The Magical Growing Office Building

July 26, 2017

 

Many times throughout my career, I have seen buildings increase their rentable square footage without making any changes or additions to the building itself.  How is this done?  

 

RE-MEASURMENT.  One of the oldest and most utilized tricks in the landlord book is to re-measure their buildings (especially when the building trades hands).  For example, if you are talking about a large office building of 500,000 SF, growing the building by say a total of 12,000 SF represents a 2.4% increase in the size of the building.  While this might seem somewhat insignificant, assuming that the rental rates in the building are at $25.00 NNN, this represents an increase of $300,000 to the building’s net operating income.  Assuming that the landlord was to sell this new “larger” building for a 7 cap, this would represent over a $4.2M increase to the sales price of the building. Math below:

 

12,000 SF x $25.00 = $300,000 

$300,000 / 7% = $4,285,714

 

It is obvious why landlords like this trick, but what is a tenant to do when they are told that their space has suddenly gotten larger?

 

Firstly, it’s tough for a tenant to dispute the size increase as it would require hiring an architect to measure the entire building.  This will cost significant money and it likely won’t make sense for a tenant to take that risk (especially for a smaller tenant).  I would suggest some of the strategies below when dealing with this scenario.

 

  1. Tell the landlord NO

 

When the landlord tells you that they have remeasured the building and that you will owe more rent, respectfully tell them that you don’t agree to this and draw a line in the sand.  Depending on how important you are to the building and the mentality of your landlord, they might agree to leave the size alone.  

 

2. Hire an architect to measure your space

 

While it likely won’t make sense to re-measure the entire building, it is much more feasible to have an architect measure your space.  If you are already working with an architect then many times you can get them to do this pro-bono.  If you find that the space is smaller than what your lease says, you can go to the landlord to argue your point.  This is the fight fire with fire strategy.

 

 

3. Agree to the square footage increase but have the landlord lower your rental rate to reflect the total rent of your “old” size.

 

Let’s say you are 2,000 SF and your have agreed to pay $25.00 NNN or a total of $50,000 annually for your rent.  The landlord has told you that the building has increase by 2.4% resulting in a new square footage of 2,048.  This would represent an increase of $1,200 annually in your rent.  To avoid this increased rent, the landlord would need to lower the tenant’s rental rate by 60 cents to $24.40.  

 

I have used all these strategies as well as others with success over my career and more often than not I have figured out a way to mitigate the square footage increase.  However, your success will depend on many factors and each situation needs a response that it tailored to that specific landlord and tenant.

 

 

Sincerely,

 

John H. Pope

President

Pope Corporation

 

 

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