DENVER BUSINESS JOURNAL
October 25, 2002
Understanding Commercial Real Estate Lingo
Why do tenants pay rent on more square footage than they are actually
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
"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
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" 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
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" 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?"