The Biggest Scam in Commercial Real Estate - A Case of the Growing Building | Hunt KL Office

November 23, 2018 No Comments

The Biggest Scam in Commercial Real Estate – A Case of the Growing Building


Posted by Ten Fong in Site Selection

 

 

What’s so hard about measuring office space – when is a square foot not a square foot? When it is a magically growing square foot.

What is the best way a landlord can increase revenue – Increasing the “size” of their rented area.

Imagine if you could magically increase the size of your market, or the size of your market share. Wouldn’t that be great?

So why is there so much room for black magic measuring when it should be a very objective exercise, especially with laser measurers? Three simple reasons…but first, if you want to watch a quick video to see what we mean, well here ya go…

 

Confusion on What Building Gross Up Means

Measuring a box is easy. If we lived in a world in which tenants paid for the actual square footage WITHIN their space you would not be reading this article right now.

The square footage would match the amount of carpet you purchased.

But we live in a world in which tenants also pay for their proportionate share of common space. That is where the waters start to get muddy. Some measurement methods include the ground floor lobby area. Others do not.

There are mechanical and electrical rooms that no tenant ever sees and they are all paying for their fair share of those rooms. Even if a tenant were to attempt to audit a landlord’s measurement of common areas, who has the time, energy, and resources to do so?

 

Information Asymmetry (Landlords know more than Tenants)

Most commercial real estate brokers do not understand building measurement methods.

Of the ones that do understand, do they have any incentive to tip off their clients?

After all, the larger the space, the larger the commission. Also, bringing up details like the landlord’s measurement of the space can be a great way to muck up the deal! So most tenants are completely in the dark and this issue falls under the category of “you don’t know what you don’t know”.

 

One client of ours in particular did not want to relocate from their office space.

The market alternatives were not cost competitive enough to justify relocating. Until we discovered that the average option in the marketplace had a 15% “gross up” factor and their building was at 33%. That’s right – 33% of the rent they paid was for space they got to use in common with all other tenants (hallways, washrooms and the ground floor lobby).

The client began giving serious consideration to outside options.

In the end they decided to relocate with their new-found knowledge that not all buildings are measured in the same way. They were able to find space that was a lower RENTABLE area, but a higher USEABLE area – they had more space in their new suite but paid on a lower square footage.

 

How to Protect Yourself

Ask what the building “gross up” or “mark up” factor is.

It is the difference between the USEABLE area (square footage of your premises) and the RENTABLE area (the square footage you pay rent on). For a normal office building the gross up factor should be 5-10% for a full floor user and 15-20% for a multi-tenant floor.

Ensure that your offer to lease or letter of intent does not allow for the landlord to remeasure your premises during the term of the lease or any renewals thereof.

If they do…do you think it will grow?

 

For more questions, you can refer to www.huntkloffice.com

 

 


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