Real estate Featured

10:10am EDT July 22, 2002

Are you overpaying for electricity?

Electricity is one of the most common pass-through expenses; it can also be among the most abused.

By DAVID ZEVE

Electricity is billed in a number of ways, depending on the age and setup of the building. Whatever the process, our goal is to ensure that you, as a tenant, pay no more than your fair share. To that end, we'll call attention to the areas in which overbilling commonly occurs and the steps you can take to prevent it.


Electricity rebilled by the landlord

Landlords who buy electricity at a volume discount and rebill it to tenants often take an excessive markup. They charge the substantially higher rate tenants would pay-because of their relatively low usage-as if they were buying electricity directly.

Thus, the lease typically states that "the landlord may bill the tenant at rates in effect as if the tenant were purchasing the electricity directly from the utility."

Your solution: Before signing the lease, find out the landlord's rate and negotiate a "landlord's markup" that includes an acceptable profit margin and the landlord's administrative cost for rebilling. In addition, make sure that the higher rate applies only to the leased premises, not to the common areas.


Prorated billing

Landlords who can't quantify how much each tenant is using normally prorate the bill based on rentable square footage. In this situation, you need to know the "electricity profile" of the other tenants. Do any run large computer installations? What about two- or three-shift operations-telemarketing or data processing, for example? If other tenants' electrical usage is abnormally high, the issue should be addressed during the lease negotiation so that you aren't subsidizing your neighbors.

Allocation

Are all tenants paying their fair share of the utilities? We have sometimes found that common-area expenses, which include electricity, are not being allocated properly to for-profit garages, retail tenants and specialized facilities such as health clubs and restaurants. When you negotiate your lease, be sure that these issues are taken into consideration.


After-hours HVAC

The most common electricity overcharge is in billing for after-hours HVAC.

These charges, which vary from building to building and city to city, depend on whether the property is old or new and whether the HVAC can be turned on by zone or if whole sections of the building must be turned on to heat or cool one tenant's space.

To arrive at the rate per hour, landlords normally take into consideration utility cost, depreciation, labor cost (if applicable), overhead and profit and, in some instances, repair and maintenance. They bill tenants accordingly and are subsequently reimbursed.

What often happens, however, is that the electricity and labor components of the hourly charge are also included in the expense pass-throughs. The reimbursement, an income item, should be deducted from the pass-throughs but isn't. As a result, tenants are paying twice for the same thing.

This is another subject that should be addressed during lease negotiations. Ask the landlord to specify his after-hours HVAC rate. If you are a large after-hours HVAC user, it is in your best interests to be familiar with charges in other buildings to determine if your landlord's rate seems to be in line. In addition, make sure that the definition of operating expenses states that "any expense reimbursements" will be reflected as an offset to pass-through operating costs.

Electricity is just one of the many components of expense pass-throughs which, together, constitute an increasingly greater portion of occupancy costs. Errors in calculation, overcharges and items that are not the tenant's responsibility appear with enough frequency to merit your attention. Regular monitoring and lease audits when you suspect discrepancies that can't be easily resolved are your best antidotes.

Information for this article was provided by Sid Rattner, partner, Friedman Eisenstein Raemer and Schwartz, a Chicago-based CPA firm.

David Zeve is president of David J. Zeve Associates, a Pittsburgh-based commercial real estate firm that represents tenants and buyers exclusively. David J. Zeve Associates is a member of ITRA, the International Tenant Representative Alliance.