It says a lot when an industry professional who works with a firm specializing in building measurement that uses the latest in wireless technology, laser measuring, customized CAD software, laser point cloud scanning and photogrammetry expresses frustration with how margins of error remain that can spark disputes between landlords and tenants.
“The bickering over the actual numbers appears to be due to a lack of a consistent method to account for area,” he wrote. “Even BOMA itself deems a variance of two per cent accurate enough, (but) every percentage point means a lot to each party.”
Indeed it does. Variances or errors impact lease charges, operating cost recoveries, property valuations and assessments, the latter of which is the basis for calculating property taxes.
Issues with the BOMA Standards invariably flow from a lack of communication, poorly written leases, different standards for different building types, and changes in standards over time.
BOMA provides Standard Methods of Measurement for six property types:
– Office Buildings: Standard Methods of Measurement (ANSI/BOMA Z65.1 – 2010)
– Gross Areas of a Building: Standard Methods of Measurement (ANSI/BOMA Z65.3 – 2009)
– Industrial Buildings: Standard Methods of Measurement (ANSI/BOMA Z65.2–2009)
– Multi-Unit Residential Buildings: Standard Methods of Measurement (ANSI/BOMA Z65.4-2010)
– Retail Buildings: Standard Methods of Measurement E-Book (ANSI/BOMA Z65.5-2010)
– Mixed Use Properties: Standard Methods of Measurement 2011
Understanding how to accurately measure a building requires understanding which Standard is appropriate for a given building, at a given time, and carefully reviewing how to measure the building according to the guidelines set forth in the Standard.
This sounds simple enough in theory, but there is still a wide margin for dispute.
First of all, Standards change and are revised over time. For example, the Standard for Mixed Use Properties didn’t even exist prior to 2000. The Standard was created to address the growing prevalence of mixed use properties and provide a consistent means for measuring area when residential, retail and industrial components coexist under the same roof.
But the creation or revision of a Standard does not automatically have a retroactive impact on existing leases. What this means is that, over time, particularly in larger buildings, some tenants will end up being subject to different Standards or versions of Standards. Unless lease agreements include references to updated versions of the Standards, different tenants will have to be treated differently until such time as the terms of their leases can be renegotiated. This can cause confusion and disagreement in relation to recovery of operating costs depending on the formula for recoveries set out in the leases.
To minimize confusion and conflict, both parties to the lease should have a copy of the appropriate Standard and the specific version to be in effect referenced in the wording of the lease.
Any professional undertaking measurements of the area will need to be informed about the version of the Standard to be used and its effective date. If this is not clear in the lease, the landlord and the tenant will have to first agree in writing on which Standard will be used.
There may be further confusion when the interpretation of the Standard makes it unclear as to which rule applies, or the area has a very irregular shape that makes it physically difficult to take accurate measurements. For example, depending on the size of window openings, the interior size of an office can be measured either to the wall or to the window surface.
Failure to have leases that clearly state which Standard and version of that Standard applies can in the extreme lead to litigation if the building, and the discrepancy, is large enough. A variance of as little as two per cent can still lead to a big disagreement. For example, in a large class “A” office space of 250,000 square feet, a two per cent variance is equal to 5,000 square feet. With base rent and operating costs potentially reaching $50 per square foot, two per cent can add up to an annual $250,000 difference of opinion. That’s enough to catch the attention of your CFO.
To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.