Major consulting company that leased 100% of an office building in North Carolina.
The lease provided that the tenant was to pay a fixed amount per “Rentable Square Foot” for its space. The number of Rentable Square Feet was estimated in the lease, and was subject to adjustment once the premises were occupied. After the tenant moved in, the landlord submitted architectural drawings and plans to support a measurement of 42,450 Rentable Square Feet, and the tenant proceeded to pay the rent based on that size. In reviewing the file several years later, however, KBA discovered that the number of “Rentable” feet was not properly defined and that the measurement standard the landlord used was incorrect. The standard the landlord used was the one intended to measure the space when a tenant leases an entire building. KBA concluded that the proper measurement standard should have been the one used when a tenant leases out normal multi-tenant office space. This subtle distinction meant an 8% difference in the rent, because the measurements for multi-tenant office buildings are taken from the inside wall to inside wall, and omit unusable space and vertical penetrations, whereas the measurements for entire buildings are taken from outside wall to outside wall and include everything inside.
KBA argued that the totality of circumstances in the case led to the inescapable conclusion that this lease was intended by the parties to be much more like a multi-tenant office lease than like a lease of an entire building. It was merely coincidental that the tenant needed the total amount of space in the building, as demonstrated by internal tenant memoranda and correspondence during lease negotiations. Furthermore, unlike most full-building leases, this lease gave the landlord full control over building operations. The most decisive factor, however, was that the lease gave the tenant the option to relinquish portions of its space at certain intervals. Had the building measurement been set at the ‘full-building’ standard, exercise of this option would have required the lease square footage to be completely recalculated.
KBA was able to clearly present its position to the landlord, and the landlord agreed that the rent should be recalculated based on a multi-tenant office measurement standard rather than the larger, entire building standard. This resulted in an immediate refund and a reduction in the rent for the entire lease term, saving the tenant $187,000.
Alliance Partner American Bar Association blog BOMA building occupancy CAM Commercial Investment Real Estate Magazine Commercial Real Estate Investment Magazine Common Area Maintenance CoreNet CPA Certification Duke Long FASB Grant Thornton Grossing Up Gross Up IASB Jason Sanquist Landlord Lease Accounting Lease Audit lease auditing Lease Management Software Lou Ferro Marc Betesh Michael Meyer Operating Expenses Pass-throughs Podcast Press Release PRG-Schultz PRGX Profit Recovery Property & Probate Magazine real estate operating expenses Real Estate Tax Retail SIOR Speaking Strategies Timing Twitter vacancy visual lease website