Office Tenants Pay for More Phantom Space than Ever
Dan Mihalovich
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.” As we open up this can of squirrely measuring sticks, let’s first flush out some observations:
This topic is so utterly hot, contested and complex that we simply cannot get our hands around the entirety of the issue in this writing. So, we’ll be digging further into it in subsequent writings for our readership within the tenant community. This is a landmark issue; tenants are unprotected and exposed to over-reaching by the landlord community.
We’re assuming a high level of understanding at the readership level. You know what we’re talking about: Load factors. Common area calculations, oftentimes imposed on tenants in a completely arbitrary manner. Building measurements and re-measurements which ALWAYS find for the landlord. More space is ALWAYS discovered when a building is re-measured. The 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 our 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 estate industry has aligned to impose this set of logic on tenants: “Tenants, you will lease space X but will pay 120% of X in rent. The extra 20% 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%, you will also 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 (Building Owners and Managers Association): 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 has always focused on actively and responsibly representing and promoting the interests of the commercial real estate industry.” So says the BOMA website. Based on BOMA’s objectives, summarized on their website, it remains to be seen how their 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 (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.
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BOMA makes no bones about its cause célèbre: Serving the LANDLORD:
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Who benefits from higher load factors? Landlords. All 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, right? Except the tenants.
So, BOMA calculations (NOT based on code or law) assist the industry in establishing “rentable” square footage areas.
Gross area calculations ARE governed by the specific city or county’s planning code.
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 (the task set out by BOMA to calculate) 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 mosttenants 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 ANSI (the American National Standards Institute) certifies, approves or endorses any space measurement firm or measurement device. Good luck with your interpretations and concoctions. More to come on this landmark topic…
Think about it.
Cheers,
MIHALOVICH PARTNERS
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About the Author
Mihalovich Partners, a San Francisco based commercial tenant-representation firm, was formed in 1998 by Dan Mihalovich, then a 16-year Industry veteran and Director of Office Leasing at Cushman & Wakefield. Mihalovich brings to the firm 35 years of business experience, focusing on Market Analysis, Negotiation Skills and Project Management expertise. He has managed over 200 office-leasing and project management assignments for many of San Francisco's most prestigious tenants. His career, and the focus of Mihalovich Partners, is solely driven to advocate the interests of San Francisco tenants in leasing negotiations of all types—renewals, relocations, renegotiations, and terminations. Mihalovich Partners never represents landlords, avoiding conflicts of interest, unlike most firms in the leasing brokerage business.
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