Business, Profits and Strategy

Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President
(908) 245-5999 x11
andrew.zezas@realstrat.com

"Is Your Company Generating Too Much Profit for Your Landlord?!"

Part Two of a three part series appearing in the March, April, and May issues of “Business, Profits and Strategy”

View Part One

When a Square Foot is NOT a Square Foot

Building measurement has been, for the longest time, a source of many real estate industry jokes. A few years ago, a New Jersey architect sent Christmas presents to the local brokerage and landlord communities. The gifts were rubber rulers. Everyone got the joke because the definition of how real estate is measured is often fluid, with a square foot having multiple definitions, if you can believe that!

Here’s the point: When measuring space, would it be fair to measure to the inside surface of a wall, to the middle of that wall, or to the outside surface of the wall? Considering that exterior walls can easily be two feet thick in older buildings, this could pose a real financial issue for both tenant and landlord. And, how should you account for vertical penetrations such as an atrium, air shafts, and so on? What about columns and heating units that protrude from walls and take-up floor space?

Although standards of measurement exist such as those written by BOMA and other real estate organizations, landlords are not obligated to employ any particular method. Many landlords employ proprietary methods of measurement, and in many leases no method is clearly defined, making it challenging to validate the dimensions of one space versus another. Since rental rates are most often calculated on a square foot basis, not being able to accurately assess the exact square size of a space is tantamount to handing extra money to your landlord.

Additionally, if your company has grown since executing its initial lease and has taken more space in the same building or complex, especially for those companies who've seen rapid growth, the likelihood exists that the additional space may not be accurately measured. An important note here is that rarely are spaces undermeasured in the tenant's favor! Such calculation errors most often work in favor of the landlord and can certainly create additional landlord profits. In such instances, the tenant who pays for more space than it really occupies, in effect, pays a higher rental rate than the rate to which it agreed.

Services, Fees, and “Promoter” Landlords

It is important to understand how your landlord conducts business. Does the landlord also provide construction services? Do they provide cleaning services, property management and leasing services, maintenance services, trash and snow removal, landscaping, or other services? If they contract with other companies for these services, does your landlord mark-up those services to include an additional profit margin?

Many landlords today, including both privately-held companies and Real Estate Investment Trusts (REITs), are structured differently than traditional landlords. In some cases, landlords are actually “promoters” that employ little of their own capital to acquire real estate, preferring instead to utilize funds from investors. Promoter landlords very often aren’t owners, but utilize real estate investments by others as vehicles to generate fees, like commissions, property management fees, construction fees, service mark-ups, and so on. This breed of landlord most often works to maintain the property and to increase its value in the hopes of generating high returns for the investors while participating in the property’s future equity appreciation. Tenants in buildings operated by promoter or fee based landlords, often experience higher operating costs than those that occupy space in buildings run by more traditional owner-landlords. When considering renewing a lease, investigate the structure of your landlord’s business to fully understand its potential impact on your company’s future occupancy costs.

We’ll leave, we really mean it this time!

Prior to lease expiration, most tenants tell their landlord that unless they receive favorable renewal terms, they'll relocate to another building. Landlords hear this all the time, and most often dismiss such comments as nothing more than posturing and idle threats. Landlords typically pay less attention to a tenant's words, and more attention to a tenant's actions. Is the tenant company growing? Are they contracting or changing how they conduct business or occupy space? Are they calling for repairs and service more often? Do they seem dissatisfied? Have they engaged a real estate broker or advisor? Landlords that really pay attention recognize the signs that could cause them to lose a tenant. Unfortunately, some landlords don't pay close enough attention to their tenants, and sometimes miss what are obvious opportunities to secure a beneficial transaction.

Old fashioned landlords think that because a tenant has occupied their building for a period of time, has paid rent, hasn't complained much, and hasn't expressed hatred for the landlord or the building, that the tenant must love being in the building, will never leave, and will therefore, recognize that paying a higher rental rate during a renewal transaction is somehow justified. We've always found this belief system to be inaccurate and the sign of a disconnected landlord.

Read Part Three of this article in next month's issue of "Business, Profits and Strategy"

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will be available shortly at www.thecfosguide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given talks, presentations, and has lead educational programs for business, professional, government, and trade associations, including the Building Owners and Managers Association, American Management Association, the U.S. Postal Service, RealComm, Society of Industrial and Office Realtors (SIOR), and others. Andrew is National Chairman of the SIOR Tenant Representation Specialty Practice Board, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.realstrat.com.

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