Why a line item most operators overlook has become a threat to net operating income, loan compliance, and the long-term preservation of affordable housing.
Of all the costs that pass through an affordable housing property, water is the one most likely to be treated as background noise. Rent rolls, debt service, insurance, and payroll get scrutinized line by line; the water and sewer bill gets paid. Yet across the affordable housing sector, that quiet line item has become one of the fastest-rising, least-controllable, and most consequential costs an owner carries, and because of how these properties are financed and regulated, it lands harder here than almost anywhere else in real estate.
A bigger line item than it looks
On a typical multifamily property, water and sewer is the single largest utility expense, generally accounting for 30 to 40 percent of the utility budget and roughly 10 to 15 percent of total operating expenses. It is also rising faster than nearly everything around it: water and sewer charges climbed about 5 percent year over year in 2024, driven by aging municipal infrastructure, deferred capital investment, and the rising cost of treatment and compliance. Industry forecasters expect that trajectory to continue for years.
What turns a manageable expense into a structural problem is how invisible the waste inside it can be. Nationwide, 14 to 18 percent of treated water is lost before it ever reaches a user, and inside buildings, undetected leaks (a running toilet flapper, a cracked riser, an irrigation line stuck open) routinely waste thousands of gallons and thousands of dollars a year without ever announcing themselves. A leak does not show up as an alarm; it shows up as a slightly higher bill, every month, until someone happens to find it.
The squeeze unique to affordable housing
In market-rate housing, a rising water bill is an annoyance an owner can eventually pass through: raise rents, install submeters, or bill tenants back through a RUBS program. Affordable housing has none of those release valves, and that is what makes water cost uniquely dangerous here.
First, rents are capped. In LIHTC and Section 8 housing, the maximum rent is set by formula, not by the market, so an owner cannot simply charge more to cover a higher bill. Second, water in affordable properties is far more often owner-paid and master-metered. Submetering older affordable stock is expensive, so the bill stays on the owner's ledger rather than the tenant's. Third, even where costs are passed to tenants, the utility allowance that offsets their rent is set against published PHA schedules, so an owner's ability to recover a spike is constrained by regulation, not by what the utility actually charged. And fourth, much of the affordable inventory is older or rehabilitated building stock with original fixtures and pipes, exactly the conditions that produce the most leaks and the highest per-unit consumption.
Stack those together and the result is stark: water and sewer is not just a cost in affordable housing, it is a cost the owner largely absorbs, cannot pass through, and cannot easily raise revenue to offset.
From the utility bill to the balance sheet
Because affordable owners cannot grow the top line, the only way to protect net operating income is to control expenses, and that is where water stops being a facilities issue and becomes a financial one. Nearly every affordable deal's permanent mortgage carries a minimum debt service coverage ratio (DSCR) covenant, typically around 1.15x for affordable properties under Fannie Mae, Freddie Mac, and FHA programs. The loan promises that net operating income will cover debt service by at least that margin.
That margin is already thin. Industry benchmarking finds that roughly one in four LIHTC properties operates at or below break-even, even with occupancy near 97 percent. When operating costs rise 5 to 10 percent a year against capped rents, coverage erodes from the expense side, and water, as one of the largest controllable lines, is squarely in the middle of it. A covenant breach is not academic: it can trigger cash-flow sweeps, block distributions to the general partner, force operating-deficit reserve funding, or, in severe cases, push a loan toward default. For an owner sitting close to 1.15x, a few thousand dollars of avoidable water waste per property is the difference between comfortable and exposed.
Geography multiplies the pain
None of this is evenly distributed. Water and sewer rates vary enormously by municipality, and the gap between cheap-water and expensive-water markets is widening. A property in San Francisco can pay several times what an identical building pays in a low-rate city for the same consumption, with combined annual water and sewer charges in the highest-cost metros running into the thousands of dollars per unit. Affordable housing is concentrated in many of these same high-cost regions (coastal California, the Pacific Northwest, and fast-growing Sun Belt metros), which is also where low-income households already face the steepest water-affordability burdens. The properties least able to absorb a high water bill are frequently the ones facing the highest rates.
The hidden link to refinancing and preservation
The stakes rise again at the moments that define an affordable property's life: refinancing and resyndication. More than 90,000 LIHTC units reached Year 15 (the end of the initial compliance period and the typical trigger for a recapitalization) in a single recent year, and the wave continues. At that point, an owner refinancing or applying for a fresh round of credits has loan proceeds sized by net operating income against that same DSCR covenant. Because the loan is NOI-driven, a lower water bill does more than improve this year's cash flow: it raises NOI, and a higher NOI supports more borrowable proceeds at the same coverage ratio. Controlling water cost therefore feeds directly into an owner's ability to fund the rehabilitation that keeps a property affordable for another generation. Wasted water, conversely, is wasted preservation capital.
An affordable problem with an affordable fix
The encouraging part of the story is that water is one of the few large costs in affordable housing that owners can actually shrink, often by 20 to 25 percent, without raising rents, restructuring debt, or touching restricted reserves. The historical barrier was the cost of visibility: traditional submetering and leak surveys meant cutting into pipes, pulling permits, and running wiring, with installs that sometimes cost more than the leaks they uncovered.
That barrier has fallen. Non-invasive, clamp-on water monitoring now lets operators watch a building's flow continuously, flag the abnormal patterns that signal a leak, and act in minutes rather than on next month's bill, without a plumber, a capital project, or a reserve draw. For an owner, the appeal is less about conservation as a virtue and more about arithmetic: a single found leak can pay for the monitoring, every recovered gallon drops straight to net operating income, and the saved cost lands precisely where the coverage covenant needs it.
Water has spent decades as the bill nobody worried about. In affordable housing, where rents are fixed, costs are climbing, margins are thin, and the next refinance is never far off, it has quietly become a bill that owners can no longer afford to ignore.
Curious what continuous water monitoring would find in your portfolio? Book a NOWi demo or explore water monitoring for multifamily properties.
Sources
- U.S. EPA WaterSense: Commercial Buildings
- National Apartment Association: Income/Expense IQ (utility & water/sewer trends)
- CohnReznick: LIHTC Portfolio Performance & Benchmarking (break-even & DSCR)
- Fannie Mae: 4% LIHTC financing (DSCR minimums)
- HUD 221(d)(4): Debt Service Coverage Ratio
- Novogradac: 90,000+ LIHTC units reaching Year 15
- PPIC: Water Affordability in California