We measure space in square footage. Then the rent is calculated either on an annual or a monthly basis depending on your market. I am in the Northeast and generally the rental cost is quoted as the annual cost per square foot. But, it is not that simple. Office buildings are measured in one manor and retail and industrial building space is calculated another way.
In a small “Main Street” building a landlord may simply measure the interior square footage of the space and base their rent upon that.
In office buildings with multiple tenants landlords desire to be paid for “every square inch” of their building. In these properties tenants get to exclusively occupy and use a certain amount of space but they also share “common areas” with all the other tenants in the building. So a tenant ends up occupying Net or Usable Square Footage but paying for this space plus their proportionate share of the common area, known as the Rentable or Gross or Billable Square Footage. For this article we will just refer to this as the Rentable Square Footage. Different terms are used in different areas and by various landlords. The important concept is that tenants often have to pay for more space than they occupy.
How is space measured? The general authority on space measurement is BOMA, the Building Owners and Managers Association. Generally, a building is looked at in three ways; certain parts of the building are considered “structural” and would be included in the base rental charge. For example: Thickness of exterior walls, exterior balconies, mechanical penthouse, upper stories of atriums, and major vertical penetrations.
The tenants occupied unit square footage is measured from the inside of the walls within the unit and includes all usable space and storage areas. If there are demising walls, internal walls dividing the space, like a private office, that space is included. Tenants must absorb HVAC convectors, columns and interior building projections in their measurements.
The common areas of a building may consist of lobbies and atriums (at floor level), public corridors (and include the thickness of the corridor walls), elevators, staircases, public restrooms, janitor, electric and phone closets, mechanical rooms, and loading docks. Such measurements will include the “common areas” on all floors.
When a building is constructed an architect or engineer will measure all the space in the building and determine the overall amount of usable square footage and the amount of common area square footage. The percentage difference between the Usable and Rentable space is known as the Loss Factor, Load Factor or Core Factor. For this article we will just refer to this as the Loss Factor. For Example: a building is 100,000 SF in total space, 15,000 SF of that space is common area. The Loss factor would be 15%.
Landlords are entitled to get paid for all the space in their buildings including the “common areas”. There are two different methods used to
do this calculation, the Add-On Factor and the Loss Factor method.
The Add-On Factor is generally found in use in areas where there is high vacancy and low absorption rates. It is best illustrated by example. A tenant can use and occupy 10,000 SF in a building. The landlord uses an Add-On factor of 15% representing the common area of the building. How much space is the tenant billed for?
To calculate; we consider the usable square footage occupied by the tenant to be 100% of their space and add to that 15%. The percentages are converted to decimals and multiplied by the usable amount of space.
100% + 15% = 115% or 1.15
10,000 SF X 1.15 = 11,500 SF
The tenant must pay for 11,500 SF of space.
The Loss Factor method of calculating Rentable Square Footage is used in areas of generally low vacancy and relatively high absorption rates. In this method the landlord advises the Net or Usable Square Footage and the Loss Factor percentage.
The Rentable Square Footage is then calculated according to this formula:
Net Square Footage = Rentable Square Footage
1 – Loss Factor Percentage
To determine the denominator for this equation we subtract from the whole number one the loss factor percentage as a decimal, this gives us the inverse of the loss factor.
For example: The landlord advises the usable square footage is 1,000 SF and the building has a 20% Loss Factor.
Step 1: Calculate the inverse of the loss factor (denominator for the equation) by subtracting the percentage from the whole number one.
1 – .20 = .8
Step 2: Calculate the Rentable Square Footage using the formula
1,000 Net SF = 1,250 Rentable SF
Note, in contrast if the Add-On Formula were used for this calculation the result would be 1,200 SF.
100% + 20% = 120% or 1.20; 1,000 SF X 1.20 = 1,200 SF
The result of using the Loss Factor method is more money to the landlord.
Retail and Industrial Buildings
When there is a free standing building, with a single tenant, in either of these categories, the gross space of the buildings is used to determine how much square footage the tenant must pay for. The gross space will include the interior square footage plus the thickness of the exterior walls.
Retail or Industrial buildings that contain multiple tenants will add to the interior square footage the thickness of any exterior walls of the unit. Plus, if there are common or demising walls shared with another tenant 50% of the thickness of those walls. That total square footage is what they will pay for.
|Edward S. Smith, Jr.|
|CREI, ITI, CIC, GREEN, MICP, CNE|
|Commercial and Investment Real Estate|
|Instructor, Consultant and Broker|
|Phone 631 807 2050|
|Smith Commercial Real Estate|
|Edward S. Smith Jr., Real Estate Broker|
|Licensed in New York and Connecticut|
|Berkshire Road, Sandy Hook, CT|