News Clipping
Office Tenants Pay for More Phantom Space
By Dan Mihalovich
California Real Estate Journal
May 11, 2009
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.”
This is a landmark issue; tenants are unprotected and exposed to over-reaching by the landlord community.
Building measurements and re-measurements always find for the landlord. More space always is discovered when a building is re-measured. There is ever-expanding definition of what is a “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 27 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 real 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 which 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 also will 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. BOMA’s 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 always has focused on actively and responsibly representing and promoting the interests of the commercial real estate industry. Based on BOMA’s objectives, it remains to be seen how its 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, or ANSI/BOMA Z65.1. Tenants, you’ll notice that BOMA calculations, while not based on code or any law, are the de facto standard for the system of measurement used throughout the landlord community. This doesn’t make the method correct or fair, however. But the 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 its “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.”
BOMA makes no bones about serving the landlord.
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.
Who benefits from higher load factors? Landlords and 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, except the tenants.
So, BOMA calculations assist the industry in establishing “rentable” square footage areas. Gross area calculations are governed by the specific city or county’s planning code, however 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 seek the most area available for maximum revenue. not favorable to tenants.
What are “building common areas”? The theoretical answer to this question is that these are areas shared by tenants throughout the entire building. The reality, however, is that most tenants rarely access most of these spaces. Many of the common areas are never accessed by tenants. Yet tenants are expected to pay the same fair market rent for these spaces as tenants do for their demised office space. Here are some examples of building common areas:
- basement-level utility, engineering and storage spaces
- roof-level utility and machinery areas
- mechanical floors
- fuel tank and pump areas
- recycling areas
- ground floor lobby areas and all circulation
- telephone rooms and janitorial closets
- restrooms
BOMA Measurement fine print: Neither BOMA nor the American National Standards Institute certifies, approves or endorses any space measurement firm or measurement device.
Good luck with your interpretations and concoctions.
©2009 Daily Journal Corporation.
