Real Estate Articles
Managing Utilities and Submetering
Written by Brent Pace for Gaebler Ventures
If you are looking to lease an office building out to multiple tenants, you will want to make sure you have sub metered the space properly to give yourself maximum flexibility.
One of the first things you learn as a real estate entrepreneur deals with the different types of leases you can sign.
There are triple net leases (NNN), base year leases, full-service leases, and more. The main difference between the different types of leases deals with operating costs. A triple net (NNN) lease has all of the tenants responsible for paying their own operating expenses. Full service leases have tenants paying a single rent amount with the Landlord covering all operating expenses. Base year leases are a hybrid lease but in the end the intent is to get the Tenant to cover the operating expenses.
Operating Expense Risk
One reason many Landlords prefer triple net (NNN) leases is because operating expenses can present a significant risk. You never know what will happen with your taxes, your cost of maintaining the building, or inflation in general. Given our current economic climate and forecasts of increased inflation in coming years, many Landlords with long term full service leases will likely see their profit margins slashed.
Utilities: A Volatile Expense
Utilities can be one of the most volatile operating expenses in commercial real estate. There are two main reasons for this. The first is that all tenants consume differently. Suppose you lease to two law firms with identical amounts of space. It is entirely possible that one of them will have twice the electrical consumption as the other simply based on their own personal habits and styles. As a Landlord it is almost impossible to tell.
The second reason utilities are a volatile expense deals with rate changes. Electrical rates can be extremely unstable. In our current situation you can look to Energy Policy in Congress as one of the main sources of instability. The Obama Administration's proposed "Cap and Trade" legislation could severely hamper and tax many of our country's coal fired power plants. These plants constitute a huge chunk of America's electrical capacity. So who will end up footing the bill? You, the consumer, will end up paying for it. We could see rate increases that we have never seen before on a historical scale.
Sub Meter for Conservation and to Reduce Risk
As a Landlord, it then becomes important to sub meter each tenant's space in order to help them conserve and to reduce your risk. Although the building will still have common area utility charges to be split among tenants, having each space individually metered allows the Tenant to pay for their actual consumption. This will also encourage them to conserve. The risk is then taken off of your plate as a Landlord and you can project your returns more smoothly by having the Tenant bear the risk of utility rate changes and spikes in consumption levels.
Use an Electrical Engineer
Hire an electrical engineer to sub meter your space according to the different layouts you have for leasing. Make sure each suite has its own meter(s) and that each Tenant is able to pay its bill directly to the local utility. As the Landlord, this will leave you the responsibility of paying the local utility for the house meter less all sub meters. You can then divide this cost out and have it reimbursed by the Tenants.
Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.
Share this article
Additional Resources for Entrepreneurs
Conversation Board
We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.