Retail Tenants…Beware of Landlords with 13-Inch Rulers!

by Dale Willerton & Jeff Grandfield -The Lease Coach

Representing commercial tenants with leasing matters since 1993, we at The Lease Coach have found that some landlords are over-charging tenants for Phantom Space (more square footage than the tenant actually has). Are you paying too much?

This is a common oversight in the commercial leasing field. Independent retail 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 property owner who has never even seen the site, the amount of reported square footage can easily be wrong. The end result is that independent retail 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?

On a related note, Dale remembers having dinner one evening with the Chief Operating Officer of a franchisor.  This franchise system had approximately 160 locations across the country.  She shared that the franchisor’s head office had recently moved into a new 4,400 square foot office space. She went on to explain how spacious, beautiful and comfortable the office was and that it was so much better and bigger than the previous head office location. When Dale asked her if she had ever verified the square footage of the office, she said “no”. Why was this necessary? After all, this was the total area stated on her Lease Agreement. It took Dale several weeks 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 but, once again, telling him everything was fine. When we completed measuring the premises, the measured space was 800 square feet short. That’s right – there was 800 square feet not accounted for. In the real estate industry, we refer to this as “phantom space” where the tenant is paying more than is required. As a result of our space measurements and ensuing negotiation with the landlord, The Lease Coach saved this franchisor over $50,000 on their first five-year lease term and the equivalent on subsequent lease terms. After that, we went on to measure many of the franchisee’s store locations as well. Granted, this larger scale example may not directly relate to you; however, it gives you an idea of just how much phantom space can negatively affect your own bottom line.

Yet another issue for independent retail 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 that benefits all tenants like trash removal, property taxes and building maintenance, and are charged proportionately. Therefore if a tenant occupies 1800 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 which are calculated per square foot.

Such square footage discrepancies are far too 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. There are several different industry standards for measuring commercial, retail, office and industrial space.

If you have been taking the landlord’s word for the measurement of your business premises, you may be overpaying substantially. 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.

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, this is worth investigating.