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A suburban software company had decided to investigate relocation options. After an exhaustive search they fell into the category of 80% of commercial tenants - they were ready to give up and just live with renewing their space. The competing options were just not attractive enough. They were lateral moves. Some of the buildings were better than staying put, but when factoring in relocation and construction costs there was not much of an incentive to take the plunge.
So they uploaded their lease to Lease Ref for some pointers prior to engaging the landlord to negotiate the renewal.
Lease Ref identified that the usable area of the premises (the actual premises - the "carpetable" area) was 2,535 square feet. But the rentable area (what the tenant pays rent on) was 3,371 square feet.
Therefore the building gross up factor was: 3,371 / 2,535 = 33%
This is well above industry norms. In fact it is about double industry norms.
If the client were to pick up their space and drop it into another building, they would expect to pay rent on a rentable area of 3,043 (based on a conservative gross up factor of 20%).
The alternative buildings the client toured were taller than their existing building. This matters because there are more tenants to spread the ground floor common areas to.
For example, if look at two buildings that are otherwise identical, but one building was built to be four floors and the other is 7 floors, a 10,000 square foot ground floor lobby will be divided amongst almost twice the square footage of tenants than the 4 storey building.
The hallways on a particular floor are only charged back to tenants on that floor. If they are extra wide then the incremental square footage over and above what is normal is now added to the square footage the tenant pays rent on without it being of any use to each tenant.
Even if the hallways were a normal width, the building had a smaller than average floor plate size. The gross up factor is really about the ratio of usable area to common area.
A landlord-friendly gross up factor provides a lot of common area, with little useable area.
The tenant's building had a distance from their front entrance to the windows of only 20 feet. The other buildings they considered had quite a bit more distance - they were deeper units that provided more usable area for the common area that has to be accounted for.
The client's building did not have an efficient lobby. The landlord wanted a more open feel to the building and sacrificed ground floor leasable area for aesthetics. As that extra square footage is charged back to the tenants, it increases the gross up factor.
These are all items that nobody can do anything about now - they were issues that were created when the architect and the landlord finalized the specs for the building.
The bad news is that the tenant has been in the building for 15 years. Compared an average building in the area, they have now paid $135,000 above market ($35 gross rent x 257 extra square feet more than they need x 15 years).
The good news is now they know better!
The client resumed the search process and began looking for spaces that actually match what their rentable area will be in those buildings. They informed their existing landlord that if they were to renew that they would need to deem the space to be at a market gross up factor (in other words, the square footage would be reduced).
The incumbent landlord did not compromise on the measurement as they feel that they can achieve that square footage with the next tenant who leases the space.
The client was able to secure a space with a below market gross up factor of 9% and ended up saving a few dollars per square foot on the gross rent, so although they cannot change the past, they are now on the right track.
What's in your lease?