Eric Feinberg was finalizing a renewal for an office lease of about 20,000 square feet earlier this year when the deal fell apart.
A major reason, the Savills Studley broker said, was his tenant refused to cough up an additional $40,000 per year for extra square footage that hadn’t been in its previous lease. Paying for more space while occupying the same office was a dealbreaker.
The discrepancy was the result of a change in the building’s loss factor, defined as the percentage of the unused square footage divided by the rentable area. A building with a rentable area of 400,000 square feet and a usable area of 300,000 square feet, for example, has a loss factor of 25 percent. Between the time Feinberg’s client signed its last lease and the renewal date, the building’s loss factor grew due to a remeasurement that used new standards released six months ago by the Building Owners and Managers Association (BOMA), a trade association that represents commercial landlords around the country.
“It’s a very irksome piece of the process,” Feinberg said. “Whenever you see a remeasurement, you know right away that it’s going to be an issue. It’s just one factor in any negotiation, but for some folks this factor is a little more emotional than others.”
The most significant change in the new standard, sources said, is that it calls for including outdoor decks, balconies, covered galleries and rooftop terraces in an office building’s rentable square footage. Under the previous standard, decks and terraces were amenities that landlords hoped would help lure tenants. Now they’re part of what tenants pay for.
The new standard advises landlords to include “vertical penetrations” like elevator shafts and stairwells down to their lowest levels, and removes public pedestrian walkways, like those found in many buildings connected to Chicago’s Pedway system, from what BOMA recommends as rentable space.
Equity ICI’s Randal Froebelius served on a committee that helped draft the updated standard.
“There’s nothing hard and fast in the standard that says the same rate has to be charged on amenity space as for the rest of the space,” he said. “That outdoor amenity space is expensive to build and including it helps ensure a fair recovery for landlords.”
In January, Real Data Management, which measures buildings for major landlords and designs building management software, surveyed about 12,000 brokers in major markets around the country in an effort to understand how the industry is adapting to the changes. Over 40 percent of respondents said they had deals in progress that would use the new measurement standard, and two-thirds said they thought the new guidelines would soon become industry standard. (As with most things, New York City operates by its own rules, adopting the loss-factor guidelines devised by the Real Estate Board of New York.)
Even landlords who are looking to sell buildings have an interest in new leases adopting the new standard, because remeasurements are part of how buildings are priced. In fact, brokers who represent office tenants say commission-hungry investment-sales brokers are often the catalysts for a remeasurement.
“A buyer will buy a building based on the dream an investment sales broker sells them,” Feinberg said. “They’ll say, ‘Hey, this building hasn’t been remeasured in a while.’ They’ll remeasure it, maybe a 1 million-square-foot building will become 1.3 million square feet, and they’ll get a loan for it based on that remeasurement. Now they’re under pressure to keep to that number every time they do a new lease.”
It’s still unclear how the new standards will impact building values, said JLL’s Nooshin Felsenthal who has recently represented the sellers on several large Downtown office building sales. At a minimum, she said, it means landlords get a tangible payback for the investment in creating amenities like rooftop decks.
Feinberg said there are ways to ease any pains resulting from remeasurements for tenants, like pushing for bigger tenant-improvement allowances or a temporary break on rent, that won’t change the base rentable square footage of a building.
Savills Studley’s George Kohl, who was president of Chicago’s BOMA chapter from 2012 to 2014, said the new standards aren’t necessarily a bad thing for tenants. The important thing, he said, is for landlords to keep tenants abreast of changes and the impact it could have on them. Tenants shouldn’t express a shock upon renewal, he said.
“When it’s a bad thing is when it’s sprung on tenants,” Kohl said. “It’s not engendering trust.”