Business and Operations
Understanding phantom space
By Jeff Grandfield
Measure twice so you pay only once.
Having represented commercial tenants on leasing matters since 1993, we have found that some landlords charge pizzeria tenants for more square footage than the tenant actually has. Are you paying too much?
In the real estate industry, we refer to this phenomenon as “phantom space,” a situation where the tenant is paying more than is required. This is a common oversight in the commercial leasing game. Tenants frequently trust the reported square footage of their leased premises. However, whether this figure is 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. Pizzeria tenants, therefore, needlessly pay an increased rent based on their incorrect square footage. Wouldn’t it be better to keep this money for yourself than pay it to your landlord?
Even the smallest amount of phantom space can negatively affect tenants as rental rates and common area maintenance (CAM) charges increase over time. We once found a 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 that charged high rent. By this time, it was seven years into the tenant’s lease term and the landlord had collected $20,000 more than was rightfully due. Fortunately, this came to a satisfactory conclusion with the tenant being reimbursed.
Pizzeria tenants should also consider 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. Common area maintenance costs cover charges on property upkeep, which benefits all tenants, for example, trash removal, property taxes and building maintenance. They are charged proportionately. Therefore, if a tenant occupies 1,800 square feet, then they are also responsible for the CAM charges on that area. If that tenant has been wrongfully paying for phantom space, they will also wrongfully pay too much for CAM charges.
Such square footage discrepancies are very common for business owners, specifically, those leasing retail space. In our experience, many discrepancies are negligent, not necessarily fraudulent. This is small consolation to the tenant that remains overcharged. When the landlord is receiving rent on 107 per cent of a building, it stands to reason that the landlord should have questioned how they could get more than 100 per cent 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 the landlord has used to determine the area of your premises. Please note that there are several different industry standards for measuring commercial space.
Dale remembers dining with the chief operating officer of a large chain store organization with more than 150 stores. She shared that her company had recently moved into a new 4,400-square-foot office and described the new premises as spacious, beautiful and comfortable. When Dale asked her if she had ever verified the square footage, she said “no.” She wondered why this was 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.
When we completed measuring the premises, the measured space was 800 square feet short. This COO was paying over $50,000 more than she needed to for space she didn’t have. The Lease Coach corrected the problem, both for the past and for the future: the tenant was reimbursed for her previous overpayments and continued to pay an adjusted rate.
Phantom space is a simple concept and can be easily avoided. No one can ascertain the exact size of an area by the naked eye alone. Nor should a tenant always trust what is stated on their lease agreement. Space measurement can provide peace of mind and can save you thousands of dollars. As a pizzeria tenant, isn’t this worth looking into?
Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal or interested in a free leasing CD entitled Leasing Do’s & Don’ts for Pizzeria Tenants, e-mail, call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.