October 25, 2002

Understanding Commercial Real Estate Lingo

Why do tenants pay rent on more square footage than they are actually using?

This question often arises when a prospective tenant is faced with a new lease and they were not adequately prepared for the language and calculations of an attractive lease proposal.

In most office buildings the difference between the physical space which the tenant actually uses, and the square footage upon which the rent is calculated, is key in negotiating the best situation. Before tenants can fully understand the value of a proposal, however, a clear understanding of commonly used building terminology - such as "BOMA Standard", "usable area", "rentable area," and "load factor" is necessary.

BOMA Standards & Usable Area

In 1915, the Building Owners and Managers Association (BOMA) developed the first standard method of floor measurement for office buildings. This standard was readily accepted as the national standard of measurement.

"Usable Area" measures the area of a floor in an office building which the tenant actually uses and is of prime interest to a tenant in evaluating the space. This is the tenant's demised area.

Referring to BOMA standards, usable area is computed by measuring from specific points, such as the center of the demising walls (walls separating one office suite from the next) to other defined points, with no deducting for structural elements within the demised space. The amount of usable area on a multi-tenant floor can vary over the life of a building as corridors expand or contract and floors are remodeled.

Rentable Area

"Rentable Area" is the tenant's pro-rata share of an entire floor, excluding those elements of the building that penetrate through a floor space, such as elevator shafts, stairwells, ducts or pipes.

The rentable area does include common areas such as restrooms, equipment rooms and elevator lobbies. The rentable area of a floor is a constant measurement for the life of the building and is not affected by changes in corridor sizes or configuration. Rentable space will always exceed usable space.

Load Factor

"Load Factor" from a rental standpoint refers to the floor area loss, or the difference between the rentable area and the usable area. This is usually expressed as a percentage and is used to calculate the tenants pro-rata share of the rentable floor area for which the tenant is to be charged rent.

The more efficient a building, the lower the load factor percentage will be. The load factor range for Denver is typically from 12 to 15 percent with a 12 percent building being far more efficient than a building factor with a 15 percent load factor.

What this all means

For the prospective tenant to compare rents and make the best economic choice, they must be aware of the impact of rentable and usable square footage and the difference in the "load factor" between buildings in order to be able to compare leasing scenarios.

Let's assume a tenant wants to lease 10,000 square feet of an office building. The tenant looks at two buildings, Building A and Building B. Building A has an efficiency rate of 12 percent while Building B has an efficiency rate of 15 percent. If the tenant were to least the 10,000 square feet in Building A, he or she would actually be paying rent on 11,200 square feet (10,000 x 12 percent). Because the efficiency in Building B is less, the tenant would actually be paying rent on 11,500 square feet (10,000 x 15 percent).

At Building A, the tenant may be quoted a rent of $20.00 per square foot full service per annum. Building B may quote $18.00 per square foot full service per annum. The tenant may want to make an economic decision and decide on Building B because it appears to be a better deal. Let's take a closer look.

Building A is actually a more efficient building. It may well be that in the more efficient building the tenant can function in less space and be in a building that is a higher quality. As a result with less square footage the annual cash flow to rent will be lower and the tenant will be getting more for his or her rental dollars. The key is more efficient space and better amenities.

An example would be a tenant who wants to expand his space and renew his lease. The square footage on the new lease does not compute with the old square footage of the primary space. In addition, the difference between the rentable and usable area in the expanded area has changed with the new lease. The load has increased and thus the efficiency of the building has decreased. The tenant is getting less usable square footage and paying for a higher load. Upon questioning the Landlord, it was determined that the building had been remeasured to the Landlord's benefit. This information and understanding of rentable and usable square footage had an impact on the negotiations.

The office market has changed dramatically in the past few months reinforcing a situation where the amount of rentable and usable space is only one criterion in negotiating the best scenario for office space. It is important when comparing and choosing office space to ask the appropriate questions. After the landlord quotes a rentable rate per square foot the next question to ask is "how big is the load factor?"
1225 Leyden St    •     Denver Colorado 80220     
  Phone 303.320.4488    •     Fax 303.377.2003

Copyright © 2003-2018, Wray & Associates, All Rights Reserved
Designed by Vision Business Concepts