Let’s get to the point:
It’s well known by negotiation experts
that the party who enters the negotiation most prepared walks away with the better deal.
Information can be powerful.
That’s why today we’re going to share calculations all commercial real estate investors and managers need to know for lease negotiations with tenants.
These calculations are used by the Building Owners and Managers Association (BOMA), which sets the standard for measuring commercial real estate space.
They are reusable, rentable, and gross square feet.
And knowing how they work is important because:
You’ll know where your rents should be at
You’re leasing team will be more prepared to sell
Good tenants likely to renovate will respect your organization
Let us begin.
Usable Square Feet
Usable square feet is the space the tenant occupies from wall to wall.
Another way to think about it is the space you can use and measure the interior dimensions.
The usable square footage calculation is different depending on full-floor tenant leasing vs. partial-floor.
For partial floor commercial leasing, the calculation generally includes all office space only that a specific tenant may use. It does not include common areas of the building. Common areas include but are not limited to hallways, lobbies, elevators, public bathrooms, and stairwells.
Most areas except for elevators and stairwells could be counted as usable square feet for full-floor commercial tenants.
Lastly, an important tip is that usable square footage is not the number used to calculate the rent; it’s rentable square feet.
Rentable Square Feet
In commercial real estate, rentable square feet is the key term.
The best way to think about this calculation is to remember that tenants share the common areas of the building.
These areas need to function appropriately and be regularly maintained. Tenants need these areas clean and well-kept to continue conducting business. It can get quite expensive, and since landlords and managers are responsible for the upkeep, they charge common area expenses to the tenants. You should find shared area expenses in commercial leases under the common area maintenance provision.
To understand rentable square feet, we must know the load factor.
When leasing a retail space, the load factor breaks down the proportion of common area rent each tenant shares. For example, suppose you have a 10,000-square-foot building with a few offices that total 8,000 usable square feet. We would divide 10,000 by 8,000 and get a load factor of 1.25.
Rentable square footage is a tenant’s usable square feet multiplied by the load factor. In this case, what they pay is not usable square footage but the thickness of their walls and percentage share of the common areas of the building.
If we used the previous example and a prospective individual wants to lease an office with 2,000 usable square feet, you’d take 2,000 multiplied by 1.25 and get 2,500 rentable square footage.
Rentable square footage multiplied by the price per square foot gets us annual base rent.
Gross Square Feet
There is no universal definition of gross square feet for commercial properties.
Several different standards, codes, and jurisdictions have their own definition for this measurement area. Adopting the right one in any situation can help you make better decisions.
In real estate finance, it refers to the total square footage of the building. It does not include any area outside the exterior walls and should not be used to calculate rental payments. Instead, we use it as a term in planning and budgeting.
Commercial owners and managers should know consistent methodologies for measuring their floor space in lease negotiations.
Like Generally Accepted Accounting Principles (GAAP) is the universal standard to communicate financial language for business owners, BOMA is the way to communicate square footage in your lease contracts.
Here you can find BOMA’s standards for gross square footage.
Wrapping It Up
The lease is your number one tool to protect yourself against risk.
But now you’re armed with some of the most critical measurements in lease negotiation.
Next, you’ll want your leases to include what spaces are rentable vs. usable specifically. As we mentioned, BOMA is the way to communicate square footage in your lease contracts. This will ensure both you and the tenant are on the same page.
But let’s face it, complex rules in calculating the square footage of commercial space can be a headache.
If you’re unsure how to guarantee accurate measurements, you may need to consider a BOMA professional. If that’s something you’d be interested in, read this blog post.