Are Landlords Overcharging for Extra Services Like HVAC?

June 21, 2017

This may start a firestorm but an issue came up during a recent lease negotiation that could potentially impact everyone reading this blog.

 

After hours heat and air conditioning (“HVAC”)is an extra service provided to a specific tenant. Therefore, tenants should be responsible for charges directly related to their specific use. But what is a fair price?

 

 

A red flag emerged during this recent negotiation. The landlord demanded seventy-five dollars ($75) per hour with a minimum of two (2) hours for that additional service. We asked the agent for a breakdown of the costs and were shocked by the response. The agent blatantly noted, “We first start with the actual electric costs plus, of course, we need to make a fair profit.”

 

That got us thinking.

 

Our first call was to the California Public Utilities Commission to find out if a non-utility can make a profit on reselling of electricity. The answer was an overwhelming, “ No”.

 

The next call was to Southern California Edison (“SCE”) to find out what the cost was per kilowatt between the off-peak hours of 7PM to 12PM for two specific buildings in our local market. While there are some multipliers SCE uses in calculating the rates, the approximate cost is about $.10/KH. Armed with that information, we then contacted Energy Experts International, a national firm specializing in evaluating buildings’ energy efficiency. The goal was to confirm our findings as well as to better understanding how the costs are calculated. Director, Marc Brener, was extremely helpful and knowledgeable. He suggested we contact both Lennox, to get the specs on air conditioning units, as well as a local HVAC contractor who could walk us through the watt/volt/kWh calculations.

 

Using the specs for a commercial 10-ton and 6-ton unit the electricity needed to power the units (Volts x Amps=Watts. Watts/1000=Kilowatt Hours) came to approximately $.75 to $1.30 an hour.

 

Pressing the agent further regarding the remaining charges, he noted these charges also reflected general maintenance, wear and tear, plus administration costs.

 

Hearing that, we took the Building Operating Expense Reconciliation Statements from two comparative properties and pulled out all line items that could remotely be connected to the use of the HVAC units. We included electricity, HVAC maintenance and repair, engineering, general repairs, security and insurance. Because those numbers represented the entire building’s charges for those items for the entire year, we further broke that cost down to 250 working days and 2,000 working hours per year.

 

Using these assumptions, a 5,000 rental square feet space would cost about $6.05/hour. Add even a 10% administration fee and you’re still under $7/HR for the landlord’s cost.

 

Terry Barger, President of Cyberlease, LLC, a leading lease audit firms based in Southern California independently confirmed the typical cost for after hour HVAC runs no more than $9/hr.

 

Certainly, the calculations are more complicated and vary from building to building depending on how many units need to be run in order for one tenant to be provided with the service, but there are remaining questions.

  • What is the actual cost of the electricity to operate the units after hours?

  • What is a realistic charge for maintenance, wear and tear, and administration?

  • What accounts for the delta between the advertise charge and actual costs?

  • Is that amount charged to individual tenants deducted from the Building’s overall operating expenses?

  • If multiple tenants are using after hour HVAC are all being charged for the same systems? Are landlords double/triple dipping?

When all's said and done, question remains, what is a reasonable charge? What are your thoughts? Feel free to email your comments as well as post.

 

When all is said and done, question remains, what is a reasonable charge? What are your thoughts?

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