Home Commercial Opinion: Tenants Overpay for Phantom Space

Opinion: Tenants Overpay for Phantom Space

TenantBase, Stonecutter TenantBase Investors, New York, Stonecutter Capital, Santa Monica, Razor's Edge Ventures, Atlanta, Dallas, Nashville, Newport Beach

By Dan Mihalovich

Fair warning: Touching this radioactive topic could be hazardous to your landlord. And pretty much every professional in the commercial real estate sector. The issue revolves around the proper, fair and legal way to measure office space you’re leasing every day.

Tenants: Why are you paying for more space than you’re using within the walls of your demised space? Landlords, real estate lawyers, brokers, architects and BOMA have a litany of answers for you. But to a significant degree it comes down to this: Because we said so. As we open up this can of squirrelly measuring sticks, let’s first flush out some observations.

This topic is so utterly hot, contested and complex that we simply cannot get our hands around the entirety of the issue in this writing. This is a landmark issue; tenants are unprotected and exposed to over-reaching by the landlord community.

We’re assuming a high level of understanding at the readership level. You know what we’re talking about: Load factors. Common area calculations, oftentimes imposed on tenants in a completely arbitrary manner. Building measurements and re-measurements that always find for the landlord. More space is always discovered when a building is re-measured, and with it the ever-expanding definition of what is common area. The notion that a lease is not a partnership between Tenant and Landlord; rather that the tenant must pay for all of the areas outside its walls, whether for the landlord’s equipment areas, janitorial and electrical closets, Building Management offices—nearly everything that is not a vertical penetration. And, when the time comes for the landlord to sell the building, you’ll likely be on the hook to pay the landlord’s real estate tax increases when all those areas within and outside your walls increase in value!

In our years of representing tenants, we’ve noticed that virtually all of San Francisco’s office buildings have been re-measured and grown in rentable area. The most opportune time to re-measure arrives when the new building owner takes possession. Time to find some easy money. Of course their tax basis with the City will increase with the newly measured asset, but the tenants will foot the bill anyway. In theory, the amount of usable space remains the same. But ask 20 architects to measure the usable area of your space, and you’ll get 20 different answers. The point is that load factors have soared over the years. This is indisputable. But how is it possible that an entire industry has swallowed this form of inflation without so much as a whimper?

On the topic of space measurement, the entire commercial estate industry has aligned to impose this set of logic on tenants: “Tenants, you will lease space X but will pay 120 percent of X in rent. The extra 20 percent is for space that you may not occupy (although you may pass through from time to time); you do not lease or own such space nor will you ever directly benefit from the sale of such space. In addition to paying full Fair Market Rent for the extra 20 percent, you will also pay for any and all costs—as such costs increase from year to year…and you know they’ll increase every year—to maintain, retrofit and otherwise service such space and the equipment contained therein.” Who thought up such a landlord-centric system upon which tenants must pay rent???

BOMA: The standard for measuring tenant’s space.

From the BOMA Web site:

BOMA (Building Owners and Managers Association): 16,500-plus members own or manage more than nine billion square feet of office space, which represents more than 80 percent of the prime office space in North America. Throughout BOMA International’s 100-year history, its goal has always focused on actively and responsibly representing and promoting the interests of the commercial real estate industry. 

Based on BOMA’s objectives, summarized in that statement, it remains to be seen how their system of space measurements benefits tenants. Perhaps tenants should offer as strong a lobby on an international front and their own standard for measuring space.

BOMA publishes research documents and how-to guidebooks, including: Standard Method for Measuring Floor Area in Office Buildings (ANSI/BOMA Z65.1). Tenants, you’ll notice that BOMA calculations, while not based on building code or any law, are the de facto standard system of measurement used throughout the landlord community. This doesn’t make the method correct or fair, however. But the American National Standards Institute (ANSI)/BOMA system provides a common ground; landlords who use a modified BOMA system of measurement must defend their maverick approach. Under pressure in negotiations, those landlords often succumb to using the BOMA standard.

BOMA also offers landlords their Insider’s Best Commercial Lease Clauses guide, in which “America’s top leasing attorneys help you maximize your revenues, reduce your liability, and protect your commercial real estate interests.” Tenants can see whose rights are advanced and protected, below.

BOMA makes no bones about its cause célèbre: Serving the landlord!

Consider the following from the organization’s Web site:

The best model lease clauses and advice for owners, managers, attorneys, and other real estate professionals, gathered for you in one handy source to skyrocket your commercial real estate profits and solve your biggest leasing headaches. Now you can have at your fingertips. 

  • Hundreds of model lease clauses to help you maximize income in virtually any commercial leasing situation
  • In-depth commentary and how-to advice in plain, easy-to-understand English
  • Proven tips to help you negotiate more effectively, plug loopholes, protect yourself legally, and stop trouble before it starts
  • Complete 2-volume loose-leaf set showing you how to handle scores of commercial leasing problems
  • Fully categorized contents for instant access to any answer you’re looking for

Who benefits from higher load factors? Landlords. All brokers, since both landlord and tenant brokers are paid on the basis of the rentable square footage leased. Architects and contractors, since the landlord’s contributions toward fees and construction are a function of the size of the space. Appraisers. Property Managers. Everyone benefits, right? Except the tenants.

So, BOMA calculations (NOT based on building code or law) assist the industry in establishing “rentable” square footage areas.

Gross area calculations are governed by the specific city or county’s planning code.

Exiting and occupancy area calculations are governed by building codes. This calculation seeks the minimal area necessary to meet allowed occupancy loads (think of public assembly areas and their capacity). By the way, as the building code defines these areas, the code measurement does not include the space taken up by columns and wall thicknesses, but rentable calculations do, according to BOMA.

In contrast, rentable area calculations—the task set out by BOMA to calculate—seek the most area available for maximum revenue. This is not favorable to tenants.

BOMA Measurement fine print from the Web site states, however: “Neither BOMA nor ANSI certifies, approves or endorses any space measurement firm or measurement device.”

Good luck with your interpretations and concoctions.

Dan Mihalovich is the founder & CEO of Mihalovich Partners, a San Francisco based commercial tenant-representation firm.

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