How Electrical Capacity Impacts Lease Deals

Power availability is now one of the most critical factors in industrial leasing. Tenants in sectors like automation, EV charging, and AI logistics need far more electricity than older facilities typically provide. Many industrial properties in the Greater Toronto Area (GTA) fall short, creating challenges for businesses with high power demands.

Key takeaways:

• Modern power needs: Facilities often require 2,000–3,000 amps, but many older buildings can't meet these needs.
• Rising costs: Industrial electricity prices increased 18% from 2019 to 2024, making power a major expense.
• Delays in upgrades: Securing utility approvals for electrical upgrades can take 6–12 months, and grid connections may take up to 5 years in major markets.
• Impact on leases: Electrical capacity directly affects rent, tenant incentives, and operating costs. Properties with insufficient power require costly upgrades, often negotiated into the lease terms.

Before signing a lease, conduct a technical audit to assess a building's electrical infrastructure and negotiate clear terms for upgrades if needed. This can help avoid expensive delays and ensure your facility supports your business needs.

Common Electrical Capacity Problems in Industrial Leases

Reading and Understanding Existing Power Supply

Industrial electrical capacity is typically defined by a combination of voltage, amperage, and service type, such as "600V, 400A, 3-phase." However, many older facilities in the Greater Toronto Area (GTA) lack proper documentation of their power systems, making it difficult to determine their actual capacity.

"Properties marketed without electrical capacity documentation face valuation uncertainty as buyers cannot determine tenant limitations." - SVN® International

Ageing infrastructure like outdated switchgear, undersized transformers, and obsolete panels can further reduce the effective capacity of these buildings. This lack of clarity often results in tenants miscalculating their power needs, leading to operational inefficiencies.

How Tenants Misjudge Their Power Requirements

Tenants frequently underestimate their power demands until their operations are fully underway. For example, a cold storage operator might account for refrigeration system requirements but overlook the combined power draw of other equipment like conveyors, dock levellers, lighting, and even EV chargers during peak usage. These oversights can significantly impact lease costs and long-term energy expenses.

In multi-tenant gross leases, utility costs may initially appear low but can rise sharply as occupancy increases. Unlike fixed expenses such as property taxes or insurance, electricity costs fluctuate with usage. This variability often catches tenants off guard, especially when their initial calculations fail to account for the full scope of their energy needs.

Even when tenants recognize the need for additional power, addressing those needs can be a long and challenging process.

Why Upgrading Electrical Capacity Is Difficult

Upgrading electrical infrastructure is rarely straightforward and can complicate lease negotiations. In Ontario, for instance, major service upgrades can take anywhere from 5 to 10 years due to grid constraints. On-site limitations, such as the distance from local substations, further restrict how much additional capacity can be added to a building. Samantha Mariano of HRE Construction explains the risks:

"Discovering electrical limitations after expansion has begun often leads to rushed and costly upgrades."

As a result, tenants may find themselves stuck in facilities that cannot accommodate their growth, or they may face expensive, last-minute upgrades that were never part of their original plans. This creates a challenging situation for businesses trying to scale within their existing lease terms.

sbb-itb-1862e65

Warehouse Power Infrastructure: The Secret Metric Redefining Modern Leases

How Electrical Capacity Affects Lease Economics

Impact on Base Rent and Tenant Incentives

The electrical capacity of a building plays a key role in determining lease pricing. Properties with robust systems - such as 600V, 2,000A, three-phase configurations - are more attractive to tenants with high power requirements, often commanding higher rents. As Capstone Commercial explains:

"Power is not just a utility - it's a critical asset that directly impacts tenant productivity, equipment reliability, and long-term scalability."

When a building's electrical capacity falls short, landlords often address this through the Tenant Improvement Allowance (TIA), which provides tenants with funds to upgrade the infrastructure to meet their operational needs. If landlords are unable to fund these upgrades outright, they may offer free rent periods instead.

"Instead of coming out of pocket for a portion of tenant improvements, a landlord may provide free rent to induce the tenant to pay a portion of construction costs." - Allegro

Landlords tend to favour concessions like free rent because reducing base rent can negatively impact the property's assessed value, whereas free rent does not.

Utility Costs and How They Are Recovered

Beyond base rent, utility costs add another layer of complexity to lease economics. In Ontario, industrial utility billing includes not only the total electricity consumed but also the peak power demand - measured as the highest usage within a 15-minute interval. This can result in significant costs, particularly for operations running heavy equipment at full capacity. Under a triple-net (NNN) lease, tenants bear these utility expenses entirely.

To ensure fairness, landlords often use a gross-up provision for variable costs like electricity, ensuring no single tenant is overburdened during periods of low occupancy. For operations with high energy demands, such as food processing or cold storage, separate metering is increasingly common to ensure accurate billing.

Splitting the Cost of Electrical Upgrades

When substantial electrical upgrades are required, landlords and tenants must negotiate how costs will be shared. Several approaches are commonly used:

Cost-Sharing Method	How It Works	Benefits
Tenant Improvement Allowance	Landlord provides upfront funds; tenant oversees the upgrades	Tenant gains control over the project’s scope and timeline
Amortized Rent Adjustment	Upgrade costs are distributed across the lease term as additional rent	Landlord recovers costs gradually; tenant avoids upfront expenses
Tenant Capital Contribution	Tenant pays for the upgrade directly, often in exchange for free rent	Landlord retains the improved infrastructure; tenant benefits from reduced occupancy costs
Value-Add / Rent Reset	Landlord funds upgrades and adjusts rent upwards at renewal or re-leasing	Landlord enhances property value and future income potential

Regardless of the cost-sharing method, tenants should carefully review a detailed breakdown of all charges, including utility recovery and Common Area Maintenance (CAM) fees, to ensure they align with market standards. Negotiating a cap on annual operating cost increases is another smart move to guard against rising energy expenses over the lease term.

