Q: I am an apartment owner in a major metropolitan area and have a question regarding heaters. I currently have leases with all 10 tenants in my building where I pay gas and they pay electricity. All the units have gas wall heaters. I recently conducted my annual inspection of the units and realized that the large majority of the tenants left their heaters on during the day (most likely because they are not paying the bill), which obviously runs my bill up. Can I switch the gas heaters out with new electric heaters (in which the tenants would pay for their heat because they pay for their electricity)?
A: This is an excellent question. You have hit on an important topic that many landlords and property managers often overlook. Any time you can make the tenant responsible for the costs of operating your rental property, you give them an incentive to conserve.
This was true back in the 1970s when many residential rental properties were converted to individual electric meters, just as it is true with the recent trend towards individually submetering water. With your situation, you could possibly convert from a master-metered natural gas meter to individual gas meters and then have the tenants become responsible for their own natural gas usage.
This would be the best way, as it would cover not only the gas for space heating but also the gas used for cooking and heating the water, particularly if you have individual hot water heaters for each unit.
A more cost-effective alternative is what you mention: simply replacing the gas wall heaters with electric ones. You can legally do this with proper notice to your tenants of the change in terms of tenancy. Simply give your tenants notice upon renewal at the end of their current lease or with a 30-day notice of a change in terms of tenancy if they are on a month-to-month rental agreement.
Since the conversion amounts to a rent increase, you may propose this change in lieu of a portion or all of an increase in rent to current market levels. If your tenants are already at market rent, then you may even want to consider lowering the base rent by the estimated amount that the tenant’s electric bill would increase so that the overall "out of pocket" to your tenant is still about the same.
Of course, your tenants will then have the ability to control their own usage, and a conservation-minded tenant will likely see a net reduction in their combined costs of rent and electric expenses.
Q: I own a property management company and began leasing a building in Sausalito, Calif., for my business in January. When signing the lease, I noticed that part of the money I pay each month is for the payment of the property taxes on the building. Is this legal? I manage quite a few residential properties, including many rental homes that I also own. Can I charge my residential tenants for my property taxes on these rental homes?
A: The custom and practice in the leasing of commercial space and residential rental units is entirely different. In commercial leasing, the tenant is often asked to pay for or reimburse the landlord for certain specific operating costs of the building. These leases are net leases.
There are reasons for this, as sometimes the particular activity of a tenant will lead to increases in operating costs. Insurance is a good example, as a commercial tenant might conduct business activities that could raise the insurance premium for the property. There also may be additional rent based on the sales generated by the tenant. Many commercial leases are negotiated and structured this way.
Residential leases are traditionally negotiated on a gross lease basis where all operating costs of the landlord are included in the quoted rent. So, in essence, you are already charging the tenant for the property taxes and all other operating costs. That doesn’t mean you couldn’t set your rent the same way a commercial landlord does, but it would not be readily accepted in the market.
A residential tenant expects and will find plenty of landlords who quote a fixed rental rate, and the certainty of that amount is beneficial to both the tenant and the landlord. That doesn’t mean that all residential landlords do not ever have any additional amounts that they charge above the base rent.
In residential rentals, the most common additional charges are for association dues or water/sewer reimbursement, or landscaping or pool/spa service. Also, it is important that you be consistent with your rental rate calculations, as there are fair housing implications in residential housing if you seem to have a discriminatory or arbitrary way of calculating rents for each tenant.
I suggest you stick with tradition and quote only gross rents for your residential tenants. If your property taxes or insurance or other operating costs increase, then you should seriously consider raising your rent if the current market conditions warrant an increase.
This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of "Property Management for Dummies" and "Property Management Kit for Dummies" and co-author of "Real Estate Investing for Dummies."
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