As a facility manager, you’ve got many opportunities to reduce the impact of utilities on your bottom line. In addition to buying utilities at the lowest cost, you need to recover as much of the utility expenses as possible. This can be accomplished through a utility cost recovery lease clause, or, internally, through a chargeback system. Various methods are used for utility cost recovery. These methods are often subject to state laws. Before using them, the manager must ensure they are allowed.
Submetering offers a way for landlords to earn a profit by charging tenants a higher rate for utilities than the rate that the landlord pays. The landlord purchases a utility through a master meter and has submeters installed for individual tenants in order to pass the charges on according to specific consumption.
The ability to submeter utilities varies from state to state. Some states prohibit submetering, while others encourage it as a green practice. States that prohibit submetering often allow temporary metering, called check metering or information metering. Such metering is sometimes used with energy rent inclusion to check the accuracy of estimates. In addition to staterestrictions, utility companies may have their own prohibitions.
Energy Rent Inclusion
In states that do not permit submetering, another option is to establish a lease provision charging additional rent for utility use. This provision is often called energy rent inclusion. With a provision for energy rent inclusion, the amount and cost of energy for each tenant or area is estimated, typically proportional to the rentable square footage. Estimates, often referred to as base rates, are established at initial occupancy, usually by an engineer or specialized consulting firm. They may be altered during occupancy to reflect changes in actual energy use and changes in energy costs.
Some lease clauses limit the amount charged to what the tenant would have paid at the applicable utility rate. When this type of clause exists, the local utility rate should be used as a guide.
Energy estimates are often inaccurate, especially over the long term. To guard against overcharging or undercharging, a balance should be tabulated. The estimated utility use for all tenants along with common areas should be totaled. That total should then be compared with the total amount recorded on the utility meter by the utilities serving the building.
Utility Cost Allocation
Another technique, utility cost allocation, is less costly than submetering. It requires less equipment—in some cases, no equipment at all.
One approach to utility cost allocation is to prorate utility costs by square footage occupied. When the character and hours of energy use are similar for all tenants, this can be a reasonable method. Each area to be billed is assigned a certain fraction of the total use of each utility. Every month, that same fraction is applied to the landlord’s utility bill to determine each tenant’s bill.
This method is fair only when utility use is uniform. When utility use is not uniform, some forms of surrogate measurement can be used in an attempt to estimate and assign utility use more fairly. These surrogate methods use such devices as hours-of-operation counters, temperature measurement, or flow measurement. Utility cost allocation is then adjusted according to the readings made by these devices. The totals from all the devices are gathered, and various formulas are used to set the fraction of utility cost allocated to each tenant.
Many state laws on submetering may also apply to utility cost allocation, so check your local laws.
Tenant Utility Auditing Firms
Some tenants that lease space in many locations employ independent utility auditing firms or have their own staff perform utility audits. More and more utility auditing firms are marketing their services to tenants. These firms usually work on a contingent-fee basis, sharing any refunds and reductions equally with the tenant. Every submetering or cost-allocation installation should be capable of withstanding the scrutiny of an independent audit. Submeter calibration and certification should be done periodically to ensure accuracy.
Most leases state normal building operating hours, with specific provisions and charges for after-hours use. The most common charge for after-hours use is for heating and cooling. The landlord and tenant agree on a dollar figure or formula to be used. All too frequently, however, these charges do not cover the actual cost.
There are other factors that should be considered in after-hours charges. If tenants require heating and cooling, they also require power for lighting and equipment. The energy consumed should be included in the charges. Also, any additional energy consumed in common areas should be included. This is yet another reason why submetering is preferred; the exact amount of energy used can be calculated, allowing the owner to recoup all utility costs.
The facility manager should document after-hours charges to clearly show how the charges were set initially, as well as how charges are updated to reflect changes in utility and labor costs.
Excess Energy Use
Leases often have clauses to cover excess use of energy. Energy used by normal office equipment during normal office hours is included in the rent, but any special equipment or additional hours are billed separately to the tenant. This separate billing can be figured either by estimate or by submetering.
Another approach is to include a specified quantity of energy use, most often of electricity, in the rent. Monthly meter readings are taken through submetering the space. If the consumption exceeds specifications, an additional charge is applied.
Common-Area Cost Allocation
Although most leases have provisions describing how common-area costs are distributed to tenants, they rarely describe in detail how those costs are determined. The manager should maintain a documented and consistent method for common-area cost allocation when submetering is used.
When all common-area services are on individual meters directly from the utility company, these costs are easy to calculate. Simply total all of the common-area utility bills. The method for calculating the cost of that consumption must then be documented for each tenant.
If the common areas are not submetered, then the common-area consumption must be calculated. The consumption on the tenant submeters is subtracted from the total quantity bought, leaving the common-area use. Cost can be allocated by the same methods used when common-area consumption is submetered.
When the common-area cost includes central heating and cooling systems, an additional step must be taken. The consumption or revenue for after-hours use should be subtracted from the common area use so that tenants are not required to cover the cost of these systems when their buildings are unoccupied.
Utility Cost Escalation
In a building that is not submetered, utility cost escalation is usually determined as the amount that the current year’s cost exceeds the base year’s cost. In submetered buildings, there is no need to apply utility cost escalation, provided that the method for billing submeters follows the traditional procedures described above. If an alternative procedure is followed, it must be well documented and communicated to the tenants.
This article is adapted from BOMI International’s course The Design, Operation, and Maintenance of Building Systems, Part II. More information regarding this course is available by calling 1-800-235-2664. Visit BOMI International’s Web site.