Mar 10, 2015 - 0 Comments - Educational -

Calculating Commercial Real Estate Usable versus Rentable Square Footage

z23Many commercial real estate professionals and tenants have difficulty understanding how space footage is measured for the purpose of commercial rental space. This is an important concept to understand because you do not want to agree to lease a property that does not have adequate usable space for your purposes.

Commercial square footage falls into two categories; useable square footage and common area square footage. Both types of footage are calculated into rental prices.

Usable Square Footage

Usable square footage is the actual total space you occupy. It is the area of the space inside your office suite and does not include entry or exit doors or structural columns. That means the space is measured as if columns and doors do not exist. Restrooms, janitor closets, elevator lobbies and public hallways are considered common areas and tenants pay for a portion of these areas along with the other building tenants.

For customers renting en entire floor or several floors, the useable square footage includes everything within the glass line including restrooms, janitor closets, mechanical and electrical closets. Full or multi-floor tenants also pay a share of the building’s common areas that are not on their floor including the main building lobby.

Rentable Square Footage

When a landlord or real estate professional refers to rentable square footage it includes the area of the enclosed interior space of the building excluding holes in the floor for stairwells, elevator shafts or mechanical duct spaces. This means that any space you can stand on is considered rentable square footage. It includes restrooms, storage closets, electrical and mechanical rooms, telephone areas and more. What you pay in rent equals the rentable square footage times the lease rate per square foot.

You can calculate the rentable square footage for less than a full floor tenancy by multiplying the useable square footage by the floor common factor and then multiplying that result by the building common factor. For a full floor or multi-floor tenant multiple the full-floor usable space by the building common factor.

What Is a Common Area Factor?

A common factor refers to the number of shared spaces on a single floor as well as shared areas within the entire building. These common areas are usually a pro-rata share of the tenant common areas and amenities that all tenants use such as the main lobby and elevator lobbies throughout the building.

A building common area factor is specific to common areas that all tenants in the building use and the rate range for these areas is generally six to eight percent. The floor common area factor refers to common areas shared by tenants on a single floor. This rate range fluctuates from building to building but generally is quoted at around eight percent of the floor, which would result in a factor of 1.08.

When a landlord quotes a common area factor it includes the total of the floor common area factor and the buildings common area factor. For most office buildings this total common area factor falls between 12 and 20 percent.

Leases and Calculations

The floor and building common factors are utilized in conjunction with usable and rental square footage measurements to calculate the add-on or loss factor. Some real estate markets use a load or common area factor instead of the add-on or loss factor. Because these terms often have different definitions depending on the landlord it is important to clarify how square footage and the total leasing costs will be calculated with the landlord so you have no surprises and make no incorrect assumptions. This should be done well in advance of signing any lease agreement because after a lease is signed there is generally no recourse to right a misconception or misunderstanding and the tenant is stuck paying a lease rate much higher that expected.

Here are the basic calculations for determining the usable square footage (USF) and rentable square footage (RSF):

Rentable square footage (RSF) equals the usable square footage (USF) multiplied by the sum of 1 plus the add-on percentage:

RSF = USF x (1 + add-on percentage)

To determine the add-on percentage the formula is rentable square feet/usable square feet – 1:

Add On % = RSF / USF – 1

Here is an example of how to use these formulas. Let us assume you want to lease a property that offers 16,000 rentable square feet of which 14,000 square feet are usable square footage:

To determine the add-on percentage calculate 16,000(RSF) divided by 14,000 (USF), then subtract one to get to an add-on rate of 14.29%. If you had a lease for 14,000 useable square feet and an add-on percentage of 14.29% then you are paying for 16,000 square feet of rentable space.

Always read through the lease carefully before signing anything because most leases do not detail out the calculations for how usable and rentable square footage will be measured. Many leases include vague terms like “approximate”. You can protect yourself by asking that the lease language be amended to include verification of the measurement of the property by the tenant’s or landlord’s architect according to a standard measurement like the BOMA Standard or the local market’s commonly accepted standard. You want to make certain that as a tenant your representative verifies that the measurement of the common area factor and building area factors represented in the lease are reflecting the actual space and that the factors are not inflated approximations.

Comparing Properties

When you are in the process of looking for a new commercial space you will want to compare buildings on an equal basis. The best way to evaluate different properties from a purely financial aspect is to compare the spaces using a cost per square foot of usable space.

Finding the perfect commercial location depends on many factors. Not all buildings will have the right type of floor plan for your needs so it is also important to consider the whole package when closing on a lease. Some buildings may offer more lobby services and amenities and others may be more affordable on a cost per square foot of usable space but hit you with very high common fees or offer less in terms of amenities and services.

The important thing to remember is that two buildings with exactly the same USF rental rate can have significantly different total rental rates as a result of all the common area factors and the add-on charges.

With the intricacies of commercial real estate transactions and leasing factors it is strongly recommended that a tenant engage the services of a qualified commercial real estate professional or tenant representation specialist that understands all of the ins and outs and has the technical skills to help you accurately evaluate your options and make the best informed choice.