It doesn’t quite qualify as finding money under the couch cushions, but it comes close: When property managers and maintenance staff at an RMK Management property in Chicago began noticing significant wear and tear on the carpets, RMK executive vice president Diana Pittro came up with a quick solution.
“This is a property with a younger, grad student–type demographic, sometimes their first apartment, sometimes a shared apartment,” Pittro recalls. “We were noticing when they left, or when we were on a work order, that the carpets were getting trashed. Not necessarily stained, but the nap and color were getting soiled. So I bought four vacuum cleaners, and now they can rent them for $10 for three hours, and it works great.”
Of course, RMK isn’t making money hand over fist with the program, but the company, which manages 7,000 units across Chicago and Minneapolis, is realizing an added incremental revenue stream to the property while cutting down on eventual cap-ex to repair the carpets. In essence, the residents are paying RMK in order to maintain the carpets themselves.
As apartment operators emerge from the recession, similar ancillary-revenue programs—from telecom marketing agreements to pet deposits—are generating some serious pocket change in addition to the increased rental rates the market is ready to bear.
“Ancillary revenue is anything outside rental revenue: from various application and key and pet fees to national agreements with business partners, rooftop agreements, and advertising opportunities,” says Barney Pullam, vice president of business process for Chicago-based Waterton Residential, which owns and manages 14,000 units. “There is opportunity to max out these offerings coming out of the recession. There’s a correlation between ancillary fees and market rents, and as the market starts turning around, we need to keep focused on these fees and begin raising them, as well.”
Slow but Steady
To that end, Waterton is trying to incrementally increase application fees while also encouraging its on-site business providers (think laundry equipment, vending machines, and trash services) to do the same. “There’s no reason application fees today should be $25, and confidently moving them upward or getting away from waiving those fees, as we might have done over the past two or three years, is proving to be a pretty steady income stream,” Pullam says. “The approach we take is not to take a large jump on a fee, but if you can push an application fee up $5 or $10, or raise the washer-and-dryer fees by a quarter, it can add up. It may sound minuscule, but those incremental increases do help out, and renters don’t necessarily see it that much. They won’t be overly concerned with that kind of jump.”
Indeed, incremental bumps to ancillary-revenue programs is one way to increase net operating income at a property as consumers continue to shop rent price to rent price cost comparisons. “Since prospective residents are still heavily focused on comparing the base rent to the base rent, it does our clients no good increasing rental rates and incorporating additional services if prospects are not taking these into consideration during their review,” says MarySusan Wanich, chief operating officer for Dallas-based Riverstone Residential. “Residents want the choice of additional services, and we’ve found they’ll pay for these services when offered, especially if they know that their base rental rates are still competitive with those of their neighbors and friends.”
That’s led Riverstone and its clients to offer an ever-expanding universe of ancillary-Âincome opportunities across the 162,182 units under the firm’s management, including programs for parking fees; clubhouse rentals; storage space; vending-machine revenue sharing; business referrals to drinking-water vendors and appliance and furniture rentals; utility billing; cost-recovery programs for vacant units; resident insurance marketing fees; advertising fees from local businesses; door-to-door trash services; Wi-Fi services; and telecom programs, to name just a few.
Know Your Resident
Just how much can be generated from an Âancillary-revenue program ranges from a couple of bucks for vacuum rentals to hundreds of thousands of dollars for renegotiated telecom marketing agreements (see “Getting Wired,” above). Success with any program, operators say, comes down to tailoring programs appropriate for your resident demographic and thinking creatively about how to leverage Âunderutilized community spaces or otherwise tap into an underserved resident need.
Getting Wired
Apartment operators continue to generate ancillary revenue by negotiating telecom marketing deals.
Quick: Name an amenity that consistently outranks pools and fitness centers as a top dealmaker and deal breaker for 21st-century apartment seekers. If you said access to consistent and reliable technology and broadband services, you’d be right. The hunger among wide screen TV–invested and smart phone–toting renters for voice, video, and data services is at times surpassed only by the desire for larger units and better apartment designs and finishes. With that in mind, John Gleason, managing director of asset management at Seattle-based Security Properties, recently tried to audit his company’s telecom offerings and was quickly overwhelmed.
“We just didn’t have a handle on, or a coordinated effort to manage, those agreements,” says Gleason, who decided, much like Security Properties did in hiring a consultant to find better utility recoveries, that an outside specialist could make a bigger difference. “I’d hate to think how long it would take us to even get copies of all 100 of our properties’ telecom agreements.”
Enter Moorestown, N.J.–based RealtyCom Partners, one of several industry firms specializing in the negotiation of exclusive marketing agreements with telecom providers. While the FCC in 2008 made it illegal to offer telecoms service exclusivity at a community, the agency left open the opportunity to offer those firms marketing exclusivity, a privilege most companies are ready to pony up for, either in an up-front lump sum or incrementally over time.
“A community of 500 apartments represents significant value to a service provider,” says RealtyCom Partners CEO Don Clark. “Multifamily represents 30 percent to 33 percent of the subscription base, so it’s a big target market. The subscribers average $100 to $130 a month in revenue to the service providers. If you use a multiple of eight to nine times cash flow, then that’s the value of the subscribers to the provider.”
At Chicago-based Waterton Residential, telecom marketing agreements—like all ancillary-revenue programs—are benchmarked monthly and reviewed annually for accuracy and profit potential.
“You need to be current and stay on top of bulk telecom agreements to maximize value,” says Waterton vice president of business process Barney Pullam. “A lot of times, you enter an agreement and set an annual fee, but if you’re not actively adjusting that fee, you could be leaving money on the table.”
How much money? Gleason says that engaging RealtyCom has already generated hundreds of thousands of dollars in found revenue at Security, and the entire portfolio has yet to be renegotiated. “Plus now, all of our telecom agreements are in order and presented in a nice database,” he says.
At another RMK Chicago-area community, Pittro has remodeled a basement storage locker area into a wine cellar, eliminating the cost of planned in-unit wine chillers, socially activating a community common area, and pulling in some rental revenue to cover costs. “The wine cellar isn’t for everybody—I think we’ve only rented 25 percent of the spaces so far—but it’s still successful,” Pittro says. “And it’s a way to get incremental revenue from an otherwise overly discerning resident base. So it’s become a nice perk on a classy building as much as a revenue generator.”
With as many services as it offers, Riverstone has found some of the greatest traction with some of the simpler and fee-nominal programs in its suite of ancillary programs. “Door-to-door trash services have really taken off as one of our programs offered in the past few years. With more properties moving to compactor services and recycling on site, the drop-off locations for our residents’ daily trash needs are becoming more and more inconvenient,” Wanich says. “We’ve found more residents are willing to pay the equivalent of $1.00 to $1.50 a day for four days a week (plus one for recycling) for doorstep service to avoid dealing with that bag of garbage.”
And while the improving economy has a lot of renters more willing to ante up for ancillary services, particularly those that have a real or implied resident value, Wanich cautions against a full-bore approach to leveraging ancillary programs, particularly at higher-end properties, where operators are likely better off incorporating (and communicating) their universe of services into base rent. “At higher-Âincome properties, there’s a little more austerity in the fact that what they pay for is all-inclusive, and the clientele doesn’t want to be nickel-and-dimed,” Wanich says. “They want to enjoy all of the amenities without seemingly paying extra or being inconvenienced by incremental charges.
“Across the board, if you’ve overpriced a service, you’ll hear complaints,” she notes. “If you’ve underpriced it, you’ll have a lot of takers. The key, as with setting rents, is finding the right balance between satisfaction and demand.”
