ANCILLARY REVENUE’S WINNERS AND LOSERS By Scott Sowers, courtesy of NAA Operations Insight
PET FEES ARE UP WHILE LATE FEES ARE DOWN. As the COVID-19 pandemic continues to cast a long shadow
over the rental housing industry, ancillary revenue would seem to be a low priority. In previous years, collecting ancillary fees was an important — though legally fraught — concern. But now, with job losses mounting around the country, many apartment operators are simply focused on collecting rent on time. For example, Haven Realty Capital, based in El Segundo,
Calif., is sacrificing the flow of one ancillary revenue stream in ex- change for trying to keep its residents in place. “Month-to-month premiums were waived to allow flexibility for residents who had lease expirations during the pandemic months,” says Sudha M. Reddy, Managing Principal of Haven. In a recession, apartment operators are justifiably focused on
just “keeping heads in beds.” Operators may even need to think twice about imposing ancillary fees. But in the longer term, the COVID-19 lockdown may pres-
ent new revenue opportunities, if residents receive financial relief and the unemployment situation stabilizes. If trends such as tele- working become commonplace, the COVID-19 lockdown could change the way residents use energy and bandwidth and give op- erators the chance to consider residents’ high-speed connections to the outside world.
NOT PRESSING THE ISSUE The general rule for multifamily ancillary revenue is about 5
percent of total income, but many of the fees are also accompanied by attendant costs. In the short term, Max Sharkansky, Managing Partner of Trion Properties, based in West Hollywood, Calif., is more concerned about on-time rent payments. “We [could] charge higher pet rates and higher lease-break fees, but we’re just not pressing that issue because it’s tough out there,” Sharkansky says. “We’re signing leases, we’re doing fine, our collections are in the mid-90s. But we’re also in a 12 percent unemployment market, so I don’t know if this is an optimal time to start increasing our fees.” As the amenity wars heated up during the past decade, ancil-
lary revenue took a back seat to services, such as dog walking. But as the recession lingers, those services are also in jeopardy. “It’s so hard to compete on what has become a commodi-
ty,” says Brian Zrimsek, Industry Principal of the tech firm MRI Software, based in Solon, Ohio. “The apartment can only be so big; the pool can only be so grand. So we found operators moving
to adding services, dog-walking services, laundry pickup services and yoga classes — amenities as a service. But when a recession comes, that’s the first thing to go.” This strategy is a throwback to the 2008 housing market col-
lapse. “In 2008 they lowered prices and increased terms to lock people in,” says Zrimsek. “They’d rather have sure but thin rev- enue. In good times, it’s okay to have a little nickel-and-diming for things. We’re also seeing concessions come back. It would not surprise me if things that people charge for in the best of times they change their mind on now.”
SORRY, YOU’RE LATE Early in the pandemic, municipalities, states and the federal
government moved to curtail evictions and late fees to help keep residents in their homes. Now, six months into the crisis, what were once seen as temporary measures are being extended in many parts of the country as the apartment business takes the hit. At Haven Realty Capital, late fees have traditionally been a
large revenue stream, followed by pet rent and admin fees. “[But] late-fee revenue has dropped to zero since April,” Reddy says. “The moratorium on late fees has also eliminated the incentive to pay on time, resulting in a delay in our collections at some of the properties.” It’s the same story at Trion Properties, as Sharkansky simulta-
neously eyes what’s happening in collections and the state legisla- ture. “We’re in California, and not allowed to charge late fees,” he says. “In California, it’s open-ended. It’s a function of when they remove the emergency order. In Oregon, it was set to expire but was then extended to Sept. 30. We still get the majority of our rents in the first week [of the month], but the next 20 to 25 percent are paying in the following three weeks.”
FUTURE OPPORTUNITIES As many residents have been hunkered down for months now,
apartment operators are seeing an increase in their energy and data consumption. Even before the pandemic, says Todd Richman, Senior Vice President at Morgan Properties, based in King of Prussia, Pa., marketing contracts with cable providers and Internet providers did well for his company. Richman is predicting that addiction to Netflix and Zoom de-
pendence is going to raise the income from fees. “I would assume that once we see the numbers, we might have higher income from these services,” he says. “With people working from home, they
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