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What's so hard about measuring office space - when is a square foot not a square foot? When it is a magically growing square foot.
What is the best way a landlord can increase revenue - Increasing the "size" of their rented areas.
Imagine if you could magically increase the size of your market, or the size of your market share. Wouldn't that be great?
So why is there so much room for black magic in measuring office space when it should be a very objective exercise, especially with laser measurers? Three simple reasons...but first, if you want to watch a quick video to see what we mean, well here ya go...
Measuring office space is easy. If we lived in a world in which tenants paid for the actual square footage WITHIN their space you would not be reading this article right now.
The square footage would match the amount of carpet you purchased.
But we live in a world in which tenants also pay for their proportionate share of common space. That is where the waters start to get muddy. Some measurement methods include the ground floor lobby area. Others do not.
There are mechanical and electrical rooms that no tenant ever sees and they are all paying for their fair share of those rooms. Even if a tenant were to attempt to audit a landlord's measurement of common areas, who has the time, energy, and resources to do so?
Every tenant's rent consists of both net rent and the additional rent. When a tenant and landlord negotiate a lease, typically the only part of the rent that is negotiable is the net rent.
For example, in the case of a building having a net rent of $20 and an additional rent of $20 and the tenant is able to negotiate the net rent down by 10% ($2.00), it is only a reduction in the gross rent of 5% ($2/$40).
The average increase in square footage when a landlord remeasures is 10%.
Let's take an example with a 5,500 square foot tenant.
The tenant is focused on negotiating the landlord down prior to agreeing to lease the space. It is a tight market, so the landlord only agrees to a $2 per square foot reduction in the net rent.
5,500 x ($18 net + $20 additional rent) = $209,000 annual gross rent
The tenant feels like a boss. He reduced the net rent by 10% in a hot market (saving $11,000 per year x 5 years - not bad!).
What the tenant does not realize that the space was only 5,000 square feet for the last tenant. Uh oh.
If the tenant knew this and agreed to not touch the landlord asking net rent of $20 but was able to keep the measurement the same, then the annual rent would look like this:
5,000 x ($20 net rent + $20 additional rent) = $200,000 annual gross rent
Can you see why a landlord would love to do some creative measuring on every space and has no incentive to keep spaces as they are?
Here is another case in which a tenant has 9 months left on their term and they are subletting their premises. The landlord is also marketing the space as direct space (not sublet space). The landlord has already "re-measured" and it is higher than what the existing tenant pays for:
Most commercial real estate brokers do not understand building measurement methods.
Of the ones that do understand, do they have any incentive to tip off their clients?
After all, the larger the space, the larger the commission. Also, bringing up details like the landlord's measurement of the space can be a great way to muck up the deal! So most tenants are completely in the dark and this issue falls under the category of "you don't know what you don't know".
One client of ours in particular did not want to relocate from their office space.
The market alternatives were not cost competitive enough to justify relocating. Until we discovered that the average option in the marketplace had a 15% "gross up" factor and their building was at 33%. That's right - 33% of the rent they paid was for space they got to use in common with all other tenants (hallways, washrooms and the ground floor lobby).
The client began giving serious consideration to outside options.
In the end they decided to relocate with their new-found knowledge that not all buildings are measured in the same way. They were able to find space that was a lower RENTABLE area, but a higher USEABLE area - they had more space in their new suite but paid on a lower square footage.
Ask what the building "gross up" or "mark up" factor is.
It is the difference between the USEABLE area (square footage of your premises) and the RENTABLE area (the square footage you pay rent on). For a normal office building the gross up factor should be 5-10% for a full floor user and 15-20% for a multi-tenant floor.
Ensure that your offer to lease or letter of intent does not allow for the landlord to remeasure your premises during the term of the lease or any renewals thereof.
If they do...do you think it will grow?