13 minute read
How to Implement Calculations of a Newly Remeasured Building
By: Becky Hanner, Hanner Commercial Asset Services
BOMA Floor Measurement Standards are very well known throughout the commercial real estate industry. They are so well recognized, that it is common practice to include a reference to BOMA floor standards in standard lease language. Any reference in a lease should be specific as to the method and year of publication of the standard, such as ANSI/BOMA Z65.1-2017, Method B.
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BOMA published the first office floor measurement standard in 1915, has updated the standard to maintain relevancy, and has developed an entire suite of floor measurement standards, all of which are ANSI (American National Standards Institute) certified. It is no wonder that BOMA is known as the preeminent industry standard for calculating floor measurements for commercial real estate buildings.
Yet, with all this validation, real estate executives often are circumspect about verifying building measurements or implementing revised calculations, when a building is remeasured.
This paper will discuss various outcomes of a measurement, recommend factors to consider when determining how the new measurements may affect your building, and provide suggestions on how to implement the revised calculations to your property.
SETTING THE STAGE
The square footages (substitute feet with meters throughout this paper, if relevant in your geography) of buildings are ever changing. You might wonder how that can happen. It really starts with the original development of the property. The initial architectural plans of a building will state what the square footage of the structure will be, when developed. During the construction process, discrepancies can occur. A wall may have been constructed slightly off from the original plans, a footing might have to be altered due to site conditions, or the front entrance could have been recessed just a little more than initially anticipated. As a practical manner, when constructing a property, things can happen that may very well change the architect’s original calculation of building square footage.
Does the building get remeasured once development is finished? This may occur, or a few important dimensions may be verified, or no validation may occur at all, depending on the development process. During the development phase leases are being drafted based on original drawings. There are so many moving parts with a new development, final accurate measurements may not be properly documented or incorporated into the building administrative records.
Over the years’ spaces will get remodeled, cojoined, subdivided or portions of common corridors absorbed into tenant suites, among other types of building alterations. If the property is capping the load factor for market accommodation then the measurements can be further altered, especially when market cap tolerance changes over the years and the building may amend the load factor as the market will accept, in order to minimize the amount of space not captured as leasable. Real estate professionals may forget to update suite square footages when they are aware of spaces that have revised measurements or when altering space configurations, they may attempt to estimate square footages according to what they feel is a fair calculation of a space. Any of these scenarios will skew building measurements. Over time this can add up to a considerable amount of discrepancy.
WHY DOES IT MATTER?
Square footage is the foundational measurement in commercial real estate. Tenants occupy usable square feet. Leases may be based on a capped rentable square foot basis. Building sales are noted on a gross leasable area basis. Lenders use square feet to proforma potential gross rents. Construction costs are estimated on actual
How to Implement Calculations of a Newly Remeasured Building
square foot basis. Operating costs are customarily measured by a rentable square foot basis, (although for a level playing field, my opinion is these should be compared on gross square footages). It seems to make sense that if square footage is the language of real estate, then a building owner would want to know a property’s true measurement calculations.
When a building is placed on the market for sale, the seller will provide a prospective purchaser with property information, such as where the boundary lines are and whether there is hazardous material on the site. The buyer’s lender wants this information verified by having a survey and a Phase I Environmental study conducted in order to protect their investment. However, in the case of whether building measurements are accurate, the overall attitude seems to be of less concern, even though this is the foundation on which revenue and expenses are based. The seller will provide the prospective purchaser a building square footage and it is typically accept as a correct number. The seller may even provide a certified rent roll stating suite rentable square footage and the building’s denominator. The purchaser will provide their lender with this information, who also accepts it as an accurate number. The tenants are told the square footage of their lease and, like the rest, they believe it to be true. The commercial real estate industry does not utilize a good system for checks and balances on a building’s square footage, the foundational measurement in commercial real estate.
This is likely because there are so many components of a building measurement. For example, a building contains a gross area, the tenant areas, the service areas, and the amenity areas. The common area measurement might be capped at a subjective market rate. A proportionate share of common area is allocated to a tenant’s usable area to determine the tenant rentable area. These extrapolations can make building measurements difficult to verify without the help of a measurement professional. You might be wondering why accurate building measurements are so important. The obvious answer is that a building’s value is determined by its gross potential rent. Capturing every square foot in a building will increase your net operating income, adding value to your building, whether you are currently charging for the full square footage or not.
Consider the actual case study where a building was purchased at the height of the economy and based on a given measurement. A subsequent downturn in the economy resulted in a large building vacancy. The owner had the building professionally measured and found 5% more space in their building, in this case, amounting to over 30,000 sf. This owner was able to reposition the property, then sell it without taking a loss that they otherwise would have.
Another true-life case study is the building that was purchased based on a given measurement. Since no plans were conveyed, the buyer had the building professionally measurement to find the building had 3% less square feet than they purchased. In this case this amount equated to almost 6,000 sf.
A final example is a tenant audit. The last situation you wish to find yourself in is having a tenant inform you they have had their space professionally measured and demanding a refund on rent paid over the years. Not only do you have less recurring income, but you potentially owe back rent and have a dissatisfied tenant.
The following recommendations are provided for consideration to implement accurate measurements for a building. The process of measuring, then implementing the standard is a step by step process and will take time and commitment.
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RECOMMENDATION #1 – DO HAVE YOUR BUILDING PROFESSIONALLY MEASURED
The building is an investment. Everything in the building is measured by square footage. Construction costs, lease rates, operating costs, contact services, management services, lending practices and sales calculations are all measured based on the square footage of the building, so why would an owner not want the building measurements used to be verified and correct? It is important that the company you engage to measure the building fully understands the BOMA floor measurements so that accurate calculations will be received. Ensure to utilize the services of a true metrologist (measurement professional).
