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Page 8 — Office & Industrial Quarterly — June 2021 www.crej.com OFFICE — MANAGEMENT I n the first part of this series, I discussed how square footage is the foundational measure- ment in commercial real estate and provided real-life examples of situations where property value was added by remeasuring a building. Once your building is measured and new calculations are provided, com- pare them to the current rent roll. You might find that suites or overall build- ing square footage have increased or decreased from the size you previ- ously had referenced. Now that you have this accurate information, what do you do with it? n Develop a square-footage tracker. While you may be utilizing excellent property management software, an Excel spreadsheet tends to be the best solution to track variances in measurements for planning purposes. In Excel, identify each tenant suite, tenant name, the new square footage, the leased square footage and the lease expiration date. Make sure you have accounted for all building square footage, including vacant suites.With the building laid out this way, you can start to develop a strategic plan on how best to handle the variances. n Review your leases. Since the lease is a contract between the ten- ant and the landlord, it is paramount you review and understand provi- sions that address building and space size.What does your lease language state? Does it state the suite is a fixed square-foot amount or does it state the square footage is approximate? Does it outline that rent is a fixed price per square foot or does it out- line a monthly rental amount based on an approximate square footage? Is there language to address changes to the building denominator or to the suite size? Understanding your leases should be a consideration as you develop your strategy. n Develop a strategy. Your strategy likely will depend on the outcome of the building measurement. You will want to consider how long each ten- ant has leased space at the building, when leases will expire, when the building might be placed on the mar- ket for sale, how many vacant spaces there are, how profitable the building is, what the goals and objectives of the ownership entity are, how open to a change in measurement the owner is and what kind of restrictions the lender may have placed for the loan to be secured. n Options to consider if square foot- age increases. If the overall square footage of the building increases, the most typical approach is to imple- ment square footages over time. For example, it may be determined to immediately implement new square footages for vacant suites. A “dummy” suite can be added to the building in your property software to encompass the additional building square foot- age so that the building denominator will reflect the new, accurate amount on the rent roll. As tenants renew their leases you might add the square footage to their lease at that time and reduce the square footage of the dummy suite accordingly. Make sure the building denominator does not change with these adjustments. Using this methodology, eventually every lease will reflect the correct rentable square footage. Another option is to change the suites all at one time and draft a lease amendment to reflect the adjustment with each tenant. This can be accomplished by adjust- ing the space square footage but keeping the tenant’s monthly pay- ment schedule the same through the lease term. That will lower the rental rate per square foot, but that Strategies to address newly remeasured assets Becky Hanner Principal, Commercial Asset Services Please see Hanner, Page 19 In the pictured example, the building has a 16.2% load factor, but the market can only bear a 15% factor. The vacant spaces and building denominators were adjusted immediately. A dummy suite was added to capture the difference in building square footage so that the building denominator is correct. In the “Comments” column, the strategy is outlined. Any suite that now reflects the cor- rect square feet has a note as to when it was implemented. The suites that still need to be updated are noted as well.