Core rules for the commercialization of office spaces.
The Strategy for owners of real estate portfolios.
When building an office, every property owner wants to earn the costs back and start making profit from the lease as soon as possible. Profit, which directly corresponds to the area. After all, it’s based on the sq. m. that the properties are sold, rent and charges are calculated. Why is it then that so many investors still downplay a strategic and complete approach to area measuring? How does the building area affect the profits? And how does it happen that in the same office building the area is different from the project area by up to several dozen percent?
Area measurement standards have specific goals – don’t mix them up!
In accordance with the Polish law, when creating any type of a building project, we have to use the Polish PN-ISO 9836:1997 standard. This standard contains a detailed breakdown of areas and cubage, as well as rules of their classification. On this, officials calculate the rates in the building permit. As such in the established project documentation, which is submitted to the architecture department in order to obtain a building permit and which is used to carry out the investment, appear: the usable area, the hallway area, the technical area, the constructional structure area and total area. The areas and factors found in the building project are meant to show to officials supervising the project, that the object we’re creating will be safe for the people inside and that working comfort will be ensured. They must be sure that the object that we want to implement will be compliant with the building conditions or the local plan. Apart from that, a number of standards used for calculating the lease area is present on the Polish market. Most used are the BOMA, Tegova and GIF standards. They help with managing lease areas and allow the investor to compare buildings in terms of future profits.
A building project compliant with the PN-ISO 9836:1997 is not suitable for calculating the lease area! What’s more, directly copying areas from the project to tax declarations is a mistake.
Well, immediately, after all, we also calculate property taxes in accordance with the Act on Local Taxes and Charges, which references also the PN-ISO 9836:1997 standard? Why is it a mistake then? Because different areas are classified for different purposes. Many of them are excluded from the area for tax purposes. Let’s analyze where the differences in areas calculated for different purposes and at different stages of a building’s life come from. I will present the strategy, which has been used by many of our clients – clients, who value the need of order in documentation, declarations and transparency with the tenant. The order will be complete when areas included in the lease agreement are compatible with other documents.
Calculate areas 4 times?
The first thing that comes to mind is probably the fact that measuring the building 4 times is unnecessary. That, it’s just in my best interest, because my company measures and calculates areas. Well, no. I’m writing this in the investor’s interest, because of several years of experience in creating strategies of managing offices, warehouses, retails and tenements areas shows how many losses are generated by wrong area management. The biggest losses are caused by a mess in this regard. The cost of measurement is earned back by the owner in half a year on average. So, how is it my interest and not the property owner’s interest? In the whole investment process the area for lease purposes should be calculated 4 times, and an additional time for tax purposes.
Calculating areas based on the building project
The first calculation (as it isn’t a real life measurement) should be performed at the building permit stage, when the architectural project is finished. It’s even better if it’s an executive project after construction. With those documents we are able to calculate the lease areas, common floor areas and common building areas. We also find out what the building factors is, and at the end we will be able to calculate the rentable building area with great accuracy. After receiving the real values from area calculation according to a given standard we will be able to modify the method of calculating factors so that those areas are rentable to the maximum. The building factor of the office part, which is usually not rentable in its pure form, can sometimes be moved to the retail part in the office building. Modifications and analysis performed at this stage are meant to create unchangeable measurement rules of a particular building. They shouldn’t change at least until the first lease agreements, and even better – for 5 or 10 years. Based on the final area calculations we are able to enter the market, look for tenants and sign agreements.
Unnecessary measurements for space plans
Space plan companies are calculating the area from the beginning and in their own way! The question is: what for? This is the second calculation, which applies to individual single tenants and which is still before the construction of the building. Companies which arrange lease areas usually either have no idea about area measurement standards, or if they have any, they can’t adapt them to the situation on the market. Depending on the lease area, the discrepancies can reach a few, or even a few dozen sq. m. What makes us think that? We have verified calculations made by space plan companies many times and we know it from practice. One question comes to mind.
