Guest Blog: The Square Foot – The Small Business Tenant’s Guide to Electricity
By admin, February 3, 2012, Small Biz
When operators of small and medium-sized businesses sign a lease for new office, warehouse, or storefront space, there are many clauses within the lease documentation that require strict attention. Aside from the rental rate, special concessions, and the operating expense clause – which allow the landlord to recover out-of-pocket expenses – knowing how electricity charges are passed down to tenants is something that can save or cost a business thousands of dollars throughout the life of a lease.
For many commercial tenants, electricity is one of the largest operating expenses. It’s not uncommon for landlords to justify a lower rental rate by recovering potential profits through the electricity clause. Commercial leases typically pass electrical costs down to the tenant in one of four ways: Direct Metering, Sub-Metering, Rent Inclusion, and Individual Tenant Survey.
Direct metering is more typical in retail centers, where each storefront business is responsible for their own electricity. They have the responsibility (and the benefit) of choosing their own provider and negotiating directly with them. The business owner pays the provider directly without any landlord involvement. It’s important to understand that, if the business is in a multi-tenant building of any kind, any common areas that require electricity like parking garages, lobbies, and elevators are the landlord’s responsibility, and those charges will likely be passed down to each tenant on a pro-rata basis.
In most larger office buildings, there will only be one meter which connects to the utility. Sometimes, the landlord will install a separate meter for each tenant to measure the electrical usage of each individual tenant. The landlord still pays the utility, but she is then reimbursed by the tenant based on what their individual sub meter reads. If the landlord can buy electricity at low bulk rates, the tenant should negotiate for a more favorable rate during lease signing or lease renewal. Leases often read that the tenant will be billed in accordance with a utility’s published rate schedule. This may mean the landlord will charge you the highest rate that would apply to your own consumption and keep the difference, so tenants need to be cautious.
If the landlord of a typical larger office building does not sub meter the property, electrical charges may simply be lumped into the rent. The landlord will average her electric costs for the entire building, and then charge each tenant additional rent based on a square foot basis that is specified within the lease.
Individual tenant surveys can also be implemented in similar situations. The landlord will inventory all the equipment in a tenant’s space and examine how the tenant uses that equipment to calculate demand and consumption. This is a rare occurrence, usually reserved for very large tenants and generally when there is a dispute over electric charges or uses.
Small business owners need to be aware of the variety of ways landlords can handle electrical charges in their buildings and do this before they agree to all other lease terms. Electricity is a cost that can wind up sideswiping a business during the lease term, especially if the owner isn’t aware of how utilities are handled in their specific building.
As mentioned at the outset, electricity is just one of the many clauses that tenants need to be careful about when signing a lease for their business. For discussion of other important clauses or help with finding and leasing space, be sure to check out TheSquareFoot.
TheSquareFoot is an online marketplace for commercial real estate leasing that educates prospective tenants and then allows them to connect with landlords, brokers, and service providers in order to get their businesses ready for business
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