Questions you may ask include:
• How many buildings has the professional measured?
• What is the total square footage the measurement professional has measured?
• Has the professional gone to court to testify on building measurements and if so, what was the outcome?
• How long has the metrologist been providing floor measurements?
• Do they have testimonials from satisfied clients? What measurement methodology does the professional use?
• What deliverable will the metrologist provide so that you can verify accurate floor measurements and calculations?
• Have them provide recommendations from satisfied clients. Does the measurement professional safely store, update and maintain the floor plans and other related files in case there is an alteration to the property?
• Once your building is measured and new calculations are provided, compare them to the current rent roll. You might find that suites or overall building square footage have increased or decreased from the size you previously had referenced. Now that you have this accurate information, what do you do with it?
While you may be utilizing excellent property management software, an Excel spreadsheet tends to be the best solution to track variances in measurements for planning purposes. In Excel, identify each tenant suite, tenant name, the new square footage, the leased square footage, and the lease expiration date. Make sure you have accounted for all building square footage, including vacant suites. With the building laid out this way, you can start to develop a strategic plan on how best to handle the variances. An example of a tracker format follows recommendation # 5.
RECOMMENDATION #3 – REVIEW YOUR LEASES
Since the lease is a contract between the tenant and the landlord, it is paramount you review and understand provisions that address building and space size. What does your lease language state? Does it state the suite is a fixed square foot amount or does it state the square footage is approximate? Does it outline that rent is a fixed price per square foot or does it outline a monthly rental amount based on an approximate square footage? Is there language to address changes to the building denominator or to the suite size? Understanding your leases should be a consideration as you develop your strategy.
RECOMMENDATION #4 – DEVELOP A STRATEGY
Your strategy will likely depend on the outcome of the building measurement. You will want to consider how long each tenant has leased space at the building, when their leases will expire, when the building might be placed on the market for sale, how many vacant spaces there are, how profitable the building is, what the goals and objectives of the ownership entity are, how open to a change in measurement the owner is, and what kind of restrictions the lender may have placed for the loan to be secured.
OPTIONS TO CONSIDER
If the overall square footage of the building increases: The most typical approach is to implement square footages over time. For example, it may be determined to immediately implement new square footages for vacant suites. A ‘dummy’ suite can be added to the building in your property software to encompass the additional building square footage so that the building denominator will reflect the new, accurate amount on the rent roll. As tenants renew their leases you might add the square footage to their lease at that time and reduce the square footage of the dummy suite accordingly. Make sure the building denominator does not change with these adjustments. Using this methodology, eventually every lease will reflect the correct rentable square footage.
Another option is to change the suites all at one time and draft a lease amendment to reflect the adjustment with each tenant. This can be accomplished by adjusting the space square footage but keep the tenant’s monthly payment schedule the same through the lease term. That will lower the rental rate per square foot, but that rate can grow quickly upon lease extension.
If the overall square footage of the building decreases: Understandably, this is the most difficult problem to address. No owner wants to make a good tenant disgruntled if they feel they have been overcharged, yet it is doubtful the landlord will desire to refund any rent collected over the lease term, either. This is a situation in which lease review is most crucial. Calculating the amount of rent that was collected based on the inaccurate square footage is a useful tool in determining how best to address the issue. Findings may be discussed with the tenant and square footages adjusted accordingly if the lease states rent as a flat monthly fee for an approximate amount of square feet. Perhaps the landlord will consider providing some rent abatement in lieu of a refund. Communication and transparency are paramount.
Some landlords elect not to inform tenants that the lease states a greater amount of square footage than what the verified measurement truly is. They may prefer to wait until the current tenant moves out of the building to change the suite measurement. Be aware that it is not proper practice for a landlord to lease out more area than exists in the building.
Whatever option might be chosen, this is an owner business decision that requires research, review of options and financial implications of each, thoughtful strategy and good tenant communication when implementing.
Once you have determined the strategy to implement correct floor measurements, track your progress by color coding your tracker accordingly. Use one color for suites that are using the new square footage and another to indicate the strategy as to when the adjusted square footage will be implemented. See the sample below. In this example, the building has a 16.2% load factor, but the market can only bear a 15% factor. The vacant spaces and building denominators were adjusted immediately. A dummy suite was added to capture the difference in building square footage so that the building denominator is correct. In the ‘Comments’ column, the strategy is outlined. Any suite that now reflects the correct square feet has a note as to when it was implemented. The suites that still need to be updated are so noted as well.
Using a tracker such as this will help you keep on track as you roll out your implementation strategy. Be sure to note on the tracker which version of the BOMA standard was used.
In general, an as-built measurement has a greater likelihood of increasing a building’s rentable area than decreasing it, but it is critical to know either way.
CONCLUSION
In conclusion, accurate measurement of a building provides the owner with factual data which is used to make critical decisions in the course of leasing, managing, buying and selling real estate. Implementing a new standard or implementing accurate measurements should not be performed without having first analyzed factors such as leases, expiration dates and lending requirements. An implementation strategy should be developed with the property owner and the leasing/ management team. This strategy will determine if the measurements will be revised immediately or if they will be applied over time. A tracker should be utilized as this process evolves. When future changes are made to the building, include the measurement professional who provided the new computations, so they can maintain in their records for future use.
About the Author
Becky Hanner is a recognized thought leader known for growing businesses while positively cultivating internal and external relationships. Becky has been in commercial real estate for 30 years. A skilled mentor, Becky develops a strong work culture focused on high expectations, collaboration, and quality service delivery, and achieving process improvements through employee engagement.
