Depending on the method by which electric is measured and billed, electricity used by Tenants can be a source of revenue for the Landlord. It is possible that the Tenant’s electricity usage is metered directly to the local utility company and billed by the utility company to the Tenant. In that case, the Landlord does not derive any revenue. By contrast, there are two methods by which Landlords can charge for and then profit from a Tenant’s electricity usage. In today’s market and for a typical office with basic computer usage and lighting, electricity obtained directly from the local utility company costs approximately $2.50 per rentable square foot. However, Tenants have been known to be charged as much as $6.00 per rentable square foot when the electricity is provided through the Landlords.
Direct Meter
The Direct Meter approach to electricity usage occurs when the Tenant pays the local utility company directly for the electricity used. The Tenant should be sure to stipulate that the meter is installed and in working order, and that the Landlord has or will pay for the installation of the meter. Also, the Tenant should be sure that there is enough power supplied to the premises to meet the Tenant’s requirements. Six watts per rentable square foot exclusive of the electricity required for the HVAC and common area lighting is typically a sufficient amount of power for a Tenant’s needs.
Submeter
In the Submeter method, the Landlord purchases the electricity from a major distributor at a bulk rate and then distributes to the individual Tenant units in the building, with each unit having its own meter called the Submeter. The Landlord measures the consumption of power through the use of a Submeter. The key is to understand how the Landlord buys the power. The Landlord is able to purchase the power in bulk through “independent suppliers” and receives a rate that is lower than the price the Tenant would receive if the Tenant purchased the electricity on a direct meter basis. In the lease, it should be stated at what rate the Landlord buys the electricity and the mark up the Landlord can charge above the rate at which the electricity is purchased. An administrative fee of 3% to 20% on the electric cost is not uncommon. As stated above, Tenants need to be sure that the building is supplied with sufficient power for their needs, and properly segregated between rentable area and common area.
Even if the electric clause is negotiated properly, the Tenant should check the per square foot amount on a monthly and yearly basis for the following reasons:
- The Tenant needs to ensure that the metered electric charges are only for electricity usage originating from the premises.
- If the premises has a dedicated HVAC unit, care should be taken that the unit is not running when the premises is not occupied.
Rent Inclusion
Due to the cost of installing electric meters and the administrative costs associated with submetering, Landlords will often charge a flat rate per square foot to simplify the process yet maintain the revenue stream associated with providing electricity. Charges of $3.00 to $3.50 per rentable square foot are typical in the current marketplace. Often an electric consultant will be employed by the Landlord to verify electricity usage. In the case where usage is suspected to exceed the baseline level the Landlord will seek to increase the Rent Inclusion amount. To ensure that there is a clear and direct way to calculate the amount of excess usage, the mechanics of the calculation should indicate the actual costs of the electric plus the markup. The use of a consultant to measure actual electric usage during the tenancy is referred to as a survey and the right to survey should be limited to once a year. The cost of the survey should be payed for by the Landlord if it is determined that the Tenant has not exceeded usage based on the fixed price of the rent inclusion.
When negotiating a lease and any clause within a lease, tenants should always consult a real estate attorney and proper consultants.
