Changing Heat - Who pays?

Question

Just purchased a 3-unit multifamily with a single boiler heating system.  I'm changing over to mini-splits for both heat and A/C and I couldn't be more excited to put that cost with the tenants and give them control over their own heat AND offer A/C.

New tenants won't be an issue, it'll be priced in and explained in their lease.

But I do have one tenant in a 2BR who has a lease through January, and she'll need heat this winter. Her current lease includes heat (and hot water which I plan on changing over too), so I can't just say "surprise, you're now paying for heat as part of your electric bill!"

I'm considering taking $100 off rent for Nov/Dec/Jan to compensate for the increased electric bills. And then renegotiate with a new lease.

I could instead add it temporarily to the 'common/landlord' panel, but that will probably require a panel upgrade, which is going to cost more than a few hundred $$.

Do you have any suggestions on how to handle it?  I want to do what's fair for both sides, but get these mini-splits installed before the heating season.

John Underwood · Answer

@Mike McCarthy I see several options. Talk with the tenant and let them know what is going on so that they are not blindsided.

1. You pay for the heat as the lease says and then specify what is going to happen in the new lease. Tie it into their electric panel and pay the extra electric. You could compare their bill from same time last year and pay the difference. The tenant would have to get these bills for you.

2. You see if you can offer the discount you mentioned in exchange for them taking over paying for the heat/AC till the lease ends. I would get their consent on this.

3. I would not do a panel upgrade for a temporary solution.

Thomas S. · Answer

Keep in mind that after the change over your tenants over all cost,  rent plus additional electric, must be cost/revenue neutral.  You will need to determine her additional yearly costs and reduce her rent accordingly.

For the first year you will need to do monthly comparisons to last year and send her a refund check. At the end of the year you will know her annual electric cost increase and lower her rent. This is tricky since if she is smart she will max out her electric costs this year to get a greater rent reduction next year.

Personally I would non renew her lease in January and find a new tenant to start fresh. IN the long term it would be far wiser than dicking around with a existing tenant change over. Getting rid of her is th eeasyist business move.

Johann Jells · Answer

Have you considered how the high electric bill will affect your turnover?  Electric heating in an old presumably poorly insulated building in the NE is very expensive.  A neighbor has a 600 ft "backhouse" studio heated with a heat pump and the turnover is constant. I have a single boiler 4U and got the heat bill far down from what it was disclosed at purchase.

Mike McCarthy · Answer

@John Underwood Thanks for the feedback.  I'm on board with doing something that's fair and getting the tenant's agreement.  I think she'll be happy having control over her own heat - last winter it was really hot since she didn't have control of the thermostat.

I'm struggling how to figure out an equitable discount.  I like your idea about getting last year's electric bills and comparing.  Since it'll be a brand new system, I'm really not sure if it'll be $50, $100 or $200.

Michael Lee · Answer

Hello Mike!  That is a good question and there will probably be different answers because the ideal cure is pretty expensive.  Being in the construction business for about 30 years and having a real estate broker license in Texas for about 30 years gives me a unique answer probably regarding your issue.  It sounds like you are pretty sharp and do show some sensibility.  Unfortunately, I would say the owner is responsible for the expenses up front but can get reimbursed by charging more in the rent payments on the new leases.

If the existing lease does not have the language in it that allows for that kind of extra expense (which is probably unusual) that makes a tenant partially or fully responsible with explanation to the new tenants responsiblility for that type of expense for air conditioning that is unusual unless common in that area and might be discovered during the research period on the subject property and uncovered then.

Unless it was found as a typical expense and included in the lease development stage , unfortunately, the owner would probably have to incur that expense upfront and slowly be paid back when new leases were made through higher rent and was able to be incurred as new language in the new lease and understood by the new tenant about who is responsible (at least partially) for that or any other possible capital expense.

With regards to the problem stated about using the landlord's panel, you might gain some additional wattage is by possibly downsizing some of your breakers.  An Electrician that is experienced could talk to you about that possibility.  When we added a bedroom to our house my electrician was able to do that without the added expense of a new, enlarged, panel.

That kind of problem is just another reason to not purchasing a residential (1 to 4 units) multifamily unless that special low down payment is part of the reason you take advantage of that you might need to get started.  I hope part of this helps you.

Good luck to you!

Changing Heat - Who pays?

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