Need Advice on Including Pass Through Utilities in Expense Ratios?

I have a question regarding including pass-through utilities in an expense ratio analysis. I am looking at the financials of an MHP and when the utility income is included in the gross revenue and the utility expense (essentially a straight pass-through of utility expenses) is included in the expenses the expense ratio is about 56%. When I use the gross revenue without including the utilities income and use the expenses without including the utilities expenses I have an expense ratio closer to 35%. The broker stated that I could increase the profitability of the Park by reducing the current 56% expense ratio, I in turn stated that since the utilities were essentially a pass-through they should not be included in the “true” expense ratio analysis because there’s not a lot I can do to improve on a 35% expense ratio. Any input on this disparity between including utility revenues / expenses in analyzing expense ratios would be greatly appreciated.

Best regards - Tim King

Tim -

Basically you are saying the utilities are (56%-35%=) 21% of the gross receipts. That sounds way high if it is for master-metered water only, but it is a reasonable expense load if you have both master-metered water and master-metered gas and electric.

What utilities are you talking about? Water only? Or water, gas, and electric?

A general rule of thumb is that master-metered water will approximate 10% of gross receipts (e.g. increase a 30% expense load to 40%). Master-metered gas and electric could certainly add another 11%.

If your park is only master-metered for water, and just water is running 21% of the gross, then I’d say you definitely have a problem - almost certainly that the park has leaks. Call American Leak Detection. But it could be that the park is on rural water. Rural water can be 2x what ‘city’ water costs.

If your 21% expense load is for water, gas, and electric, then that expense load sounds reasonable. But you have a whole additional chapter of due diligence to complete on the electric and gas infrastructure if you are responsible for the maintenance of the gas and electric lines. Electric can be better managed (e.g. if there is an overload/short in your park, you can monitor each lot’s usage, and look at the Amp boxes on each lot, and find/fix the problem. Hint: look for the trailer with 8 window A/C units). Gas is a whole different animal. If you have a gas leak, and are responsible for maintaining the gas lines, then it is much more difficult to find that sort of leak. Frank tells stories of a park that had a total gas line failure (metal pipes had been in the ground 50+ years), and it was just too expensive to re-lay the gas pipe. So he told the residents they had to convert their homes to all-electric.

Regardless of exactly which utilities are accounting for the 21% expense load, you must bill each tenant for the utilities they use. It is not only the prudent business decision, it is also the correct ‘green’ decision. You’ll find their usage drops by about 1/3 once they have to pay for their utilities.