When a tenant leases commercial space, one of the most basic issues is how much rent will it will be paying each month. And the single-most important rent factor is the physical size of the premises
Yet, despite its importance, few tenants really know how much space they really have. That’s because the basis for determining the size of the premises is often not addressed in the lease.
The amount of space the tenant can actually use is called the “Usable” space. However, space in a market isn’t priced based on Usable square footage. It’s based on the Rentable square footage, which includes an allocation of the common areas of the building.
There are several different measurement standards that apply, depending on the market. These standards vary primarily by treating common areas differently and by measuring to different points on perimeter walls. The various standards include:
BOMA—The Building Owners and Managers Association
REBNY—The Real Estate Board of New York
GWCAR—The Greater Washington Commercial Association of Realtors
IFMA—The International Facility Managers Association
AIA—The American Institute of Architects
Because of these variations, if there is no specific understanding as to which one applies to a particular lease, the exact size of the space will remain unsettled.
Most lease documents provide no help in giving a tenant comfort as to the correct size of the space. In most leases, there are no direct references to the measurement standard being employed by the landlord. Nor is there any direct linkage between the size of the premises and the rent. The most the lease will say is that there is “approximately X rentable square feet.”
Furthermore, even though the rent may have been negotiated as an amount per square foot, the rent obligations in the lease are not; they are usually set as aggregate amounts, payable in monthly installments.
The difficulty this presents is that without such linkage, if the space turns out to be less than represented, the tenant may have no recourse in reducing the rent to reflect the correct size.
Many landlords recognize the “fuzziness” of measuring footage, and some have touted the potential for increased rents due to remeasurement. As stated by one landlord, “[Our firm] plans to utilize REBNY standards as leases expire to increase the rentable area of the Property by 5%.”
In reality, rarely does anyone actually measure the Rentable Area. The most tenants will do is measure the Usable Area as part of space planning. The Rentable Area is often taken at face value. When pressed, many landlords are flatly unable to substantiate their numbers. Many Rentable square footage numbers are not based on measurements; they are based on “guestimates.”
What’s the answer? Here are a few tips to determine how to deal with space measurement during lease negotiations.
Define the rent as a cost per Rentable square foot;
State a measurement standard; and
Provide for adjustments if the Rentable footage changes.
Try to obtain a representation from the landlord as to the building size in Rentable square feet. This will affect your Rentable Area as well as share for determining building expense pass-throughs.
Because the size of the premises is the single most important determinant of cost, it is imperative that it receives the proper attention both during lease negotiations and drafting of the lease documents.
Alliance Partner American Bar Association blog BOMA CAM Commercial Investment Real Estate Magazine Commercial Real Estate Investment Magazine Common Area Maintenance CoreNet CPA Certification Grossing Up Gross Up Landlord Lease Audit Marc Betesh Michael Meyer Operating Expenses Pass-throughs Press Release PRG-Schultz PRGX Profit Recovery Property & Probate Magazine Real Estate Tax Speaking Timing Twitter website
WP Cumulus Flash tag cloud by Roy Tanck and Luke Morton requires Flash Player 9 or better.
Grossing Up Operating Expenses in Commercial LeasesYour Landlord’s CPA Certification is Not EnoughFailing to Audit Last Year’s Expenses Can Cost You Years of Rent Overcharges6 Reasons to Check Your Lease’s Operating Expense Bill
How can the timing of my lease audit affect the results?Do I have the right to audit my lease?What can be wrong with my bills?How will auditing my lease affect my relationship with my landlord?
