Measure twice so you only pay once.
While most commercial tenants pay their rent by the square foot, I have found that some landlords are overcharging business tenants for more square footage than the tenant actually has.
Are you paying too much?
This is a common oversight in the commercial leasing field.
Commercial tenants frequently trust the reported square footage of their leased premises.
However, whether this figure was accidentally reported by the landlord's architect or reported by a distant property manager who has never even seen the site, the amount of reported square footage can easily be wrong.
The discrepancies are often due to negligence, not fraud, but that's small solace. The end result is that you may be overpaying for your commercial space.
I was having dinner one evening with the chief operating officer (COO) of a large chain store organization.
She said her company had recently moved into a new 4,400-square-foot office, which she described as spacious, beautiful and comfortable.
When I asked her if she had ever verified the square footage, she wondered why this was necessary. After all, the total area was stated on her lease agreement.
Eventually she agreed to let me measure the premises; the premises were 800 square feet smaller than she'd been told – and 800 square feet less than she was paying for. In the real estate industry, this is called "phantom space."
Commercial tenants must consider two ways in which phantom space affects their costs. Every commercial tenant pays two rents: the base rent, which is negotiable, and common area maintenance (CAM) charges.
CAM costs cover property upkeep (for example, trash removal, property taxes and building maintenance), which benefits all tenants; the costs are charged proportionately. Therefore, if a commercial tenant occupies 1,800 square feet, he/she is responsible for the CAM charges on that area as well.
Every commercial tenant paying for phantom space is also overpaying on his/her CAM costs.
In the case of the COO, her company would have paid $50,000 for commercial space she didn't have over the course of her five-year lease term.
When informed of the situation, we negotiated with the landlord who reimbursed the tenant for her overpayments and adjusted the rent.
Even a small amount of phantom space can become a big loss.
Another client had a size discrepancy of only 27 square feet – but this unit was in a prime downtown shopping mall with high rent.
When the size difference came to our attention, the tenant was seven years into his lease term and the landlord had collected $20,000 more – in combined rent and CAM charges – than was rightfully due.
Again, this case came to a satisfactory conclusion, with the tenant being reimbursed.
With both of these examples, phantom space was caused accidentally, when the commercial space was initially measured improperly.
Regardless of the reason for the error, it is the commercial tenant who is left to pay the price – even if you are presented with a "measurement certification."
A location might be "verified" as correct, yet still be incorrect, because the certification simply reports on the initial measurement made.
Typically, an architecture firm (small or large) will have someone on staff or someone it can refer to who can come out and do a space measurement.
Architects who design buildings are accustomed to doing measurements. Usually a firm will send a junior architect to do a simple space measurement.
No one can ascertain the exact size of a space by naked eye alone.
Nor should a commercial tenant always trust what is stated on a lease agreement. Double-checking the measurement on your premises will give you peace of mind – and might save you thousands of dollars. •
Dale Willerton ([email protected]) is a lease consultant for tenants, a professional speaker and author of Negotiate Your Commercial, Retail & Office Lease or Renewal
