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Electricity recoveries: are you leaving money on the table?

Electricity cost management within a property is often expense driven. At times the same level of scrutiny is not always applied to revenue. The question to then ask is are you recovering enough of your electricity cost from your tenants? How would you know?

The basic rule of thumb is as follows: if you have a steam-driven chiller plant, then you should be collecting 65% of your total electricity bill from your tenants; if you have an electric-driven chiller plant, then you should be collecting approximately 50% of your total electricity bill from your tenants.

When applying this ratio remember to include total recoveries from multiple cost centers. Recoveries come from not only submetering and rent inclusion, but also from overtime HVAC charges. If you have a public light and power study (PLP), then instead of the rule of thumb, you can apply a more exact test. Common Area Expense (based on your PLP) plus Tenant Lease Revenue, plus Tenant Overtime Charges should be greater than or equal to total building expense.

How do you begin to pinpoint where exactly you may have a revenue shortfall after noticing that your recovery ratios are less than the noted rule of thumb? Let's first examine common submetering problems such as: 1) submeters are not capturing the entire load, 2) submeters are malfunctioning, and 3) the submetering company is not billing properly.

To identify submetering issues, a watts per square foot and load factor analysis can be performed. A tenant baseline is then established to determine which tenants should first be examined. Though not a perfect method of revenue problem identification, it is an excellent starting point to discover the large immediate problems. While this is objective, it requires subjectivity as well.

For example, even if a tenant falls below the baseline, the property manager may know that the tenant in question is underutilizing the space, with few employees and very little equipment. On the other hand, a tenant that falls above the baseline may also be questionable because the tenant runs a 24/7 operation with dense occupancy and heavy computer usage.

Once the problematic tenants are determined, the next step is to use a portable testing device such as a "Dranetz" meter to test the questionable submeters. This will provide a reasonable degree of certainty regarding meter accuracy. If a meter is inaccurate, it should be replaced. Most people are unaware that the older socket type meters still in use in many office buildings lose approximately 1% per year efficiency after 10 years of service. The owner may also be entitled to additional income from retroactive electricity billing.

Another place to look for a shortfall is in the submeter calculations. In one case the reason for a significant shortfall was that the submeter company had reversed the tenants' on-peak and off-peak meter readings so the submeter billings had been incorrect for over a year. In many other cases, the calculations were simply incorrect.

Rent inclusion is another area to closely examine. If a property with rent inclusion tenants is not collecting enough income it may be necessary to survey the tenants. The property manager will know which tenants have significant usage. Those are the targets. But the most critical issue is the failure to perform annual or more frequent rate escalations.

Lastly, determine that all tenants are actually being charged for electricity. Ensure that each tenant is paying for electricity for each leased space. Also confirm that any tenants who should have direct meters are not still drawing power from the landlord's meter. If all else has been checked and corrected and the property still lacks appropriate recoveries, check the Con Ed meter.

An annual or more frequent review of these cost-revenue centers could prevent a cumulative shortfall in revenue. This type of review also serves to strengthen lines of communication between leasing, property management, accounting and submetering company representatives for a more streamlined organization.


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Article Details
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Title Annotation:Property Management
Author:Sweeney, Diana
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Sep 13, 2006
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