Tenants, beware of landlords with 13-inch rulers
Thursday, March 09, 2017
Measure twice so you only pay once.
While representing commercial tenants with leasing matters since 1993, we have found that some landlords are overcharging tenants for more square footage than the tenant actually has. Are you paying for phantom space?
As we explain in our book, "Negotiating Commercial Leases & Renewals For Dummies," this is a common discrepancy in the commercial leasing industry. Tenants frequently trust the reported square footage of their leased premises.
However, whether this figure was accidently reported by the landlord or reported by a distant property manager who has never even seen the site, 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?
Dale remembers having dinner one evening with a client. She shared that she had recently moved into a new 4,400-square-foot office. She went on to explain how spacious, beautiful and comfortable the office was.
When Dale 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 us several weeks to convince her to let us 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. That’s right — there was 800 square feet of phantom space.
In the real estate industry, we refer to this term when the tenant is paying more than is required for space that doesn’t exist. And, in this case, our client was paying over $50,000 more 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.
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 Common Area Maintenance (CAM) charges. CAM costs cover charges on property upkeep which benefits all tenants (e.g., 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.
If you have been taking the landlord’s word for the measurement of your business, you may be overpaying substantially. You may be presented with a "measurement certification."
Don’t take this certification at face value. 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 30–40 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 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?
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