Is Your Business Paying Too Much For Electricity?
One of the best-kept secrets in the commercial real estate business, or at least one of the most lucrative secrets, is the degree to which landlords exploit the electricity clauses in their leases. Virtually every tenant over-pays for electricity. It’s an enormous profit center for building owners and landlords go out of their way to make electric clauses confusing. They do this because it makes them money. Even sophisticated tenants with smart attorneys routinely sign terrible electric clauses – in large part because they don’t fully understand what they are signing.
In NYC, electricity is either billed by a meter to the public utility (like you’d have in your home) or by something called “rent inclusion”. If you are a small tenant you typically cannot get your space metered. Electric meters are expensive to install and as such landlords do not generally install them to measure the electric output of smaller partial floor tenants. Since the majority of tenants in the commercial real estate market in New York City are small tenants (77.1% of all Manhattan tenants are 10,000 square feet or less according to the Co-Star Group, an independent tracking agency), rent inclusion is prevalent as a method of billing tenants for use of electricity.
Here’s how it works: landlords typically advertise rent inclusion electric at $3.25 or $3.50 per rentable s.f. The question most tenants don’t ask is, “how much electric do I actually use?” If you’re an average office tenant with computers, phones, and basic business equipment, you use about $2.00/s.f. per year. So right off the bat, landlords are making an extra dollar or two per foot per year on every deal without anyone being the wiser.
To make matters worse, tenants assume that when they sign up for $3.50 per s.f., this is what they will be billed and they don’t pay adequate attention to what the lease actually says. If you think about it, it makes no sense that all tenants would pay the same $3.50/s.f. for electric. Ultimately there must be some correlation between what you use and what you pay. Landlords handle this by giving themselves the right to “survey” your consumption of electricity.
The electric clauses in leases are generally about ten pages long, and they’re as complicated as the philosophy you tried so hard to understand in college. Of course, the landlord makes them complicated on purpose – so that the tenant and often times the tenants’ attorneys don’t understand all the implications of the clause. I mention this because as educated as attorneys are they are typically not versed on how electricity is measured and surveyed and will often be unable to articulate how the clause should be rewritten or will be unable to take out some of its more draconian language.
Once a lease is signed, and in many cases before even a year of term goes by, the landlord will send an electric consultant to the tenant’s office to conduct an “electrical survey” of the premises. This consultant will produce a report that the landlord will send to you which will likely indicate that you are consuming more electricity than was expected and that as per your lease you will have to pay more for your use.
Landlords routinely make reference to something in their electric clauses called “connected load”. This means that when it comes time to survey (and raise your bill), the surveyor is allowed to presume that every electrical device you have is turned on and being used at full capacity 24 hours a day, 7 days a week. This is not fair or accurate, but tenants and lawyers miss this distinction all the time. What is fair and accurate is a tenant being billed on their “demand load” – or what they actually consume.
This practice of surveying you and incrementally increasing your electric bills can go on for years and in some cases can become so egregious that a tenant will end up paying tens of thousands of dollars a year in additional electricity.
Unfortunately, from a legal standpoint, the landlord is doing nothing wrong. If the tenant signs off on this, shame on them. In fact, there’s a major landlord in NYC that has in the first draft of all its leases, the right to survey and increase the tenant’s cost for electricity if the price of electricity has gone up since July 1st 1970. And this is not a typo – 1970! You literally can’t make this stuff up. Believe it or not, many smart business owners and their attorneys miss this and other like-minded electrical clauses – and then they end up paying the price. This is a common problem and a time tested profit center for landlords – so make sure you have a knowledgeable tenant representative real estate broker and real estate attorney that look carefully at the these onerous electrical clauses so they can be negotiated out or mitigated.
Depending on the credit worthiness of a tenant, the state of the market, and the needs of the landlord, these clauses can be altered to reasonability and accurately portray what you actually consume in electricity. Just make sure you don’t simply sign your name without being crystal clear what you are getting into.