How to Handle Electrical Capacity in Lease Agreements

Running a Technical Audit Before Signing a Lease

Before committing to an industrial lease, it’s essential to conduct a technical audit of the building’s electrical setup. As Hollander Real Estate Law aptly points out:

"Industrial space does not necessarily guarantee adequate electrical service."

This audit ensures that the building's amperage, voltage, and phase configuration can accommodate your equipment - whether it's conveyor belts, refrigeration units, robotics, or EV fleet chargers. It also helps identify if upgrades are feasible, such as adding utility easements or modifying existing systems. Think of this process as vital as the due diligence you’d perform when purchasing property. Standard lease terms might gloss over operational limitations that only surface after you’ve moved in. Starting this audit during the Letter of Intent stage is smart, as utility approvals can be time-consuming. Once the audit is complete, make sure its findings are clearly addressed in the lease agreement.

Writing Lease Clauses That Address Electrical Needs

To avoid the pitfalls of underpowered facilities, your lease should include specific provisions about electrical upgrades and responsibilities. Standard leases often lack details about power infrastructure, so it’s critical to include clauses that clarify upgrade rights, landlord cooperation, and utility easements.

"The lease should address rights to upgrade electrical capacity, landlord cooperation obligations, utility easements, ownership of installed infrastructure, and removal obligations at lease expiration." - Hollander Real Estate Law

Key points to negotiate include the landlord’s role in working with utility providers and municipal authorities during upgrades, and a clear agreement on who owns any new electrical infrastructure installed during the lease. Will the infrastructure remain with the building, or will it need to be removed when the lease ends? These specifics can protect your investment and keep lease costs predictable.

"Industrial lease clauses can be complicated, so it's important to know what to look for before you sign on the dotted line." - Brian Smith, SIOR | CCIM | MBA, Regent CRE

Matching Tenant Power Needs to the Right Property

Once you’ve completed a thorough audit and secured well-crafted lease clauses, focus on properties that already meet your power needs. Choosing a site with sufficient electrical capacity upfront can save you from costly delays and headaches. Modern industrial operations - especially those relying on warehouse automation or EV charging - often require 2,000 to 3,000 amps of service. Properties offering this level of capacity are in high demand, with tenants increasingly prioritizing infrastructure readiness.

Blake Chroman, Principal at Sitex Group, captures this shift in priorities:

"It's no longer just about what is your rent. Instead, reliability, predictability, and infrastructure readiness define value."

Working with a specialist, like Michael Law at Lennard Commercial, can make all the difference. These experts help align your operational power needs with the right property, considering factors like location, clear height, and floor load capacity early in the process. This proactive approach can help you avoid unwelcome surprises and stick to your occupancy timeline.

Conclusion: Aligning Electrical Capacity with Your Lease Plan

Electrical capacity has become a critical factor in industrial lease decisions, making careful planning essential.

As Blake Chroman, Principal at Sitex Group, explains:

"Electrical service has become one of the key leasing variables."

The message is clear: ensure your power supply matches your operational needs before signing the lease. Falling short on power can disrupt operations significantly. Utility approval processes alone can take 6 to 12 months, and discovering a power deficit after moving in can lead to much higher costs than selecting a properly equipped property upfront.

To avoid these pitfalls, take proactive steps: conduct a technical audit, negotiate clear lease terms, and focus on properties that meet today’s power standards. These strategies, discussed earlier, can save time and money while ensuring your operations run smoothly.

For those navigating the industrial market in the Greater Toronto Area, these considerations are increasingly pivotal. Experts like Michael Law at Lennard Commercial can help you secure a lease that aligns with your electrical capacity requirements - whether you’re renewing, relocating, or searching for new warehouse or manufacturing space. Planning for power needs now can prevent costly delays and keep your business running efficiently.

FAQs

How do I confirm a building’s actual electrical capacity before I sign?

To determine a building’s electrical capacity, start by reviewing the specifications supplied by the landlord or property manager. Pay attention to details like amperage and phase configuration. It's a good idea to request thorough documentation and, if necessary, bring in a qualified electrical engineer or inspector to ensure the infrastructure can handle your specific operational requirements. For industrial properties, a three-phase power system is commonly used, as it supports heavier loads and provides a steady energy supply for high-demand operations.

Who should pay for electrical upgrades - the landlord or the tenant?

In many situations, tenants are responsible for paying for electrical upgrades when their operations demand extra capacity. These upgrades typically fall under the category of tenant improvements. That said, the exact responsibilities can differ based on the lease terms, so it’s crucial to examine the agreement closely.

What lease clauses protect me if utility approvals or upgrades are delayed?

When it comes to utility delays, certain lease clauses can help protect tenants from unnecessary financial strain. Two common provisions to look out for are delayed commencement and rent abatement.

• Delayed commencement means your lease start date is pushed back until all necessary utilities are up and running. This ensures you're not paying for a space you can't fully use.
• Rent abatement allows for a temporary reduction - or even suspension - of rent payments if utilities are delayed after the lease has already started.

Make sure to discuss these clauses during lease negotiations. They can provide a safety net, ensuring you're not left footing the bill for issues beyond your control.