Commercial Leasing: Usable Square Footage vs Rentable Square Footage
When you look to lease an office space, retail space, or any other type of commercial real estate, this question is priority number one:
What is the usable versus rentable square footage?
Landlords and tenants alike should understand this calculation and how it is addressed in a commercial lease agreement. This is a vitally important calculation that any leasing agent or tenant representative (leasing broker) should be able to help you with. It’s useful to understand the basics of these numbers, especially as some of it will relate directly to tenant leases and relationships. Read on for a comprehensive primer on calculating usable versus rentable square footage for commercially leased properties.
Covered in this article:
- What is Usable Square Footage?
- What is Rentable Square Footage?
- What is Gross Square Footage?
- How to Calculate Load Factor
- Why Do Tenants Have to Pay for Common Areas?
- How do Landlords Calculate a Tenant’s Portion of the Common Area Cost?
- How to Calculate Loss Factor
- How do Landlords Specify Space as Usable Square Footage vs. Rentable square Footage?
- Commercial Leases in Texas: Find Optimal Usable Square Footage
What is Usable Square Footage?
Usable square feet (USF) is defined as the total usable floor area of a building. It is measured from the outside of exterior walls and windows and also includes interior walls, hallways, and common areas. Commercial USF measurements are comparable to residential measurements, in that calculations are made by measuring from the outside of exterior walls. Because of the method of measurement, it is common that tenant measurements will slightly vary from USF, because they do not account for the thickness of the walls.
For a commercial property, the USF is the space a tenant will actually occupy. Usable square footage is sometimes referred to as leasable square footage.
What is Rentable Square Footage?
Rentable square footage (RSF), is the amount of space that determines a tenant’s rent. It is expanded from the leasable square footage to also include common areas, such as public restrooms, hallways, lobbies, shared kitchen spaces, fitness facilities, elevators, and other spaces in a commercial building. Sometimes, common areas consist of as much as 20% of the total rentable square footage.
The common area factor, sometimes referred to as the add-on factor, can have a significant impact on rental rates, lease terms, and profit margins for property owners. When tenants are calculating office space, this is an important point of consideration as well.
What is Gross Square Footage?
Gross square footage (GSF) is calculated from exterior walls, but also includes all space in areas such as multi-floors which are open. Measured from the exterior, gross square feet can include mezzanines, utility rooms, stairwells, rooftop terraces, lobbies, intermediate floored spaces, basements, and is essentially the sum of all space in the building.
How to Calculate Load Factor
Building occupancy is a high priority for landlords, but maxing out your space requires even more than just raw calculations of square footage. These numbers are used to determine the load factor, which can be calculated by dividing the building’s total square feet by the usable square feet.
Here is an example of how load factor is calculated:
Load factor compares the amount of space tenants actually pay for on their lease to the amount of space they use.
Building owners can calculate total load factor, but also calculate the common area load factor, providing enhanced insight into how much money each individual space can make.
Why Do Tenants Have to Pay for Common Areas?
Common areas are appealing components of a commercial building. Things like shared kitchen spaces, conference rooms, and fitness centers are great incentives for office leasing. Rental rates are impacted by these amenities in different ways depending on what type of commercial lease tenants have signed.
There are two broad categories of commercial leases: gross and net.
- In a gross lease, tenants pay a single flat fee and landlords pay for all taxes, insurance, utilities, expenses, and repairs. The potential cost of all of those are factored into the lease. This is a simple way to approach commercial leases that give tenants a static number they pay each month.
- In a net lease, the reverse arrangement is secured: tenants, not landlords, cover taxes, insurance, utilities, expenses, and repairs, in addition to paying rent. The rent can be much less, because these additional costs are included, but the price will vary each month depending on numerous factors.
There are two types of gross leases:
- Modified gross lease, which has the same provisions as a gross lease but functions as a combination of a gross lease and net lease. Tenants pay a base rate, but also take on a proportional share of operational and building costs.
- Full-service gross lease, which is an easy gross lease option in which the tenant covers rent and the landlord covers extra costs.
When it comes to tenants paying for common areas, the portion which they will pay or not pay is stipulated by the lease. Landlords may charge tenants for a pro-rata share of common spaces using load factor analyses.
How do Landlords Calculate a Tenant’s Portion of the Common Area Cost?
Common Area Maintenance (CAM) fees typically include all repairs, maintenance, and cleaning of common areas. These can be broad or specific, and may also include parking lot maintenance, landscaping, sidewalks, snow removal, bathrooms, hallways utilities, elevators, and other operating expenses.
In lease agreements where tenants are sharing the load of the common areas, the onus is on landlords to parse this out correctly among occupants. The National Association of Realtors stipulates that CAM charges should be calculated by determining the pro-rata share of square footage for each tenant on the property.
Here is an example of how CAM could be calculated:
This would mean that $5 per square foot would be added to the total rent amount for each tenant.
How to Calculate Loss Factor
The loss factor, or the percentage difference between the rentable space and usable space, is an important number to establish.
Calculating loss factor is done by the following:
The loss factor is also sometimes called the core factor and in some lease types it helps landlords recover the cost associated with shared spaces.
How do Landlords Specify Space as Usable Square Footage vs. Rentable square Footage?
Specifying what spaces are usable versus rentable is an important caveat to any commercial lease agreement. The Building Owners and Managers Association International (BOMA) has standards for measuring buildings. A commercial lease should specify measurements according to those standards. This ensures everyone is on the same page and operating according to official guidelines. It’s common for small errors to occur, which may seem negligible at first but could amount to a lot over the course of a lease.
As tenants consider their budget for an office space or retail space, they should factor in the cost versus value of amenities they may share cost on. For instance, a business may or may not require a high-end lobby space or private restrooms. On the other hand, your team may really want a shared kitchen or conference rooms. Funds should be allocated according to these established priorities, and knowing rentable vs. usable square footage, and how a specific commercial lease is set up, is a key component of making that strategic choice.
Commercial Leases in Texas: Find Optimal Usable Square Footage
More people than ever are starting businesses in Houston, Dallas, San Antonio, and other metropolitan areas of Texas.
Knowing the difference between usable square footage, rentable square footage, and gross square footage is important to understand before signing a new lease. The key consideration layed out in this blog will help you get the best value for your money.