Four Ways Accurate Square Footage Can Impact a Property's Financial Position and Accounting Practices
By Robert Ladner with SDI Presence
The responsibilities of a commercial real estate property manager are many and varied, ranging from managing occupancy, tenant relationships, safety concerns and building financials. One common – but often overlooked – source of data used across all these functions is their property’s square footage. While straightforward from a leasing and occupancy standpoint, it’s worth walking through the impact that accurate square footage can have on increasing revenue and informing sound financial and accounting decisions for your property:
Increase the Market Value of Your Property
From an ownership perspective, the quickest way to add value to a property is to increase the rentable square footage, since the value of the building is based on future cash flows. The evolution of the industry-accepted BOMA standard for measuring buildings – recent editions include 1996, 2010 and its current BOMA 2017 standard – allow for a property’s rentable square footage (RSF) to change over time. For example, the standard accounts differently for shared amenity space between BOMA 2010 and 2017. Somewhat surprisingly to owners, the variance of a property’s RSF can swing up to 10% of its previous measured space - which could translate into additional value of the building. Especially during a property transaction, having your property’s square footage measured according to the most advantageous BOMA standard is a benefit for both buyers and sellers alike: Accurate square footage allows the seller to maximize its price point, while preventing buyers from overpaying.
Increase Rental Revenues
From a property management perspective, accurate square footage provides an undisputable mechanism to increase rent revenues during lease negotiations. First, using accurate square footage and tenant information, your property’s stacking plan will clearly identify the tenant leases with impending term dates. This is a prime time to introduce the recalculated building’s square footage, with the goal of increasing the rent. How you go about this is your decision: during lease negotiations, with the right RSF you will be able to reduce line items that are deemed shared space (a new fitness space amenity for example); and raise rent costs based on this industry-accepted BOMA standard recalculation number.
Reduced Operating Expenses
The costs of several building services rely on an accurate square footage number, so that your property is fairly charged. For maintenance contracts, knowing your cleanable square footage will ensure that you only pay for cleanable, walkable space - not columns or elevator shafts! Also, your building’s utilities expenses (HVAC) are totaled up at the end of the year, with the building’s total consumption divided by the square footage. Plumbing supplies expenses can also be estimated according to accurate occupant per square footage ratio.
Successful Yearly Audit
As part of your yearly audit, the “BOMA number” comes into play when reconciling estimated operating expense and taxes with the actual expense for your tenants. This magic number is best based on accurate square footage, so that reconciling operating and tax expenses are spread over the largest rented square footage number. It is important to have your accurate square footage available to support this process.
It goes without saying that to achieve the results above, you need to be sure that you are working with the most accurate square footage of your property! Consider when was the last time you recalculated your property’s square footage, and whether you are using the BOMA 2017 standard. Both tenant space changes over time and the evolving BOMA standards will allow you to account for your space differently and strategically for your property. In the latest BOMA 2017 standard, for example, buildings with roof top decks, balconies, and tenant amenities will have significant changes to their rentable square footage.
The above scenarios demonstrate how accurate square footage information can inform property management decisions and have a real financial impact. Note that how you use your square footage information can depend on your role at the property:
Building ownership that is looking to sell the property will want to increase the square footage to maximize the property’s valuation.
Property managers will leverage square footage when renegotiating tenant and new tenant contracts, to increase revenues.
Leasing managers might find a conundrum in that an increase in rentable square footage might result in a high load factor – but your load factor can be capped as needed under the BOMA 2017 standard. A leasing manager will benefit from access to accurate rentable square footage (including in broker mailers and marketing plans) is beneficial. It’s hard for potential tenants and their brokers to argue with your numbers during negotiations with a full BOMA compliant measurement to back them up. Also, higher RSF means higher commissions!
The common critical data in each of these scenarios is accurate square footage. With so many benefits to so many parties involved in managing the financial position of a property, your building’s square footage is the golden number that keeps on giving all year round.
For additional review of how to use square footage information for your property, consider BOMA’s Education programming at https://www.bomachicago.org/home/education.