Is Your Practice Lease Haunted by Phantom Space? by Dale Willerton and Jeff Grandfield

Tenants should beware of landlords with 13-inch rulers

by Dale Willerton and Jeff Grandfield

As lease consultants, we’ve found some landlords who overcharged tenants by calculating their leases based on more square footage than the dentists actually have. This oversight is more common in the commercial leasing industry than you might think!

Tenants tend to trust the reported square footage of their leased premises. However, that figure can be wrong—maybe it was recorded incorrectly by the landlord, or not properly measured by the owners when they bought or built the property. Either way, the end result is a tenant needlessly paying an increased rent. Isn’t it better to keep such money in your own pocket than paying it to your landlord?

A recent real-life, five-figure example
We recently had dinner with a tenant who said that her company had just leased and moved into a new 4,400-square-foot office. She gushed about how spacious, beautiful and comfortable the new head office was, but when Dale asked her if she had ever verified the square footage, she said no. Why would it be necessary? After all, it was the total area stated on her lease agreement.

It took us several weeks to persuade her to let us measure the space to determine if she was actually getting the 4,400 square feet the landlord was charging her for. When we completed measuring the premises, the measured space was 800 square feet short—it was just 3,600 square feet.

In the real estate industry, we refer to this as “phantom space” where the tenant is paying for space that doesn’t exist. In this case, this tenant would have paid more than $50,000 extra over her entire five-year lease term … for space she didn’t have.

We approached the landlord and corrected the problem for rent already paid and moving forward; the tenant was reimbursed for her previous overpayments and will pay an adjusted rate even into the renewal term. (An interesting note: The landlord was an attorney who had bought the building a few years previously and had assumed that the previous landlord’s measurements were correct.)

The wrong square footage hurts you twice
Another issue for tenants to consider is how phantom space can repeatedly affect them. Every tenant pays two rents: the base rent, which is normally charged per square foot and is negotiable, and common area maintenance (CAM) charges. CAM costs cover charges on property upkeep that benefit all tenants—trash removal, property taxes and building maintenance, to name a few—and are charged proportionately. If tenants occupy 1,800 square feet, they’re responsible for the CAM charges on that area as well. If they’ve been wrongfully paying for phantom space, they’ll also wrongfully pay too much in CAM charges.

Even the smallest amount of phantom space can grow to have a quite large effect, because rental rates and CAM charges increase over time. One previous client had a discrepancy of only 27 square feet—which doesn’t sound like much, but this specific unit was in a prime downtown shopping mall with high rent. When the difference in practice square footage 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 common for dental tenants—specifically, those leasing retail space. In our experience, many discrepancies are negligent, not necessarily fraudulent, but that’s a small consolation when you’re still being overcharged.

Make sure your practice measures up
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. Tenants should note that there are several different industry standards for measuring commercial space. If you’re not sure about the size of your space, ask a leasing consultant!

If you have been taking the landlord’s word for the measurement of your practice premises, you may be overpaying substantially on one or more of your locations. You may be presented with a “measurement certification” but don’t be fooled—many of the locations we’ve have found discrepancies on had been “verified” as accurate but in fact had been measured incorrectly. Sometimes the discrepancies are only 30–40 square feet, but they can also be hundreds of square feet off, especially if the leased space is significant in size.