Commercial Tenants with Phantom Space
Beware of landlords with 13-inch rulers
Grandfield (left) and Willerton.
As The Lease Coach, representing independent and franchise commercial tenants with leasing matters since 1993, we have found that some landlords are over-charging tenants for more square footage than the tenant actually has. Are you paying too much?
This is a common oversight in the commercial leasing industry. Commercial tenants frequently trust the reported square footage of their leased premises. However, whether this figure was incorrectly measured by the landlord or reported by a distant owner when they bought the property, the amount of reported square footage can easily be wrong. The end result is that commercial tenants needlessly pay an increased rent, based on their incorrect square footage … isn’t it better to keep this money in your own pocket than pay it to your landlord?
To explain further, Willerton was having dinner one evening with the COO of a large franchise store organization (one hundred plus stores). She shared that her company had recently moved into a new 4,400-square-foot office. She went on to explain how spacious, beautiful, and comfortable the new head office was. When Willerton asked her if she had ever verified the square footage, she said “no.” Why was this necessary? After all, this was the total area stated on her Lease Agreement. It took several weeks for Willerton to convince her to let him measure the space to determine if she was actually getting the 4,400 square feet that the landlord was charging her for.
Finally, she agreed. When we completed measuring the premises, the measured space was 800 square feet short. In the real estate industry, we refer to this as “phantom space” where the tenant is paying more than is required. And, in this case, this COO was paying over $50,000 more (for her entire lease term) than she needed to for space she didn’t have. We approached the landlord and corrected the problem—both for the past and the future. The tenant was reimbursed for her previous overpayments and continued to pay an adjusted rate into the renewal term.
Common Area Maintenance
Even the smallest amount of phantom space can grow to be quite large as rental rates and Common Area Maintenance (CAM) charges increase over time. As an example, we found that one previous client had a discrepancy of only 27 square feet. While this doesn’t sound like much, this specific unit was located in a prime downtown shopping mall with high rent. When this came to our attention, it was seven years into the tenant’s lease term and the landlord had collected $20,000 more than was rightfully due. Again, this came to a satisfactory conclusion with the tenant being reimbursed.
Yet another issue for commercial tenants to consider is how phantom space can repeatedly affect them. Understand that every tenant pays two rents—the base rent (which is negotiable) as well as the CAM charges. CAM costs cover charges on property upkeep which benefits all tenants (eg: trash removal, property taxes, and building maintenance) and are charged proportionately. Therefore, if a tenant occupies 1,800 square feet, then he/she is responsible for the CAM charges on that area as well. If that tenant has been wrongfully paying for phantom space, he/she will also wrongfully pay too much for CAM charges.
Such square footage discrepancies are very common for business-owners (specifically, those leasing retail and office space). In our experience, many discrepancies are negligent, not necessarily fraudulent. This is a small consolation as the tenant remains overcharged.
It’s never too soon or too late to have your space professionally measured. Nearly all lease agreements will state what measurement standard that the landlord has used to determine the area of your premises. Commercial tenants should note that there are several different industry standards for measuring commercial space.
If you have been taking the landlord’s word for the measurement of your business premises, you may be overpaying substantially on one, or more, of your locations. You may be presented with a “measurement certification.” Don’t be fooled. Many of the locations where we have found discrepancies on were “verified” as accurate, but, in fact, were measured incorrectly. Sometimes, the discrepancies are only 30 to 40 square feet; however, these can also be hundreds of square feet off especially if the leased space is significant in size.
As you can see, phantom space is a simple concept and can be simply avoided. No one can ascertain the exact size of an area by naked eye alone. Nor should a commercial tenant always trust what is stated on his/her Lease Agreement. Space measurement can provide peace-of-mind and can save you thousands of dollars … as a commercial tenant, isn’t this worth looking into?
Dale Willerton is founder and CEO of The Lease Coach. Willerton and Jeff Grandfield are Professional Commercial Lease Consultants who work exclusively for tenants. Both are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Contact Willerton or Grandfield at 800-738-9202, DaleWillerton@TheLeaseCoach.com or visit TheLeaseCoach.com. Request a copy of their free CD, Leasing Dos & Don’ts for Commercial Tenants, from JeffGrandfield@TheLeaseCoach.com.
This article first appeared in the October 2016 print edition of Alaska Business Monthly.