The Real Deal New York

Fighting rubber ruler measurements

Office tenants find ways to avoid charges for hallways and staircases
By Sarah Ryley | July 01, 2008 12:28PM

Every industry uses its own metrics. Fabrics come by the yard, gas is sold by the gallon, office space in New York City is rented by the square foot. As it turns out, however, renting precise amounts of office space isn’t quite that simple.

As with most things in the real estate world, New York is in its own universe, one where building sizes sometimes seem to grow and shrink based on market conditions rather than actual physical dimensions. It’s also normal for all sorts of charges, some of which date back to pre-Depression days, to find their way onto leases.

“Buildings are the only inanimate objects that grow. A new landlord buys a building, and ‘poof’ — it gets bigger,” said Richard Warshauer, senior managing director of GVA Williams, a commercial real estate brokerage. “It’s fair if it’s not against the law and both parties agree.”

Arguing against these extra charges has been a longstanding headache for office tenants in the city. But experts say these charges are a problem that can be overcome with the assistance of a savvy broker, architect and sometimes a lawyer.

“The check upon the landlords for not going berserk is that we’re in a competitive marketplace,” noted Warshauer.

Landlords’ most notorious tactic for
manipulating rent is using a proverbial
rubber ruler to measure space.

“There’s no accurate way for a tenant to compare one space to another without actually measuring the floor area themselves,” said Jonathan Anapol, president of Prime Manhattan Realty.

The technical term for this phenomenon is “loss factor,” the difference between the actual square footage a tenant occupies and the area paid for in rent. In the past few decades, loss factor charges have swelled as tenants got charged for hallways, fire towers, staircases, ventilation ducts, sometimes even sidewalks.

Landlords argue this practice is fair because it considers common space everyone uses, like hallways and bathrooms, that still cost money to maintain, said Peter Boritz, president of Real Data Management, which performs technical area calculations.

Boritz said that landlords also increase the loss factor to account for major
capital improvements.

At the same time, worries exist that landlords are inflating numbers to pump up their bottom lines. Indeed, Commercial Tenant Real Estate Representation, a firm that advises clients how to cut rental costs, conducted two recent surveys of 100 randomly selected office towers in Manhattan. Their studies concluded that 32 percent of the subject buildings grew substantially in square footage since 1990, even though there had been no physical additions.

A tower owned by Swig Equities at 5 Hanover Square in Lower Manhattan grew 33.8 percent to 320,000 square feet, according to the CTRR report. The Department of Finance has the building listed as 292,466 gross square feet.

Two buildings in Midtown also grew
by more than 20 percent without physical additions: 800 Third Avenue and 666 Fifth Avenue, which Kushner Companies purchased two years ago for $1.8 billion, the most expensive building sale in the nation at the time.

“Loss factors actually go up both in
depressions and boom markets, which seems anti-intuitive,” explained Jan Zegarac, founder of Manhattan Office Space, a firm that helps tenants quickly find office space below 50,000 square feet. “It dilutes the actual price per square foot.”

Zegarac said it’s common for tenants to sometimes unwittingly lease floor space larger than the actual lot.

Despite knowing about these practices, brokers acknowledge that landlords are often unwilling to negotiate square footage, however arbitrary the measurement may seem. After all, unlike a gallon of regular unleaded, “there are other variables — such as views, number of windows, percentage of interior or non-windowed space — that affect a tenant’s usability of that space,” said Anapol.

Still, solutions to the problem of questionable charges exist.

“A well-advised tenant goes out and hires a space planner and architect and has him measure not just feet and usage, but how many employees can function in that space,” said Warshauer.

Of course, experts disagree whether brokers always work in the interests of their clients when it comes to reducing such costs.

“Tenant brokers, they’ll fight hard on something like real estate tax increases or operating tax increases because it doesn’t affect them,” said Zegarac. “Will they work as hard on getting the lowest possible rent? No. Will they work as hard on reducing the loss factor? No, because it reduces the check they’ll get from the landlord.”

Anapol, however, said charges hidden within the fine print can make a huge difference in annual rent increases and can often be negotiated. Tax increases borne by the tenant are calculated using the “base year,” which sometimes isn’t updated when leases are renewed, forcing the tenant to pay that increase twice. “It’s an added expense many tenants don’t realize [or] understand,” he said.

An annual increase known as the “porter wage clause,” negotiated in the 1930s by a union that represented the city’s elevator operators, is another common charge, even though most people push the button themselves these days. Experts say it’s possible to dispute these charges, too.

In all these instances, brokers advise consulting with experts.

Joel Spolsky, whose firm Fog Creek Software recently rented in Midtown, sought representation from another landlord’s lawyer. “He spends most of his days in court trying to evict tenants,” he said. “I thought he would be perfect to protect me from the likes of [people like] him. And he was.”

Spolsky said the lawyer removed from the lease words like “broom clean,” an ambiguous term that describes how the space must be left when the tenant vacates and can be used to withhold a tenant’s security deposit. Small language changes in contracts can make a big difference, he said.

Sometimes reducing charges can be as simple as examining the rent bill closely. Stephen Sunderland, senior managing director of Optimal Spaces, a tenant brokerage, said some landlords make a profit on electricity by charging above what was metered and capital expenses normally borne by landlords sometimes find their way into maintenance charges.

Yet he stopped short of calling for tighter regulation on this relatively autonomous industry. “Usually regulation causes more harm than good because laws aren’t usually imposed until [after the market in which they were based upon] changes, and then [they] never get taken off the books,” he noted.

In this universe, Sunderland said, negotiation and litigation keep things in order.

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