How much space does the tenant get to use or occupy and is it always the same amount of space that they have to pay for?
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.
If we have a small building or a single tenant (even in a large building): “what you see is what you get”. Meaning if the unit is 1,000 SF your rent is calculated on 1,000 SF.
Many buildings, however, are large 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. 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 or Core Factor.For Example: a building is 100,000 SF in total space, 15,000 SF of that space is common area. The Loss or Core 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 or Core 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 of Core Factor method of calculating Rentable Square Footage
a/k/a Gross Square Footage or Billable Square Footage. This system of calculationis found in use 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 or Core 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)
20% = .20
1 – .20 = .8
Step 2: Calculate the Retable Square Footage using the formula
1,000 Net SF /.8 = 1,250 Rentable SF
Note, in contract 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 or Core Factor method is more money to the landlord.
Ed Smith serves as Regional Director of Coldwell Banker Commercial NRT Long island Metro and Mid-Atlantic Region, is a Real Estate Broker, Commercial Continuing Education Instructor, Corporate Trainer, Speaker and Author; he may be contacted at ESmith@CBCWorldwide.com or www.CommercialEd.com.