500 per unit (for the meter and installation), significantly cheaper than the SFPUC meters. The meters are read monthly and each tenant is billed for their actual use. This retrofit requires an actual person to read the meter each month or the owner could have a more expensive wireless reading system installed.

Mazza has worked to install these systems in San Francisco working with a local company called Greenview Utility Management. I spoke with Daniel Sharabi, CEO of Greenview, and the San Francisco story became both more clear and more complicated. He said, “While it is true that in a perfect scenario there are individual lines running into each unit, which would allow an individual sub-meter to be installed, the reality is that most of the pre-1979 rent-controlled housing in San Francisco is not plumbed in this way.” Plumbing is run from one unit to another from the ground floor leading up to the top floor of the building. Typically, this configuration has three to five units per line running up a stack of the building.

Ratio Utility Billing Systems (RUBS)
There is an alternative solution being successfully implemented in San Francisco that has no need for hardware installation. Greenview’s Ratio Utility Billing System (RUBS) Program works when new leases are written. The tenants agree to pay a charge back for consumption based on occupancy. The simple math is one tenant uses a certain allocation of water, the second a 60% addition, the third another 30% addition to that, and so on. (The declining consumption is due to economies of water used in a living environment.) This theory is based on years of study of actual water consumption data in these types of buildings in San Francisco. Part of their core value proposition is the assessment of deductions (Common Area and Good Will) to offset anomalies and consumption variance from unit to unit. For example, a unit with high water appliances, such as clothing washers, might pay more than a unit without one. Their program has been well received by rent-controlled tenants. The feedback they are getting for their “Full Transparency in Consumption” program creates a sense of community that inspires conservation efforts via tenants’ own awareness of usage.

In an interview with David Wasserman, a Greenview client who is also a well-known San Francisco Rent Control attorney and Rent Board Commissioner, I found another recent development on the allocation that puts a further wrinkle in the equation. Mr. Wasserman points out, “With the ordinance from Supervisor Jane Kim in November 2015 that essentially permits subletting and the addition of roommates, it is impossible to understand how many people are or will be in the future inhabiting a unit.” He feels the only way to implement an allocation post-ordinance would be to use a unit square footage fraction of the total unit square footage.

There are no easy answers when it comes to water, but as you can see, costs are going up astronomically. At the same time, there is a strong interest in San Francisco to conserve water and one way is by allocation of actual usage. By doing the research, talking to the right people, and including your tenants in the conversation, there are some viable options to mitigate the increased expense while at the same time encouraging individual conservation.

Terrence Jones is a senior broker associate with TRI Commercial and specializes in the marketing and sale of investment properties. His business specialty is San Francisco rent controlled apartments. He has extensive experience with properties with special circumstances. He can be contacted at 415-786-2216 or by email at [email protected].