In commercial leases the leased premises is usually defined in terms of rentable square feet. Tenants often focus their negotiations on the rental rate for those square feet. However, it is important to understand how the rentable square footage number was calculated and to compare potential spaces on a true “apples to apples” basis by calculating the usable square footage of a space.
Rentable vs. Usable
While a lease will commonly only reference the rentable square footage of the premises, a tenant should also determine the usable square footage of the premises. Usable area is considered the space that a tenant can actually occupy. It is measured from interior wall to interior wall of the leased premises. Usable square footage does not include common areas such as shared restrooms, the building lobby, stairwells, janitorial rooms, mechanical rooms or hallways. For tenants leasing an entire floor or multiple floors, the usable square footage of their premises would include the hallways and restrooms exclusively serving their floor(s).
The rentable area of a premises is broader and includes a tenant’s share of space in the building deemed beneficial to the tenant even though the tenant does not have exclusive possession of such space. The rentable square footage of a leased premises includes the tenant’s share of the building’s common areas such as lobbies and other nonrentable space such as mechanical areas, bathrooms and staircases. Rental rates are typically quoted on the basis of rentable square footage. Operating costs, taxes and insurance costs are usually based on rentable square footage as well.
The increase in a premises’ square footage above the area that a tenant exclusively controls is often referred to as the “load factor,” “loss factor” or “add-on factor.” For example, consider a building that contains 200,000 square feet of floor area, of which 175,000 square feet is area that can be used and occupied by tenants and 25,000 square feet is common area (common restrooms, lobbies, hallways, utility rooms, etc.) The 25,000 square feet of common area is spread over the 175,000 square feet of usable area to determine the building’s loss factor. In this case the building’s loss factor would be 1.14 (200,000/175,000). Thus, a space with a usable area of 25,000 square feet would have 28,500 rentable square feet.
A building with a low load factor can save a tenant money (or provide a tenant with more usable square feet) as compared to a building with a high load factor. The implications of a higher load factor are easiest to observe through an illustration. A tenant is considering two premises in two different buildings. Option A is a premises of 10,000 rentable square feet in a building with a 25 percent loss factor. Option B is a premises of 10,000 rentable square feet in a building with a 15 percent loss factor. Both options specify 10,000 rentable square feet and an identical rental rate. However, a savvy tenant would calculate the usable square footage of Option A versus Option B. Option A contains only 8,000 usable square feet while Option B has approximately 8,696 usable square feet. While the rent for both locations is the same, the tenant gets an additional nearly 700 square feet of usable space in Option B.
Tenants should be careful to compare the rental rates of prospective premises on the basis of usable area, since that is the space that they will have the exclusive right to use and occupy for their business. An “inefficient” building with a high loss factor can cost a tenant more per usable square foot than a tenant realizes, but a tenant may determine that a higher loss factor is worth the added cost due to the larger, more elaborate lobbies and common areas that some high loss-factor buildings provide.
BOMA Standards
In most markets, usable square footage, rentable square footage and the load factor are calculated in accordance with standards established by the Building Owners and Managers Association International (BOMA). BOMA has established standards for measuring buildings, including office buildings, industrial buildings, retail buildings and mixed-use properties. A lease should clearly specify the BOMA standard that was used or will be used for measurement purposes. Also, tenants should be aware that certain regions of the country adhere to different measurement standards. A tenant will want to familiarize itself with the market and the system of measurement that is commonly used for its type of lease (office, industrial, retail, warehouse, etc.) and understand the implications of that standard of measurement.
Drafting and Negotiating Considerations
Leases should clearly state both the total usable square footage and rentable square footage of the premises. The parties may also want to include the loss factor that was used in calculating the usable square footage of the premises. To avoid claims by a tenant disputing the square footage of the leased premises, landlords should include in the lease a statement that “the parties agree that the rentable square footage of the premises is ‘x’ rentable square feet.”
Tenants should try to obtain a representation from the landlord that the rentable area of the building and premises was determined by the landlord’s architect in accordance with the proper BOMA standard, or other applicable standard. A tenant with some leverage may also be able to negotiate a right for the tenant’s architect to remeasure the space and an adjustment procedure for the rentable square footage if the tenant’s architect’s determination differs from the square footage stated in the lease. If the lease includes a remeasurement right by either party, the lease should also provide that all lease provisions that are based on rentable square footage (including fixed rent, proportionate share and tenant allowances) shall be adjusted accordingly following remeasurement. Additionally, parties may want to cap any upward or downward adjustments in the rentable square footage of the premises following a remeasurement in order to provide a level of certainty upon execution of the lease.
