Definition of "Utility"
In order to determine what is the definition of utility, we only need to look at what the term comes from. The word utility can be used to describe something useful and when looking at what is utility in real estate we see amenities that provide functionality and the actual ability to use properties based on our modern lifestyle. Thus, utility is an additional service that is required so that the property can be fully functional. These services are paid on a monthly basis and include services such as electricity, natural gas, air conditioning, sewage, water, trash, and, based on the evolution of modern living needs, sometimes internet and cable as well.
In other words, the term utility covers services provided to a parcel of land by public utility companies, such as gas, water, electricity.
Why are Utilities Important in Real Estate?
Whether you are interested in rental properties or are looking to purchase a home, the cost of utilities can tell us a lot of things. When the landlord determines the price they charge tenants for rentals, they keep in mind the cost of utilities because these monthly expenses influence your return on investment and profit. Utilities can also be offloaded to the tenant, making them responsible for the monthly costs from gas, electricity, water, etc. However, by not passing the utilities responsibility, they make sure that all the bills are paid on time.
Utilities in Commercial Real Estate
Regarding commercial real estate, utilities are included in the operating expenses as they are paid out-of-pocket and impact the Net Operating Income (NOI). These costs are split between the multiple commercial tenants through the pro-rata method and come as a cost added to the monthly rent. The cost of utilities and other operating expenses is split based on the square footage of the space rented for common areas. Otherwise, and mainly if it can be determined how much each renter spends, they each pay the amount of water, gas, and electricity they use.
Popular Real Estate Terms
Interest based on a 360-day year instead of a 365-day year. The former is referred to as simple interest and the latter is termed exact interest. The difference between the two types of ...
Expenditures incurred to improve a specific real estate development; however, these improvements are not directly on the property. Example are curbs, driveways, and streets. ...
Giving money, a good, or service that is worth something in exchange for another good or service provided by the other party. An example is paying cash for the market price of a home. ...
Same as term capitalization rate: Also called cap rate or income yield. A useful way to compute the rate of return on a real estate investment. It equals the net operating income (NOI) for ...
lender who charges an exorbitant interest rate, which is typically illegal because it exceeds the interest rate allowed in the state. A borrower may go to a loan shark if he cannot obtain ...
Term given to two depreciation systems defined by the Internal Revenue Service: The main system is called the General Depreciation System (GDS). Under GDS, most property is assigned to ...
When a mortgage loan is provided to a borrower, the lender establishes a fund called a tax and insurance escrow to accumulate the debtor's monthly payments for property taxes and insurance ...
A clause in a document forbidding an individual from selling or transferring the subject property to another. Frequently, nonalienation clauses are used in a trust where the grantor of the ...
Land located on a precipice. ...
Have a question or comment?
We're here to help.