Electric Clause – New York State
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:
1.
The Tenant needs to ensure that the metered electric charges are
only for electricity usage originating from the premises.
2.
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
rentable 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 why 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.
To view any future or previous real estate advisories, please visit the Cresa
New York site or follow me on LinkedIn.
Sincerely,
Richard Plehn
Senior Vice President
212-687-1723
Barry Spagna
Vice President
212-687-4294
Stephen Naidu
Advisor
212-687-4309
Christopher Aquilino
Advisor
212-687-4537
Disclaimer: This document has been prepared based strictly on the professional opinion and expertise of the writer, it contains general statements regarding the real estate process and is
intended strictly for informational purposes. We encourage every client to contact their Cresa tenant advisor prior to relying on the general information disclosed for action or decision-making.
For additional information regarding your lease or to discuss specific elements of your occupancy, please contact your Cresa tenant advisor.
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