The following is an excerpt from Jamie Moorhead's new book, Tenant Leasing 101, now available in paperback and Kindle formats on Amazon here:
Per Square Foot Basis
In leases, the rented space is measured on a square foot basis, and the rent is calculated on dollar-per-square-foot basis. This much is known and is pretty obvious to most people.
Drilling down a bit, office leases become more complicated when the question is asked: ‘how is the square footage measured?’
In office leases (different standards can apply to retail, industrial, and residential leases, so we will stick to office space here for simplicity, even though this is good to know for all types of property), the leased area can be calculated in two ways. The first is ‘Usable Area,’ and the second is ‘Rentable Area.’
Usable Area vs. Rentable Area
In basic terms, Usable Area and Rentable Area can be defined like this:
This area is the actual physical area within the rented premises in which the tenant will operate. It is literally the space between the walls of the leased premises over which the tenant has exclusive control and possession. It can be helpful for a tenant to know this figure for purposes of planning the office layout, including locating workstations and furniture. This area is measured from the interior side of the common corridor walls, the inside of exterior building walls, and the middle of walls separating the leased area from adjoining tenant spaces. It does not include restrooms, elevator shafts, fire escapes, stairwells, electrical or mechanical rooms, janitorial closets, elevator lobbies, and public corridors.
Rentable Area is the Usable Area plus a proportionate share of the elevator lobbies, restrooms, corridors, and other common areas in the building. This proportionate share is commonly called a ‘Load Factor.’ This Load Factor is generally calculated by dividing the total rentable area of the building by the total usable area of the building and typically is around 108-115%. The purpose of the Load Factor is to have the tenant pay for its proportionate share of the shared building space.
Rent is determined on a Rentable Area basis. This means that the annual base rent (not the common area expenses or other additional rent) is calculated by multiplying the Usable Area by the Load Factor, with the product (the Rentable Area) then being multiplied by the dollar-per-square-foot rent rate. One thing a prospective tenant should consider is that a building with a high Load Factor likely will cost the tenant more per square foot of Usable Area.
This is a very broad overview of a complicated topic. A safe recommendation is that any company looking to lease space should retain a skilled broker to help guide them through these complexities...
For more, please visit Tenant Leasing 101 on Amazon here.