Top 10 Things Tenants Should Know About Real Estate (and most don’t).
#8 HOW TO GROW A BUILDING WITHOUT MOVING A BRICK
A DISCUSSION OF RENTABLE AND USEABLE SQUARE FEET
A tenant’s nightmare…. you’re paying for space you don’t have! This might equate to leaving your office one evening and coming back the next morning to an office space that has grown perhaps by 20%, yet not one brick was moved.
In today’s market, everyone is concerned with lowering their operating costs. With real estate usually ranking as the second largest expense, it’s a good place to focus. The obvious place to start is by paying the lowest price per square foot.
But have you ever thought to confirm your square footage?
You may have seen the terms “load factor,” “rentable” and/or “useable” square footage in your lease. An unfortunate, but fairly common mistake many tenants make is not understanding these terms and the calculations behind them, which may equate to your rent being 10 to 15% higher than it should be.
Useable Square Feet
The space within the walls of your premises.
Rentable Square Feet
The useable square feet plus your proportionate share of common areas (such as lobbies, hallways, common restrooms, fitness facilities, etc.)
The rentable square feet divided by the useable square feet
In most buildings, there are two calculations that determine the total square footage that you are paying for, 1) is “net usable” square footage and; 2) “net rentable” square footage. Determining and measuring the usable square footage of a space is pretty straight forward. You simply measure the space you typically think of as yours. If your space was 20 feet wide and 50 feet deep, you would lease 1,000 useable square feet. Most retail and industrial buildings do not have any common areas (building lobby, hallway corridors, etc), so the useable square footage is also the rentable square footage.
If you lease space in a multi-tenant office building, then you pay rent on the rentable square footage which is your useable square footage and adds your share of the common areas.
The common areas of a typical office building are the mainfloor lobby, elevator lobbies on upper floors, wide corridors, restroom facilities and other such “common areas”. In our example, say the total building size was 12,000 rentable square feet and it had 2,000 square feet of common areas.
This would leave a total of 10,000 useable square feet. You occupy 1,000 useable square feet, or 10% of the building. So, in order to calculate your rentable square footage, you add 10% of the common areas (200 square feet) to your useable square footage (1,000 square feet) for 1,200 rentable square feet.
The load factor is the rentable square feet divided by
the useable square feet (RSF/USF).
In our example, it is 1,200/1,000 = 1.20%, or 20%.
So when the landlord is charging on a net rentable basis, the tenant pays its share for the common spaces in the building. This methodology is very common in office buildings and is always subject to scrutiny. Usually load factors for multi-tenant office buildings are between 13% and 17%. But, we’ve recently seen one as high as 23%. Oftentimes landlords will not bother to calculate it and merely state it at the industry average of 15%. These calculations are very subjective, not straightforward or black and white. There is much room for a landlord to interpret, manipulate and calculate to his advantage and your detriment.
We’ve seen a building’s total rentable square footage change merely by changing the calculation of the load factor. This has a direct effect on a tenants occupancy cost as it may change its rentable square footage.
Today the Building Owners’ and Managers’ Association (“BOMA”) guideline is the closest thing to an industry standard, although it’s often subject to wide interpretation and is not universally accepted. The situation leaves tenants to compare apples and oranges when not everyone agrees on what an apple or an orange is. To clear away this haze, tenants should choose an experienced, exclusive tenant representative to help navigate them through pitfalls such as these.
For a certain engineering client of ours, we reviewed their lease and how they were utilizing their space. We found that they were not using at least 1/3 of the space that they were paying for and were in a nice Class A building with a 21% load factor. By relocating to a slightly lower-grade building without a load factor and a more efficient layout they reduced their space and monthly rental costs by 75%. They were amazed by the savings and the move actually allowed them to stay in business.
Tenant Real Estate Advisors (“TREA”) is an outsourced full-service real estate department that serves as an advocate for commercial tenants throughout Colorado and nationwide. Our creative, common sense solutions have been proven to save time and money so that you can remain focused on your business.
If you have questions about your exact situation, we are happy to answer questions or help you find the right professional that can. Give us a call anytime @ (719) 634-9000.
866.799.8732 | 719.634.9000 (o) | 719.448.0500 (f)