A Fresh Take on CRE

Additional Rent!? Post #1 - Electricity

The picture to the left is the cover of a real estate brochure from the former NY firm, Cross & Brown. Rosanne DeBernardo in my office used to work for Cross & Brown (before they were acquired and amalgamated into what is now CBRE) and she was kind enough to share some momentos of her past. I think this picture is pretty funny, and it really shows us how far we've come.

And now, without further ado . . . by request of John Lench - Grubb & Ellis broker extraordinaire in Tyson's Corner, VA and former NYC real estate broker, today I am touching on "Additional Rent." I imagine that this topic will take multiple posts, because it certainly is not simple, particularly in NYC.

To get started, it's important that one understands the basic principles of an office lease. There are two basic types of office lease, the triple net lease, and the gross lease.

In a triple net lease, the tenant pays for all of the expenses of the building, including maintenance, taxes, operating expenses, etc.

In a gross lease, the tenant pays only for the rent of their space, and the landlord is responsible for everything else.

Now, I have grossly oversimplified this, so if you want more information on the variations of these leases, do a Google search.

In Manhattan, we generally use what is called a "modified gross lease." In actuality, it more closely resembles a net lease, but that's besides the point.

In a "Modified Gross Lease" the tenant is responsible for paying base rent, electricity, and the tenant's proportionate share of any increases in operating expenses and taxes. What's important to note about this type of lease, is that landlords love to use these increases as a way to make more money, so it's critical that you understand how the increases work in order to protect yourself from overpaying. These increases are generally labeled in the lease as "Additional Rent."

Let's start with electricity - There are three ways that electricity is billed.

1) Direct Meter - In this case, you have a meter straight from the local utility, and you pay the utility directly for amount of electricity you use. This is generally the most favorable way to be billed for electricity, but it is becoming less and less common. Direct meters are often found on full floors of small office buildings.

2) Sub-meter - In this case, the landlord buys the electricity in bulk (at a discount) from the local utility. He/she then installs individual electric meters on the circuits going to each tenant. Tenants are billed for their actual use, and the rate at which they are charged is based on a markup of what the landlord pays. The landlord tacks on this markup to account for the cost of the administration of the sub meter and to make an extra buck. The typical markup is somewhere between 10-17%.

3) Rent Inclusion* - This is the third, final and least desirable way to pay for electricity. The landlord charges you a set amount of money per sf per year. This charge has absolutely nothing to do with how much electricity you actually use. Rent inclusion is most commonly applied to small tenants in large buildings. There is an expense for landlords to install a sub-meter for a tenant and in the case of small tenants they generally are not inclined to do so. Also, small tenants have much less leverage in negotiating with a landlord, and this is a great way for them to make additional money. The standard charge per sf for electric is generally between $2.75 and $3.50.

* A note on Rent Inclusion - Many leases make the rent inclusion "subject to survey." Most unrepresented, or poorly represented tenants simply overlook this clause. This means, that at any time, the landlord can send a company into your space to survey the amount of electricity you are actually using. If you are using more electricity per sf than you are paying for, the landlord may increase your electric charge accordingly. This may not sound so bad if you are a standard tenant, but what if the Landlord surveys your electricity use on the hottest day of the year, when your a/c is at full blast, or during tax week if you're an accountant? Contesting this increase is tough and expensive.

So, now you know what to look out for when it comes to electricity. In my next post - tax increases!