Phantom Space – Are You Paying Too Much?
We have found that some landlords over-charge franchisees for more square footage than the tenant actually has. Are you paying too much?
This is a common oversight in the commercial leasing industry. Franchise tenants frequently trust the stated square footage of their leased premises. However, whether this figure was recorded incorrectly by the landlord or not properly measured by the owner when they bought or built the property, the amount of reported square footage can easily be wrong. The end result is that franchise 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 … Dale was having dinner one evening with the Chief Operating Officer of a large franchise store organization (100+ stores). She shared that her company had recently moved into a new 4,400 square foot office. She went on to explain how spacious, beautiful and comfortable the new head office was. When Dale 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 us 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. And, in this case, this Chief Operating Officer 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 9even into the renewal term).
Yet another issue for franchise 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 are charged proportionately. Therefore, if a tenant has been wrongfully paying for phantom space, he/she will also wrongfully pay too much for CAM charges.
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.
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.
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. Franchise tenants should note that 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 be fooled. Many of the locations where we have found discrepancies on 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.
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 franchise 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 franchise tenant, isn’t this worth looking into?
For a free copy of our CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail to JeffGrandfield@TheLeaseCOach.com.
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? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com / JeffGrandfield@TheLeaseCoach.com or visit www.TheLeaseCoach.com.