September 1, 2010
by Dale Willerton
Are you paying for Phantom Space? Some landlords are over-charging dentists for more square footage than the tenant actually has.
This is a common discrepancy in the commercial leasing industry. Dental 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 dental 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?
To explain further … I was 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 I 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 me several weeks to convince her to let me 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. In the real estate industry, we refer to this as “phantom space” where the tenant is paying more than is required for space that doesn’t exist. And, in this case, my client was paying over $50,000 more (for her entire lease term) 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 one more example was our accountant for The Lease Coach who consented to have his space measured as well. We confirmed the space actually measured less than reported and negotiated for the landlord to reimburse our accountant $3500.00 as well as ensured the problem was corrected for future rental payments. For our accountant, this was a pleasant surprise.
Yet another issue for dental 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 (eg: 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.
Such square footage discrepancies are very common for business-owners (specifically, those leasing retail and office space). In my experience, many discrepancies are negligent, not necessarily fraudulent. This is a small consolation as the tenant remains overcharged. When the landlord is receiving rent on 107% of a building, it stands to reason that the landlord should have questioned how he/she could get more than 100% of rent from that building.
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. Just as there are various similar – yet slightly different – recipes for a German Chocolate cake, there are several different industry standards for measuring commercial space.
If you have been taking the landlord’s word for the measurement of your business premises, you may be overpaying substantially on one, or more, of your locations. 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 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.
On a related note, I was just speaking to a dentist before writing this article. He had made an Offer to Lease for a 2,000 square foot area of a building which was still under construction. When the dust settled, this had ballooned to almost 2,400 square feet, thereby blowing his rental budget out of the water. My advice is that, when you are negotiating a lease for space that is not fully demised and measureable in advance, you should restrict the maximum increase or decrease that will be allowable on the area of the location. This restriction or condition should appear in both the Offer to Lease and the Formal Lease Agreement.
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 dental tenant, isn’t this worth looking into? DPM
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