Why are space plan companies measuring the area from the project, if it has already been done? It results from one fact. A frequent investor’s mistake is not giving those companies the previously made area calculations – usually from before the building permit.
It’s this calculation which should be the basis of the fit-out projects. It’s enough to additionally calculate the lease area based on the project for just one tenant. As a result, the mistakes in double measured areas are eliminated. It hasn’t happened before that the areas calculated and shown on the fit-out floor plan were the same, or even close to the areas calculated by us for lease purposes
Executive measurement of the building after construction
After being constructed, the whole building should be measured in real life, in accordance with the standards used in calculations based on the project. This is our third measurement. You should perform measurements of the building at the building shell stage, and the common areas when they are finished. If we change the measurement rules at this stage, there will be area discrepancies. This will surely not make the tenant optimistic and will cause him to be unsatisfied. It will also cause a mess in the investor’s documentation. Assuming the same area calculations based on the project and the same area measurement rules after the building has been built, the difference in lease area for the whole building should not be larger than 0.1%. This means less than 1 sq. m. for 1000 sq. m. of area. Obviously, it’s assumed that there were no changes in the project or substitute permit during construction.
In current lease agreements we can often find that the lease area calculated from the project and the area measured after the construction are 2%, 3% or even 8% different. It’s nonsense!
Examples of lease area discrepancies
Let’s analyze what those values mean, basing on the 3% example. In our latest inspection of a building in Wola, Warsaw with the floor area of 2400 sq. m., the permissible mistake in area in the lease agreement amounted to 3%. This means the investor assumes that the floor area can change by as much as 72 sq. m. after the building is constructed. And in a 30 storey office building by 2160 sq. m.? These are values that fit within the range in the lease agreement. Let’s analyze the second example. Not so long ago, we were carrying out two commissions. In the first one we were measuring the whole building for the owner, and in the second, less than two floors for one of his tenants (area of 800 sq. m.). The tenant knew we were measuring the whole building for the owner. Despite that, he wanted us to measure his office again. For us it was a great opportunity to check the measurement with different equipment and measuring team. With the area of 800 sq. m. the difference between the two measurements was 0.3 sq. m. In percentage form it’s a 0.0375% difference. When we assume the accuracy of 1-1.5 cm of building construction walls, the difference won’t be greater than 0.1%. However, if it was 10 or 30 times bigger, it would mean that someone has made a serious mistake when calculating or measuring the area. A certain mistake is changing the method of calculating the area. That is, however, more of a business decision of the property owner. In my opinion, a chosen standard and its changes, modifications at the first calculations stage should be kept for measurement after construction of the whole building. After this, the same measurement rules should be included in the lease agreement. The second stage of lease area measurements allows for verification of the calculations based on the project and resulting from the changes made during the construction process. Executive measurement after construction of the building (building shell and finished common areas) is often skipped. However, it’s the most crucial measurement for the whole building. It eliminates all future area losses of spaces in the lease, due to the possibility of measurement without making borholes through the arranging walls and pillars. It’s a measurement done before the tenant arranges the area, i.e. before creating the kitchens, bathrooms, offices. Before building the construction columns covering the reinforced concrete walls with drywall, hiding pipes or wires behind walls. It’s a measurement of the clean area which the tenant receives. A measurement which will ensure that no matter what happens in the future, how the individual floors will be arranged, what will be built on – this measurement will give us the maximum gross lease area.
Area measurement for tax purposes
The fourth stage is a measurement for tax purposes. It’s best to measure the whole building area, but after all the tenants have arranged it. Any tenant’s arrangement decreases the area for tax purposes.
The usable area calculated in accordance with the Act is different from the usable area from the building project even by 30%. Yes, the 30% is not a mistake. That’s because the Act and the PN-ISO 9836:1997 standard classify areas by function differently and define the usable area in a different way.
That’s why you should perform measurements and not copy the values from the building permit or the permission to use the building. If you are able and take the time, you can skilfully choose the area from the building project. As a result you’ll get an area value for tax purposes But wait a minute, when we have all the tenants arranged in the building, the area for tax purposes will be smaller by about 5% than the open space. However the difference between the area according to the BOMA standard and the area according to the Act on Local Taxes an Charges will reach 7-8%.
