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Strategy
Utility costs and building systems
Facility infrastructure
In the last few years, facility infrastructure, particularly flexible, cost-effective HVAC systems, the availability of adequate electrical capacity at reasonable cost, and expanded IT capability, have become increasingly important to most healthcare tenants' business operations, and have a significant value in lease negotiations.
This means that a prospective or renewing tenant should assess the infrastructure at its facility compared against other options available in the marketplace. If a tenant occupies a building with a central HVAC plant with significant costs for overtime use, and if many buildings in that market offer tenants tenant-controlled HVAC systems with substantially lower costs, the landlord will be under competitive pressure to provide an alternative to costly overtime HVAC when faced with a savvy tenant. The tenant may seek to have the landlord install supplemental HVAC systems for part of its space, have the landlord agree to favorable long-term rates for chilled water or condenser water, or provide extended hours for use of the base building system at no additional cost. For a mid-sized facility with substantial overtime or supplemental HVAC needs, proper negotiation of terms like this can result in savings of thousands of dollars each year over the lease term.
For instance, an urgent care practice sought to renew its lease of a single-tenant suburban facility. The tenant had extensive supplemental and overtime HVAC requirements. The practice obtained an engineering analysis, which demonstrated that the existing HVAC units, which the tenant was responsible for maintaining, had substantially exhausted their useful lives. In addition, the HVAC control system in use was obsolete. It was increasingly difficult to get parts and to find technicians skilled in the repair of such systems. Because the practice was fully prepared with the information, the nature and condition of the HVAC system and its controls became a significant issue during renewal negotiations. The landlord agreed to accept additional responsibilities and absorb costs that under the existing lease would have been the tenant’s responsibility. This aspect of the renewal negotiations saved the tenant at least $400,000 during its renewal term.
Utilities, capacity and pricing
As with building infrastructure, the need for and provisions of electricity has changed significantly over the last few years and continues to change. Office and healthcare tenants should therefore look at this issue in terms of current and anticipated needs, no matter what the existing lease now says.
The lease should stipulate the minimum capacity of electricity that will be available to the tenant, in the premises throughout the lease term. It is typical to specify this capacity in watts-per-rentable-square-foot (demand load), as this maximizes the electricity actually available to the tenant to use. A tenant in a multi-tenanted building seeking additional power in connection with a new lease or renewal should specify that the landlord will deliver the power to the premises. Otherwise, the tenant may need to pay substantial sums to install risers or other distribution systems to bring the electricity to the space.
Payment for electricity is another matter to be negotiated in a new lease or renewal. If a tenant accepted a so-called rent inclusion formula in its original lease, it may want to insist at this time upon submetered or directly metered electricity, as this is likely to substantially reduce costs. For one renewing tenant with substantial laboratory requirements and above-standard electricity needs, for example, it made sense to retain rent inclusion electricity for basic office use and the landlord agreed to provide all supplemental service (above 4 watts-per-square-foot in this case) on a submetered basis at cost. Through this arrangement, the tenant expected to save 30 percent or more on its total electricity costs.
