Electricity And Utility Expense Pass-Throughs Are Common Hiding Places For Overcharges
Summer is here with rising electric use and escalating electric costs. As many corporate tenants struggle to maintain profit margins, significant expense reduction opportunities may lie in a closer examination of utility costs.
Many commercial leases call for tenants to purchase some share of their utilities from the landlord. These building operating expenses are passed through to the tenants using a myriad of billing methodologies and the tenant is separately charged for utilities (electricity, chilled and condenser water, steam, gas, etc.). Inaccurate electric reimbursement calculations can skyrocket already existing costs in the summer months, and with utility prices continually on the rise even a small miscalculation can result in significant losses in operating capital.
Electricity And Utility Expense Pass-Throughs Are Common Hiding Places For Overcharges. How can a commercial tenant protect itself from these impermissible or inflated expenses? Through keeping a careful eye on what and how a landlord passes through expenses to the tenant and building operating costs.
Areas Where Systemic Issues Can Exist Include:
- Sub-Metered Electric: Calculation Errors, Incorrect Rate Application, Improper Metering of Space, Faulty Meters, Exaggerated Profits, and Wholesale/Retail Distortions
- Rent Inclusion (ERIF): Incorrect Rate Applications, Incorrect Base Dates, Improper Pass Throughs of Rate Increase/Decrease, Incorrect Surveys (Overestimated Consumption, Calculation Errors, Improper Equipment Inclusion)
- Common Area Electric: Improper Allocation between Building and Tenant Electric, Double Billings, Failure to Deduct Reimbursed Costs, Incorrect Tax Applications
- Direct Meter: Misapplied Rates, Billing for Incorrect Meters
HVAC Overcharge Case Study: An international law firm wished to audit its’ North American leasehold expenses. While conducting a compliance review of the firm’s 220,000 square foot, New York City headquarters lease, the audit revealed that the landlord was overcharging the firm in numerous expense categories. One particular expense area was in the substantial overtime HVAC usage the firm’s international practice required. The tenant’s lease stipulated that overtime HVAC be charged to the firm at the landlord’s actual cost plus ten percent (10%). The landlord, however, was inflating that actual cost by what CTS later discovered to be some four hundred percent (400%). Compounding the overcharge, the landlord was then failing to back out this tenant specific expense from the building operating expenses, so the firm was paying for the same expense twice.
Financial Impact: The overtime HVAC/electric overcharges to the firm across the previous five years totaled some $840,000, with additional and continued cost avoidance benefits.
Overcharges can hide in virtually any expense category, and some of the most overlooked overcharges reside in electricity and utility expenses. When choosing cost containment solutions partner, it is critical to ensure that the prospective partner firm bring all necessary skill sets to the table – including electric and utility audit expertise.