By Joseph DeCarlo, MBA, CPM, CCIM
Even though Proposition 10 (Rent Control) was defeated in the November 2018 election, cities are allowed to enact rent control and moratoriums. The County of Los Angeles recently instituted a rental cap that remains in effect until the end of 2019, which will likely be extended.
MITIGATING EFFECTS OF RENT CONTOL OR MORATORIUMS
Many rent control ordinances are capped at CPI or 3% annually. Cities such as Santa Monica or Los Angeles have unique rules and regulations with no standardized or uniform code. While rents are capped operating expenses like trash, electricity, water, gas fees can increase freely. When operating expenses increase faster than rent, the owners operating income and cash flow decreases and could even be negative. New apartments in California, starting in 2020 will require separate meters or sub meters. Large apartment complexes usually bill back these utility costs to their tenants using an independent billing company. These outside billing companies will likely not service smaller apartment complexes due to economics of scale.
RUBS FOR SMALLER UNITS
Most smaller unit managers do not use RUBS (Ratio Utility Billing System) to bill back utilities to their tenants. If you have RUBS in place, before rent control is enacted, you may continue to use RUBS however, cannot institute RUBS unless for vacancy re-rents in City of Los Angeles. In other words, if RUBS is in place you can continue to use it. We try to promote the environmental benefits of using less utilities fees to our tenants. Installing submeters is usually very costly and not feasible.
REASONS property owners DO not usE RUBS?
- Usually we institute RUBS in lieu of a rent increase and some owners want the higher rent today
- It’s difficult to find a billing company that will handle less than a 100 unit property.
- Property Managers and onsite managers are not receptive as it is hard to explain to existing and new tenants and onsite managers need to be trained.
- Some owners and property management companies are afraid of change and the added work
- Small property owners need to find a property management firm that will do the RUBS billing and conduct the necessary training to implement.
Each tenant gets a monthly rental bill with the base rent and RUBS charges in an itemized list. We provide the tenants the actual utility bills if they question the amount, as we do not mark up any of these bills. A 2 bedroom pays a higher percentage than a 1 bedroom apartment since they generate more utilities.
Looking at the real estate tax bill, you may want to use Sewer & Water Bonds, City Services (Paramedics) etc., as part of the calculations for the RUBS charges. As these costs increase, the tenants will pay the increases vs. a rent control cap. This is similar to a commercial property net lease, except for maintenance costs. In California, Civil Code 1941.1 states “Landlord must provide a habitable unit” (no roof leaks, working plumbing & electrical, etc.). We, as the property management firm, do all of the billing and collection and charge the tenants a $4.00 p/month fee and there is no cost to the apartment owner for RUBS.
By using RUBS, which usually returns over 5% per/mo. of your gross income, you can more than likely expect to cover your property management cost for the month. That means free management for your apartment.
In summary, rent control is on the horizon and apartment owners should now do everything possible now to have secure future income practices in place that a rent control cap allows. Using RUBS, allows the owner to pass higher utility and other costs, dollar for dollar, to the tenant. RUBS is environmentally friendly as tenants will use less utilities knowing they will pay more if they are wasteful.
Joseph W. DeCarlo
JD Property Management, Inc.
Author personally owns over 100 units, previous Adjunct Real Estate Professor at Coastline Community College for over 30 years and his property management firm manages over 2,000 units.