Core rules of measuring
Dear owner, real estate manager and other experts serving commercial real estate. If you don’t want to have problems with tenants, please take some good advice from a long-term commercial real estate advisor to your heart. Advisor, who has worked all across Poland in many different companies and with many different building types. Advisor, who has seen countless mistakes resulting in huge losses in area management.
As far as I have measured over 5 million sq. m. of surfaces.
My last business talks about an investor’s property portfolio area strategy concerned amounts above 36 million PLN. An amount which will or will not belong to the property owner. It’s worth looking into.
Don’t disclose the area for tax purposes
First, I believe that you shouldn’t disclose the area for property tax purposes of a particular office in the lease agreement. This area will be smaller than the area for lease purposes by a few percent. If somebody insists, you can disclose the area for tax purposes of the whole building or the combined property tax value charged for the whole building. Usually this cost is moved from the property owner to the tenant and it’s best to calculate it based on the “tenant’s participation”. The area for tax purposes is the area arranged by a tenant, and the rentable area is the area without the arrangements, along with the common floor and building areas.
Don’t change the team
The second piece of advice is: the area for lease purposes should be calculated from the architectural project by a company that know what they’re doing and do it every day. Architects are not always the best choice. Most architectural companies don’t have a “feel” for foreign standards. They don’t like to participate in the process of commercialization profiting the owner and real estate manager. Next piece of advice is: area measurement after the building has been constructed should be performed by the same company that did the project calculations. Why? Because they already know about all the changes, modifications and arrangements from the project calculations stage. It helps to avoid repeated arrangements or modifications of corrections. It saves time and eliminates the mistakes resulting from the team changing arrangements.
Share data with the company from the office arrangement
What’s very important is that the plans for the fit-out arrangement works should be plans with surfaces measured or calculated for rental purposes. This measuring company should provide files in CAD format to the fit-out arrangement companies. It’s on this material that they should work, not on their own measurements. The property or leasing manager should coordinate us. I understand that sometimes office arrangements are made still at the construction stage, and it’s impossible to get a real measurement. Then, you need to take plans and calculation results and cut the data into an arranged tenant. If we don’t do that, the tenant will always ask the same question – why is the fit-out area smaller than the one in the lease agreement? It’s logical that every tenant would like to pay for a smaller area. And knowing from practice, the fit-out area is always smaller than the area for lease purposes calculated by us.
The responsibility is on the property owner
Following the advice above will allow the investor and manager to make the negotiation process with the possible tenant easier. That’s why I draw your attention to the fact that the choice of people generating the outcomes of calculations or real measurements should be crucial to the property owner when managing areas for lease and tax purposes. It’s them who generate the values used in lease purposes, taxes, fee accounting, etc. Why does it still happen that the measurements are performed by people (surveyors, architects) who often didn’t even purchase the area measurement standards? Who after taking the commission call and ask to be trained in using the measurement rules of the standard? The measuring team’s knowledge about measurement rules alone doesn’t do much for the property owner.
What should the investor expect apart from just the measurement results? A showcase of market practices, what the tenant is willing to accept, ways to generate higher profits from the area. Because an individual strategy of managing areas in the whole property portfolio is something that measurably translates to time and money.
I urge people who are measuring areas using different standards for the first time to be reasonable. Saying it’s simple and not thinking about numbers “here and there” generates losses for property owners. It’s hard to talk about such companies being competition with the low prices for studies that generate losses for the owners. However, many Clients are encouraged by low measurement costs and still fall for it. Still, there is something ever sadder. Namely the fact that, as always in the whole investment process, the responsibility that comes from this knowledge and the decisions made lies with the property owner. It’s up to him whether he wants to focus on looking for big savings and profits. That’s why I hope that I have contributed to increasing the knowledge on the matter, and that you’ll generate worthwhile profits from areas.
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Translation: Julia Pająk