The IoT retrofit on a 224-unit pencils, but who's supposed to pay for it?

Question

Sat in on a budget call for a 224-unit mid-90s garden community last week, third-party managed, fee is 3.5% of collected revenue. The manager brought a proposal for leak sensors at every water heater and washer box, plus smart thermostats in the vacants and a bulk water submeter read. Numbers they put up: about $240 a door installed, so roughly $54k, then $5 a door a month for the monitoring platform, about $13.4k a year. Their claimed return was two avoided catastrophic water events a year at $18k to $30k each, a lower insurance renewal because the carrier gives credit for monitored shutoffs, and maybe 3% off the common area water line.

The owner's asset manager pushed back hard, and I don't think he was wrong to. Every dollar of that saving lands in NOI, which is the owner's, and the manager's fee only moves by 3.5% of whatever revenue effect there is, basically nothing. So the manager is asking the owner to fund the tool that the manager will then use to prove they're an operationally sophisticated shop and go win the next assignment.

The manager's counter was that if they had to carry the platform themselves across their whole portfolio, the fee would have to be 4.25% and every owner would pay for it whether their asset needed it or not.

Both of those sound reasonable to me and they can't both be the answer on the same asset. I've seen agreements handle it four different ways and I honestly can't tell which one survives a bad year.

aliyah_b · Answer

What's inside the $240 a door? I've priced sensors for a 14-unit and the hardware was more like $60 to $90 a unit for two sensors and a hub, so most of that number is labor and a gateway per building. If a third of the cost is one electrician's week, the owner should be able to bid that separately instead of taking it as a bundled per-door price from the manager's preferred vendor.

mitchell_ray4 · Answer

Nobody has put a dollar on who answers the alert. A leak sensor at 2am is a text message, and a text message does not close a valve unless you also bought the automatic shutoff, which is a different line item and a plumber to install it. I've pulled batteries out of these things in year three because nobody had a replacement schedule. Budget an hour a unit a year of tech time on sensor upkeep and false alarms, and the $13.4k platform fee becomes more like $28k all in.

ryanmck27 · Answer

Dumb question while I'm still working through the licensing material. Can any part of that monitoring cost get billed to residents as a fee, or is that only for things like valet trash and pest? Asking because if it can, the whole argument changes shape.

samantha_ruiz · Answer

@halyard depends entirely on your state and your lease form, and some places are getting aggressive about junk fees, so that's a question for a lawyer in the state the property sits in, not for us.

@beacon on the actual question, I'd fund it as capex, but only with a written baseline. Twelve months of water consumption, twelve months of insurance claim history, and the carrier's credit in writing from the broker before I sign the PO. Managers propose these with the savings already booked and then nobody measures. If the manager won't agree to a measured baseline they don't believe their own number either.

monica_tran3 · Answer

Ran the absorb-it-in-the-fee version for two years. It ate about 40 basis points of my margin and no owner ever gave me credit for it, because a cost you carry invisibly is a cost that doesn't exist to the client. I now bill a technology charge per door, disclosed on its own line in the agreement, at cost plus nothing. Fights are shorter when the number is visible.

stephen_ok9 · Answer

The distinction that matters is capex versus opex, and it's not academic. A $54k capex item on a value-add budget competes with roofs and unit interiors, and it has to clear the same hurdle. A $13.4k annual opex line reduces NOI directly and at a 5.5 cap that's roughly $244k of value on the exit if the savings don't show up. So the manager's ask is much bigger than $54k if the platform fee never comes back out.

angela_burke · Answer

@thatch that works at your size. My whole book is 380 doors across eleven buildings and the platforms I've quoted have minimums that assume 2,000 plus. One vendor wanted $1,400 a month floor no matter how few sensors I deployed, which is $3.68 a door for me and $0.70 a door for a shop with 24,000 units. The scale story in this sector is real and it's not friendly to small managers.

brandonlee36 · Answer

I'll be the anecdote. 32-unit, third floor washer supply line let go on a Friday night, water down three stacks, $41k of restoration and two units off line for six weeks. Insurance covered most of it, my deductible was $10k and the renewal went up. I put sensors in for about $2,900 out of pocket afterward. I'd have paid it twice. Small sample, I know.

tonyv88 · Answer

We bill technology per door and it's in the agreement at signing. The argument always arrives at renewal when the owner has forgotten what the line is for and the property had a clean year, which reads to them as paying for nothing. What defused it for us was a one-page annual summary, alerts triggered, valves closed, gallons off the bill. Not elegant, but the fee stopped being questioned.

dpatel_re · Answer

Water savings go into my model at zero, and so do the avoided-loss savings. That isn't because I think they're fake. I can't verify either one at diligence and I won't hand a seller a higher price for a claim I can't test. What I will underwrite is a lower insurance quote, because that arrives as a bindable number from a broker, and on 224 units a monitored-shutoff credit can be real money if the carrier actually offers it in that state.

@beacon the version of this I'd sign is owner-funded capex with the platform fee shared, manager pays a third. Skin in the game changes whether the alerts get worked.

The IoT retrofit on a 224-unit pencils, but who's supposed to pay for it?

11 replies