Here in the Garden State, we have a custom of charging office tenants for their tenant electricity use outside of the rent. When gross rents are quoted, they are stated as “plus tenant electricity”. New Jersey customs are a bit different from most of the country where the tenant electricity is included in the rent which is known as a “full” gross lease.
Tenant electricity is defined in an office lease as the charges that a tenant incurs for the use of electricity inside the office for lights and “plug-ins”. Tenant electricity does NOT include HVAC (heating, ventilating and air conditioning), charges that ARE included in the rent.
Why does New Jersey do this? The whole thing started back in the 1960’s when electric office equipment such as the electric typewriter and calculator were first introduced. These were soon to be followed by personal computers, which replaced the older style typewriters allowing for word processing and other business computing for finance.
The impact of this new equipment, while profound for business, did not initially affect electricity rates dramatically and those small increases were shared by all as the use of this equipment was ubiquitous. What did have an impact on the electricity rates was the introduction of the IBM 360, the first mini datacenter-style computer, which was an energy sucking nightmare. Used by finance, computer and pharmaceutical firms, these new computers needed lots of power 24 hours a day, seven days a week and even required special air conditioning to ventilate the heat they produced.
Up to this time, most office buildings had one or two electric meters for the entire building. The electricity charges for tenants were simply shared by all the tenants and included as part of the building’s operating expenses, and everyone was happy.
With the introduction of the IBM 360, Landlords had to quickly come up with a way to segregate the electricity use of these new energy consuming tenants and pass the charges on to them, before the other tenants in the building would revolt.
From an infrastructure point of view, all this was a bit of a challenge. Office buildings up till then had only one electric meter for all the tenants in the building and the properties were not designed to have multiple meters for each tenant. It was at this point that Landlords in New Jersey decided, rather than trying to meter each tenant, that the cheapest and best option was to segregate the electricity into two meters. One meter was wired for the tenant spaces for tenant electricity, (lights and plug-ins) and the other, known as the Landlord’s meter was for everything else. Landlords could, by electric survey or submeter, weed out the high volume electric users from the general population of tenants.
To this day, the system has operated in this way, which I refer to as “below the radar screen”. In Central New Jersey, most Landlords have “conspired” or agreed, depending on your perspective, to charge each tenant $1.75 per square foot for tenant electricity use. The rates in Northern New Jersey are mostly a bit higher at $2.00 per square foot. These rates have been the same for roughly 20 years now with the last big tenant electricity rate increases agreed to by Landlords in the early 1980’s.
How can this be? While I don’t believe that Landlords covertly discuss with each other how these rates should be established, they do somehow all seem to work in tandem. Just a word of caution to my tenant/clients in the New Year, that electric utility rates have been skyrocketing in the last few years since Covid came on the scene. Just look at your home energy bill. Sooner or later, Landlords may wake up and see the money they can create by passing the increasing cost of energy onto tenants.
As office tenants under a gross lease, you will soon receive an annual statement of operating expense and real estate tax escalation. If you have any questions regarding the charges in your invoice, why not give us a call to find out why, at Dickstein Real Estate Services, “OUR DIFFERENCE IS YOUR ADVANTAGE®”.
Regards,
Lawrence Dickstein
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