Symptoms

Is your office shrinking or swelling?

While many tenants in metro Boston are trying to right-size their offices as they migrate to a more mobile workforce, many owners and landlords are pushing in the other direction:  They are trying to bloat the size of their buildings, charging tenants for space beyond the terms of the existing leases, and also passing along additional operating and tax expenses.  Sometimes, tenants are informed about dramatic and arbitrary increases for their rentable space even in the absence of construction that added to the building's size.

These are painful and costly pills for tenants to swallow, especially while the economy is still uncertain.

In general, two scenarios illustrate the insidious manifestations of swelling:

Q1 Reconciliation.  The first case is seasonal and timely.  In the first quarter every year, tenants receive reconciliation charges from landlords that might include unexpectedly higher operating expenses and real estate tax charges (according to tax assessors who determine a building's value based partly on rentable square footage).  Landlords may attempt to justify additional building expenses, claiming these are tied to a remeasurement of the building that results in more rentable square feet.  In the reconciliation letters, tenants may be asked to pick up a disproportionate share of the building expenses.

Do tenants have any recourse here?  Before they automatically absorb the additional costs, tenants should scrutinize their leases and see if they have audit privileges.  If so, they should exercise them.  Otherwise, they should make sure they take preventive measures in the future against the remeasurement of the building. 

Lease Renewals or New Ownership. The second case, which may result in more acute pain, is tied to lease renewals or new ownership.  How this works is covered below:

Risks

How prevalent is this "growing" trend?  In recent studies in downtown Boston, more than half the buildings reviewed showed a spike in size, with the increases ranging from a couple of percentage points to 20%.  Let's use the following as an example:

• 10% increase in space
• $50/SF rental rate
• 25,000 rentable SF 

Based on these figures, the resulting additional cost for a tenant would be $125,000 per year!  So, size does matter, and tenants may assume significant financial risk if asked to pay their base rent according to inflated rental numbers.

Diagnosis

Landlords may try to change the rentable square footage of a tenant's space or even an entire building based on several scenarios, some benign, others not so benign:

• It's possible that the prior owner of the building underestimated the actual rentable area, in which case an adjustment might be reasonable.
• It's also possible that new construction did in fact add to the rentable square footage, which would justify new numbers.
• A third more problematic scenario is when the owner may try to arbitrarily add space to increase the building's value, in which case such action may not be justifiable by industry measurement standards such as those set by BOMA. Note that there are variations in the BOMA standards. For instance, is the measurement based on the perimeter of space inside the exterior column or the exterior of glass?  

The owner's motive is to increase the building's value. And if tenants don't exercise due diligence, they may allow this to happen at their own expense. This is especially true when outside investors buy a local building, generate as much revenue as fast as possible, and then attempt to "flip" the building to another owner at an inflated price before they leave town.

Treatment

How should tenants protect themselves? They should insist that their square footage be determined by an accepted industry measurement method, such as BOMA, and they should verify the calculation. This may require the assistance of a third party such as a real estate advisor, attorney, or architect, but any expense incurred to do this will be worth it as a way to mitigate more substantial costs and exposure. If an owner refuses to have the space measured by an independent party, the owner probably has something to hide.

Prevention

Of course, the best way to protect yourself is by not waiting to react after the fact, but by practicing "preventive medicine." This involves ensuring the proper language in the lease from the get-go, including a clear description of your pro rata share and audit rights. The lease document needs to be thorough and avoid common and costly errors of omission.

Overall, the fiscal health of an organization can be measured in terms of square feet. To protect their interests, tenants need to make sure they are represented by advisors who always have their back.

Since the stakes in this matter are so high, you should be proactive and make sure have a strategy in place. You may also want to ask your real estate service provider to analyze your lease to ensure you're protected. For more information, please contact us (Cresa Boston).