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Plan for Soaring Utilities

As I squint to write this offering on a dimly lit notebook computer screen powered by a half-dead battery, I find myself pondering the question on the minds of all office tenants nowadays — and everybody else for that matter.

Just how high will my utility bills go?

That’s followed by a question more specific to my present undertaking: Will I ever feel comfortable again about plugging this computer back into a wall outlet? Nobody, of course, presently knows the answers to these questions, so let me get to what I do know. Pointing fingers at SDG&E, assorted politicians and a Middle Eastern sheik or two isn’t going to help solve the problem.

For some, finding someone to blame may have some cathartic benefit personally, but it’s not going to make anybody feel better about electrical bills that have doubled in the past two months. Unfortunately, there is no one party to offer up as a sacrifice at the altar of public wrath. And, there are no specific pearls of wisdom that will slash or instantly reduce the soaring utility bills office tenants and others are receiving this summer. At best, consumers can only hunker down and cut back power usage as much as possible.

My counsel to office tenants is a little more specific: Get educated immediately on how utilities and other operating expenses are structured in your lease agreements. Do not assume for even a nanosecond that it is the landlord who will absorb the additional utility costs in a full-service lease. With flashlight in hand, fetch your lease agreement out of the filing cabinet and get up to speed on how increases in utilities and other operating costs are to be handled. My bet is that the language in your agreement is almost prophetic in terms of anticipating operating cost increases in those full-service leases.

I mentioned “full service” because most downtown high-rise office leases are “full-service gross,” meaning that the rent the tenant pays each month covers everything, including the base rent itself, casualty insurance, common-area maintenance, property management fees, janitorial services, maintenance, gas, water and, oh yeah, electricity.

The first year of a full-service lease becomes the baseline by which all operating costs are calculated for the annual adjustments in the second and subsequent years of the lease. Some operating costs, in fact, may decrease. Others, more predictably, may increase. These add-on costs are summarized each year to become the basis for what those costs should be in the ensuing 12-month period.

What’s ironic is that these annual calculations and operating cost adjustments typically take place in the early spring, which this year came a month or two before the really big utility bill hikes.

Does that mean tenants have escaped the big hikes in utility costs for another year? Look at your lease agreement for details, but, even if you do enjoy a full year at a lower rate, the piper eventually will be paid. Full-service office tenants need to factor in and begin to budget aggressively for these escalating utility costs now.

Out in the suburbs and elsewhere, office leases are typically full-service “net of utilities,” which means all the above operating costs are included in the monthly lease payment except utilities, for which the tenant pays separately. A few months ago, I cautioned readers to beware that utilities in such leases are sometimes defined differently. Back in those days when electricity was not a four-letter word, I explained that in some situations utilities cover gas, water, sewer and electricity, while in others, utilities are defined as only electricity. Know specifically what your lease is “net of.”

Yet another caution I mentioned earlier this year was an abusive situation in which some landlords are a bit liberal in defining operating expenses. In days past and present, there have been many instances in which landlords slip baseball and football tickets, ski trips, wine and cigars into operating expenses that are charged back to lessees. I mentioned at the time that office leases need to carefully specify the appropriate expenses that can be charged back to lessees in order to provide tenants with legal remedies in the event charge backs are abused.

Wine, cigars and a few stadium tickets may pale in comparison to electrical rates these days, but soaring electricity costs are problematic enough without tenants being abused outright by good-time landlords. Frankly, tenants need to have access to financial records that document how operating expenses are being calculated and spent. That’s not allowable in some lease agreements, nor is it always financially feasible in terms of what formal audits cost these days. Nevertheless, tenants need as much protection as can be negotiated on their behalf.

So, instead of tenants pointing their fingers at the supposed villains in this energy melodrama, they would be better advised to point to the language in their lease agreements that cover operating expenses and begin planning accordingly.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.



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