With all the panic/ecstasy of data centers being built in Central PA, the one thing that is certain is that the demand for electricity and water is increasing. Many people are concerned that the additional demand will increase our utility costs going forward.
These data centers will bring jobs and a lot of investment in the local economy, which is a positive for local real estate investors.
- A data center in Lancaster is expected to bring a $6 Billion Dollar investment into the facility and power grid updates, with an addition $2.5 Billion in a future phase.
- In Carlisle, an expected investment of $15 Billion is expected.
- Southern York County has a $5 Billion data center in the works.
- Meanwhile, Amazon has committed $20 Billion to several data center sites and power infrastructure upgrades in PA, the largest private sector investment in the state ever.
- Many other sites are also rumored to be in the works, with competition for sites, power and zoning challenges heating up.
One of the best things a Real Estate investor can do at the current moment is to protect themselves from rising utility costs, which is likely to come because of the demand that development of this level will put on the infrastructure.
Here are some suggestions for you as an investor to help your utility costs.
- Remember that Landlords cannot profit off of any difference in utility costs versus what they charge a tenant, but passing on and/or reducing these costs benefits both owner and tenant.
With utility cost making up 10-18% of an average apartment building’s operating cost, smart investors will focus here to reduce and stabilize this ongoing expense.
- Electric:
Yes, it is standard that most tenants pay their own electric. However, there are some avenues of benefit for owners here:
- Solar:
While solar investment credits will be phased out in the next few years, there is an window of opportunity for Landlords to get the Commercial Investment Tax Credit for installation of solar panels on their buildings.
- While most apartment buildings will have meters where their tenants pay the utility provider directly, the electric used for common areas, laundry rooms, parking lot lighting, etc can add up.
- Due to the 30% Investment Tax Credit, Landlords can take the credit, take accelerated 100% bonus depreciation, and benefit from a large tax incentive.
- What makes this possible from a financial standpoint is the Net Metering rules in PA & MD. This laws permits solar generation by property owners, and any excess supply can be sold back to the grid at retail rates.
- Example -Here’s how it typically breaks down:
- System Cost: $100,000
- ITC (30%): $30,000
- Adjusted Depreciable Basis: $100,000 − (50% × $30,000) = $85,000
- Bonus Depreciation (if eligible): $85,000 deduction
That’s potentially up to $115,000 of total tax benefit in the first year alone when you combine the credit and deduction.
- Gas:
Most Landlord costs of gas is due to hot water heating, or overall heating of a building if the property has common heat.
- For Common Heat:
- Focus on reducing heating use by sealing air leaks around windows and doors, installing smart a thermostat, and insulating pipes for hot water heat systems.
- Ensure HVAC equipment is up to a modern efficiency standard, and have it served regularly.
- For Hot Water:
- Insulate water heaters and piping that carries the hot water
- Replace old water heaters – gas water heaters are more efficient
- Install low flow faucet heads in showers and sinks
- Water & Sewer:
Water and Sewer rates can vary widely based on the municipality and the method of metering.
- Water:
Since water charges are directly based on gallons used, decreasing water usage is the easiest way to reduce this cost.
-Toilets are one of the largest culprits of water usages, replace with newer toilets that use less water per flush.
-Install low flow shower and sink heads
-If you have a common laundry room, invest in newer machines that use less water and sense the size to adjust the water usage.
– Submeter: With today’s technology, wireless water submeters can help to monitor tenant’s water use, and institute a RUBS program to ensure water is used effectively, alert you to leaks, and move the cost on to the tenant appropriately.
- Sewer:
- Some municipalities charge based on a flat fee per apartment units for sewer use.
- Other areas charge based on how much water is used, if the water and sewer are both owned by the municipality. Directly reducing the usage of water will reduce the sewer cost, a win- win.
- Trash:
Some municipalities require that their contracted waste hauler be used for a building
- Other municipalities allow an open market only on Commercial classification, so if you own apartments of 5 units or more, make sure you verify if you are permitted to shop for service. A competitive quote can help your cost significantly.
- For smaller apartments, some municipalities will allow tenants to pay their trash service directly. Alternately, you can institute a charge built in to ongoing rent for the cost of the service.
Conclusion:
While utilities can be viewed as a boring subject, conserving these resources will become even more important for multifamily owners as the cost for basis services continue to mount in an inflationary environment and the mounting demand.
Consider these conservation measures to enhance your return and stay on top of the best cash flow ratio for your asset.
Many clients we work with appreciate the in-depth knowledge that we are able to provide to assist them in finding profitable investments. If you are looking to grow your investments contact us today to discuss your strategic plan.
Sources
-https://energydigital.com/articles/amazons-nuclear-energy-deal
-https://ir.talenenergy.com/news-releases/news-release-details/talen-energy-expands-nuclear-energy-relationship-amazon
-https://www.abelpersonnel.com/inside-central-pas-26-billion-data-center-investment-a-new-digital-corridor-is-here/#:~:text=Amazon%20Web%20Services%20(AWS)%20is,new%20Lancaster%20area%20data%20center.
-https://www.cpbj.com/5b-data-center-coming-to-york-county-energy-site/#:~:text=$5%20billion%20data%20center%20to,create%202%2C500%20new%20construction%20jobs.
-https://www.cruxclimate.com/insights/tax-equity-clean-energy-credits?utm_term=tax%20credit%20financing&utm_campaign=ls-search-non-branded-buyers-sellers-
-https://h2odegree.com/whitepaper-smart-water-submetering-saves-money-in-affordable-housing/
