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Hidden Value of Commercial Square Footage in Leases

Here’s how to make sure you are getting the most value out of your commercial or retail leases – both from the perspective of the landlord and the tenant. Knowing exactly how much square footage you have (and are paying for) is the key to maximizing your rent and your overhead costs.

March 24, 2012

About three weeks ago I moved into a new office in Pioneer Square in Seattle. While the process of moving has kept me busy, I love the space and I love being around lots of great old buildings and some decent lunch food (and some great, check out the Berliner). Part of the process of moving, though, was negotiating my lease and making sure I had enough square footage. We’re in a small space, but it is all laid out well and there isn’t a wasted square foot. This is so key. Smaller space equals lower rent equals lower overhead equals less I have to charge clients. Simple enough math, right?

The math that isn’t always simple enough though is what square footage you are actually paying for? I recently had a conversation with a client that got me thinking about commercial leases and how square footage is calculated and how the number provided is usually taken for granted. The landlord tells you 1,000 square feet at X amount per square feet and you pay that amount. Simple enough.

But what has happened over the last several years in particular due to a variety of factors (the Great Recession, property managers upgrading to more accurate drawings, tenants being savvier), is that the assumed square footage of tenant spaces that have been passed down like folklore over the generations have gone out the window (which you may or may not be paying for!). Both sides of the table need to be aware of what is going on and use it to their advantage. Quite frankly, the smartest person wins these days. Come prepared and come prepared to pay just what you have to.

Commercial real estate spaces (retail, storefront, office space) have been measured over time to a variety of different ways. Some landlords will just measure the computer drawings (which may or may not have been built that way), some will measure to paint, and others will just guestimate. It is all over the map. The official method that should be used is produced by BOMA (Building Owners and Managers Association International) who produces exacting standards of what you measure to in a variety of conditions. Depending on if you have an adjacent tenant, or are next to a common stairwell, there will be different things you measure to. This is the gold standard and one which is very defensible in all sorts of situations.

You also have to factor in that the common areas of the building (hallways, lobbies, etc.) are usually charged to the tenant in some sort of prorated form. So the smaller your space is the smaller your prorated charge for common areas will be.

So what does this mean to you?

If You’re a Building Owner:

You need to verify how your spaces are measured and to make sure that you’re not leaving square footage on the table. If your measurements are taken to paint, there’s a good chance you’re missing out on valuable square footage that tenants should be paying for. Getting your building field measured isn’t as painful as you may think, and will provide some clarity in lease negotiation and also likely some increase in revenue. If you’re thinking of buying a building, there may be hidden value in the building just because of the way it was improperly measured!

If You’re a Tenant:

It can be very helpful to measure your space to BOMA standards with the help of an architect who can walk through exactly what size space you are preparing to lease. There’s a very good chance that you’ll actually have a space smaller than the landlord thinks and with a simple report from an architect you can back up your claim far easier than if you take the measurements yourself. And heck, if you find out that your space is BIGGER than the landlord thinks it is (like I said, it is all about who comes to the game with more information) than you can know that you’re getting a good deal and lock in your lease at the square footage given to you.

It is all about knowledge. And in today’s economy (“now, more than ever”), we’ve all had to learn that to maximize profits it is smart to really make sure we’re only paying what we need to. Your rent is certainly something that shouldn’t be left on the table.

Building and space assessment is one of my favorite services to offer. I get to talk to great clients and usually help them out and save them (or make them) some money. Besides getting to blog about stone covered hot tubs and mismatched interior trim this is one of the greater rewards of what I do.

And for a little extra, I’ll even go and measure that stone covered hot tub you bought on site. (Hint: it is too big and you paid too much for it).

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