Beware How Buildings “Grow”
Great leasing deals are not the only ways to cut costs in the soft-as-meringue commercial real estate market. Town Sports International Holdings, a New York–based owner and operator of 160 health clubs along the East Coast, saved $200,000 in 2010 thanks to a thorough audit of its myriad leases. Town Sports leases all but one of its health clubs. “We hired a lease auditor to review all of our leases to see if we were being gouged on the common-area charges, which seemed to rise faster than other property-related expenses across our portfolio,” says CFO Dan Gallagher. “We thought something unusual was going on.”
There was reason for the skepticism. Paul Stevens, president of P. Stevens Associates, the firm that conducted the audit, determined that the language in Town Sports’s many lease contracts made the company vulnerable to additional charges. “Landlords are very creative and will ‘grow’ the size of their buildings [with] nonrentable space — the common areas like hallways, stairwells, and elevators that all the tenants use,” Stevens explains. “We did a study of approximately 200 million square feet of rentable space in Boston and found out that 65% of the 51 buildings we surveyed had grown in size over a 10-year period. The buildings had not changed physically — the owners just measured the square footage differently. We’re now paying our fair share of our allocations for common areas,” says Gallagher.
In total, Town Sports will likely save more than $750,000 through the end of its leases. To ensure that renters aren’t overcharged for common areas, Stevens recommends that leases contain contract language requiring building space to be measured in accordance with ANSI/BOMA Z65.1-1996, a standard published by the Building Owners and Managers Association.
Another CFO, Terry Peterson of Deluxe Corp., has pulled out $10 million in annual expenses from the company’s facilities costs. The Shoreview, Minnesota-based provider of business services and printed products such as checks, with $1.3 billion in annual revenues, turned to a commercial real estate firm, Minneapolis-based NorthMarq Real Estate Services, to evaluate its operating costs. “We have several printing plants, which require specific humidity levels to run efficiently,” Peterson explains. “We wanted to manage the related utility costs more effectively and decided to outsource this responsibility.”
NorthMarq attacked the objective in diverse ways. Remote sensors were attached to buildings to find out if the lights and heat were on when they shouldn’t be. Electrical meters on buildings were monitored centrally to determine any electrical anomalies. “We learned that there was something wrong with the electricity in one facility that caused it to spike,” Peterson says. “That alone saved us $32,000 in utility costs.”
“In the past, utility bills did not hit the CFO’s radar as a significant expense,” comments Mark Houge, senior vice president of NorthMarq. “But there are some real dollars in there that can be saved and redeployed into more important things, like technology and growth objectives. The savings on energy is typically between 10% and 30% of the previous three-to-five years’ average annual energy costs.”