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
City apartment building that is overcrowded, poorly constructed or maintained, and generally part of a slum. In law, a tenement also refers to possessions of an individual that are ...
Cash flow before subtracting income taxes. ...
Obligation taken on by a person who did not obtain it originally, but agrees to honor the terms of the existing obligation as a condition for the transaction. By assuming the loan rather ...
Latin for by itself. A per se matter is one that is alone and not connected to another matter. For example, age, per se, is not a determinant of health. ...
Reduction of part of the balance of property by charging an expense or loss account. The reason for a write-down is that some economic event has occurred indicating that the asset's value ...
The maximum pre-approved amount that an individual or business can borrow without preparing a new credit request. It is a safety buffer in the event funds are needed for unexpected ...
Value of a company's or person's name and reputation, As a result, the business will have a competitive edge, and generate better-than-typical future earnings. ...
Money set aside for a possible loss, such as from a fire. ...
The term ad valorem comes from Latin, and its literal translation is “according to value”, which makes the ad valorem tax definition easy to understand. Defining ad valorem tax ...
Have a question or comment?
We're here to help.