Variable Lease

[Thomas Ince]

I'm looking to purchase an apartment complex that was previously offering all bills paid.  The current owner is spending a high percentage of the expenses on utilities and my fear is that it could ger worse.  The complex is on the bottom end of the spectrum and one way it gets residents is by offering "all bills paid" (no credit check on the utilities).  

I think it would be unwise to kill the all bills paid but I'm thinking of adding a new twist to it.  I'm thinking   of advertising an "All Bills Paid Variable Lease" or "All Bills Paid Green Lease".  Here is how it would work.  Assume a resident was paying $800 a month as the landlord was paying $200 in electric and water.  The new lease would say your rent $600 (base rent) + $200 (variable rent).  The variable rent is what can go up or down each month. So the first month the resident will pay $800.  During the 1st month the water and electric was $190.  Since the utilities was $190, the next month the resident would  pay $790 (600 base rent + $190 variable rent).  

My questions area:

1. Is this a common practice, can someone point me in the direction of lease that would accomplish it.  
2. Any drawbacks to this? 
3. Any suggestions? 

Thanks for any advice in advance!

[Anthony Chara]

This is common practice on some of my properties. Nothing special needed in the lease except an addendum that explains how the monthly billing will work. i.e. If the electric was $2000 for the month, how do you determine what that resident's amount will be for the month? Is it based on square footage of their unit compared to the entire complex? Is it based on number of occupants? Is it based on number of bedrooms? Once you figure that out (btw, I use the sq. ft. method), give it to your attorney to draft the addendum.

1 other note, I wouldn't lower the rent the the lowest. Using your example, I might only take it down to $625-$650. 

Putting the amount of utilities back onto the residents is a great way to get them to realize they are in control of their costs. If they see the monthly rate dropping with some marketing by you to conserve electricity/water, it may have the added benefit of actually costing them less to live in your property than it used too. In properties where we instituted a flat fee for water ($10 for a 1 bed, $20 for a 2 bed) our water usage went up!!!!  I think that was due to the 'buffet' mentality. If I'm paying for it, I'm gonna use it!!!  However, if its variable and you can show them the monthly cost and calculation, they will get it that the less they use the less they'll pay. The more they use the more they'll pay.

Having said that, be aware that you will have turnover. Some residents don't like change of any kind. As long as you budget for some extra vacancies, you'll be okay.