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New trend for commercial leases

When Peter Notari pays utility bills for his architectural firm, Notari Associates, he writes his checks directly to Baltimore Gas & Electric Co., not his landlord.

The company, headquartered on West Ostend Street in Baltimore City, has paid utilities separately from its rent for about 15 years. That puts Notari in the vanguard of a growing trend.

According to commercial real estate observers, a growing number of office tenants have landlords who require them to be metered separately for power usage. Some tenants, such as Notari Associates, pay utility companies directly. Others pay sub-metered bills to landlords.

The strategy is meant to save landlords the trouble of having to predict volatile utility costs while giving tenants more control over their expenses.

“When you’re separately metered, you can affect changes to manage that,” Notari said. “I can decide that I want to run the thermostats higher in the summer and lower in the winter to affect cost savings.”

Utility costs for commercial users have been erratic in recent years, according to statistics from BGE. Commercial electricity prices rose about 17 percent between 2003 and 2004, then just 4 percent between 2004 and 2005. Hurricane Katrina threw electricity rates for a loop when it hit the Gulf Coast in 2005, shooting prices up 39 percent in 2006. Heating costs rose 28 percent between 2001 and 2006.

Himmelrich Associates, Notari Associates’ landlord, has been separately metering office tenants since the mid-1980s. The company was ahead of its time. Even 10 years ago, many office owners included utilities in tenants’ monthly rent, said Sam Himmelrich, the Baltimore-based company’s owner.

But that does not mean landlords paid utilities out of pocket. In most cases, landlords would estimate annual utility costs for a building and distribute those costs as part of tenants’ rent. Lease contracts often had clauses allowing landlords to recoup losses if utilities cost more at the end of the year than they had planned.

That tactic still occurs, but it happens less frequently than in the past.

“Clearly tenants and landlords are much more focused on the impact that energy, particularly electricity costs, has on their budget,” said Tucker Davis, an energy consultant with Baltimore-based South River Consulting LLC, which helps commercial users deal with utility bills. “Landlords want to shed that risk.”

With energy costs varying unpredictably from year to year, landlords no longer want to deal with the work of estimating rates and year-end adjustments. Separately metering tenants eliminates that work while giving tenants more power over their own energy costs. It is also fair, Himmelrich said, because tenants who use less energy are not forced to subsidize those who use more.

Himmelrich separately meters most of his tenants, although he does allow some tenants to include utilities in their rent payments.

Not every tenant is a fan of separate metering. Law firm Duane Morris LLP, which just opened its first Baltimore law office at 111 S. Calvert St., prefers to have its utilities included in its rent.

“We have space in 23 different buildings across the country,” said Fred Strittmatter, Duane Morris’ director of real estate and facilities. “It’s one less bill to have to pay.”

But Himmelrich said separate metering is not just about money. The concept is also environmentally friendly.

“It creates efficient consumption,” he said.

When tenants have to deal with their own bills, Himmelrich thinks they are more likely to use less energy.

“The theory is: If it’s free, I’ll take two,” he said.

“There is absolutely a trend among multistory space to have the tenant pay for utilities,” Himmelrich said. “The reason is clear. Nobody knows how much [utilities are] going to go up.”

Owen Rouse, senior vice president and principal of Manekin LLC, said his Columbia-based development company now separately meters tenants more often than it did in the past. He said tenants tend to like the concept.

“There’s an expression in the business, ‘You get what you pay for, and you pay for what you get,’” he said. “We’re making sure that tenant-incurred charges are really tenant-incurred costs.”

Corporate Office Properties Trust, which owns more buildings in Maryland than any other company, has been separately metering tenants in its office buildings for years.

“It’s been that way for a lot of the tenants, and we’ve been increasing the utilization of that technique over the past few years,” said Randall M. Griffin, Columbia-based COPT’s president and chief executive officer. “In today’s world, where there is a lot more data in buildings, a lot more extended hours at a varying cost of utilities, I think that is a very practical solution.”

While Himmelrich’s tenants tend to pay electricity companies directly, COPT’s tenants pay its landlord. COPT buys electricity in bulk and is therefore able to offer tenants discounted rates for utilities.

“That’s one of the advantages we have as a large owner,” Griffin said. “I think the big thing is that tenants know what their costs are because they get their bills directly, so they don’t get surprised at the end of the year.”