Phantom space – measure twice to pay once

Dale Willerton

10/08/2011

As someone who has represented independent and franchise tenants with leasing matters since 1993, I have found that some landlords are over-charging tenants for more square footage than the tenant actually has. Are you paying too much?
This is a common oversight in the commercial-leasing field. 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 owner who has never even seen the site, the amount of reported square footage can easily be wrong. The end result is that commercial tenants needlessly pay an increased rent, based on their incorrect square footage. And isn’t it better to keep this money in your own pocket than to pay it to your landlord?
To explain further … I was having dinner one evening with the chief operating officer 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 I 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 me several weeks to convince her to let me measure the space to determine if she actually was 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. That’s right – there were 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. And, in this case, this executive was paying more than $50,000 more over the course of her lease term than she needed to for space she didn’t have. We approached the landlord. After some dealing and negotiating, we corrected the problem – both for the past and the future. The tenant was reimbursed for her previous overpayments and continued to pay an adjusted lower rate for the future. The savings were even compounded when that tenant renewed the lease for another five years. After that, we went on to measure many of the franchisee’s store locations as well. Even the smallest amount of phantom space can grow to be quite large as rental rates and common-area maintenance 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 we measured the space and proactively became involved, 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, but it was not easy. Not all landlords are willing to concede that they made a mistake.
Yet another issue for 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 CAM charges. CAM costs cover charges on property upkeep that benefit all tenants (e.g.: trash removal, property taxes and building maintenance), and are charged proportionately. Therefore, if a tenant occupies 1,800 square feet, then he or she is responsible for the CAM charges on that area as well. If that tenant has been wrongfully paying for phantom space, he or she will also wrongfully pay too much for CAM charges that are calculated per square foot. Such square footage discrepancies are far too common for business owners (specifically, those leasing retail and office space).
When the landlord is receiving base rent and CAM for 107 percent of a building, it stands to reason that the landlord should have questioned how he/she could get more than 100 percent of rent from that building.
In my 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. Just as there are several 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. You may be presented with a “measurement certification.” Don’t be fooled. 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 to 40 square feet. However, these can also be hundreds of square feet off – especially if the leased space is significant in size.
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. •

Dale Willerton is a lease consultant who works exclusively for tenants. He can be reached by email at
dalewillerton@theleasecoach.com.

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