RUBS Income: Will a Lender Count Utility Bill-Backs?
A ratio utility billing system, usually called RUBS, divides a building's water, sewer, trash or other utility bills among tenants using a formula based on unit size, occupants or both, rather than metering each unit. Sellers often present RUBS as new income waiting to be switched on or as income already flowing, and lenders treat those two claims very differently when they size your loan.
Lenders generally underwrite RUBS on what has actually been collected, not on what has been billed, and many want a full trailing year of collections before they give the income full credit. A program started three months before the sale may show up in the seller's pro forma at full value and in the lender's underwriting at little or nothing.
Collections usually fall short of billings, because some tenants dispute the charges, some pay late and some move out owing the balance, so a building billing $50 per unit per month across 100 units bills $60,000 a year but may collect closer to $50,000. At a 6 percent cap rate, the difference between those two figures is roughly $167,000 of value, and the seller's number almost always uses the larger one.
The formula itself deserves a look, since an allocation based only on square footage charges a single tenant in a large unit the same as a family of five, and those mismatches produce the disputes and unpaid balances that drag collections down.
Leases are the next test, because a tenant is only obligated to pay RUBS charges if the lease says so. Check whether every current lease includes the utility billing addendum, and whether older tenants were grandfathered without it. Units without the addendum produce no RUBS income until those leases renew, and some tenants will leave rather than accept the new charge.
State and local rules can limit how a billing program operates and what a new owner has to file to keep it running. In Texas, an apartment owner who bills tenants for water through submetering or allocation must register with the Public Utility Commission before sending bills, and a new owner has to report the change of ownership on the same form, so the program you are buying may need paperwork before it can legally continue under your name.
Lenders also look at how RUBS is recorded, since some treat it as other income and some net it against the utility expense, and the choice affects your expense ratio and how your numbers compare with the lender's comparables. Ask the seller how it was booked, and keep the treatment consistent in your model so the lender is not reconciling two different presentations.
The tenant side matters for your pro forma as well, because adding RUBS to a building that has never charged it is effectively a rent increase, and tenants judge the total monthly cost, so a building already near market rent may lose tenants or pricing power when the bill-back starts.
Utility charges that were billed but not yet collected at closing belong to the seller unless the purchase agreement says otherwise, so settle in the contract who keeps those balances and how they show up on the settlement statement.
Before you pay for RUBS income, ask for twelve months of billing and collection reports by unit, copies of the utility addendum for every lease and any registration or notices the program requires where the property sits. Underwrite only the collected amount, and treat billed-but-uncollected income as upside rather than price. Then confirm with your lender how it will count the income before you finalize the offer.
The collected figure is also the one that belongs in your price, since paying for billed income the tenants never paid hands the seller value the building has not produced. I help apartment buyers review RUBS billing and collection reports, separate collected income from projected income and build a model that values each one on its own terms. If you are buying a building with a RUBS program, send the billing reports and rent roll to amer@awadcapitaladvisors.com, and I can help you see how much of that income is real.