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Strategy
My landlord wants me to sign a lease with various end-of-term obligations, including one that requires me to remove the entire buildout at the end of the lease term. Should I go along with this, fight it, or try to negotiate a renewal option and hope for the best?
Definitely fight this one. Landlords often impose stringent end-of-term obligations – costs not included in the rental rate tend to be 50 percent or more of total lease costs. These requirements, however, are highly negotiable. The landlord will be making a profit all through the term of the lease, but wants you to accept financial responsibility to prepare the space for leasing to someone else. This can cost you $4-5 a square foot and should not be your problem or responsibility. Agree to remove what you put in only if it is a highly specialized build-out that would not work for any occupant of the space other than a medical practice or company similar to your own.
Our office is expanding and will be offering extended hours of operation. We are also in the process of upgrading our office technology and converting our existing patient records to EMR. My landlord wants me to sign a lease which says that our electricity is charged on a rent-inclusion basis.
Is this the best way to pay for electricity?
Whether you are negotiating for a new lease or will be considering a lease renewal, consider the best way to pay for electricity. An effective negotiation can save you several dollars per square foot each year.
Many landlords like to charge tenants for electricity on a so-called “rent inclusion” basis. This means that you will not see a separate line item for electricity on your rent invoice. The charge will be added to and billed as part of your rent. This is often the easiest way for a landlord to bill electricity and the most costly solution for you. Rent inclusion charges often run $3.50/sq. ft. or more while actual costs for normal nine-to-five office electricity use may be closer to $1.50/sq. ft. Avoid rent inclusion electricity if you can. If you agree to this as part of your lease negotiation, then know that your landlord is likely benefitting from a large extra fee – seek some other off-setting concession. Also seek to limit any further electricity increases that your landlord can bill during the life of your lease.
A favorable and practical way of paying for electricity is through a sub-meter or check-meter. Landlords may sometimes resist offering this option, because they prefer the additional fee they can collect from rent-inclusion charges. Many landlords will say submetering is too difficult or too costly. This might have been the case some years ago, but newer technology makes submetering widely available on a cost-effective basis. When you negotiate for sub-metered electricity be clear about who will pay for the cost of installing the meter if one does not already exist. Negotiate the rate at which you will be billed; even though sub-metering is more cost-effective than rent inclusion electricity, many building owners will still seek a hefty mark-up – sometimes 15% or more over their actual costs. It may even be possible with a submeter electric arrangement to negotiate an electric rate more favorable – by taking advantage of the landlord’s larger bulk purchases – than you could obtain on your own. Also negotiate administrative charges for sub-meter bills and the right to see and verify sub-meter readings from the billing company. Overall, a well-negotiated submeter clause is likely to save you as much as $2.00/sq. ft. compared to rent inclusion.
Direct metering of electricity is often ideal. When you can secure this treatment, you know that you are dealing with the utility company directly and will not be subject to mark-ups of any kind. Sub-metering is generally available only to larger tenants in New York City because of technical considerations. Inquire about the possibility at any location where you intend to sign a new lease or renewal.
Electric charges are a significant component of your rent bills. Tenants at a well-known building on Madison Avenue found themselves paying more than $12/sq. ft. for electricity under a rent-inclusion clause and engaged in a costly litigation to get relief. Avoid battles like this and keep your occupancy costs under control by negotiating effectively for the electricity whenever you seek a new lease or sign a lease renewal.
