Explaining Actual Accessible Office Space to Prospective Tenant
Q A prospective tenant responded to an ad that I placed for vacant space in the office building I own. It needed 10,000 square feet to accommodate its employees and equipment, and had budgeted roughly $8,500 per month for base rent. The tenant told me that the space was the exact square footage it needed and that it would pay the asking price of $10 per square foot. The tenant figured that 10,000 square feet multiplied by $10 per square foot equaled $100,000 per year, or $8,333.33 per month.
The tenant decided that the space was large enough to accommodate its needs and that the price was in its budget and rented it from me. However, as the tenant was moving into the space, it had trouble fitting in all of its employees and office equipment.
The tenant claimed that the space I advertised wasn't the actual space that it could use for its business and accused me of taking advantage of it by charging for inaccessible space.
The tenant didn't ask whether the square footage I advertised was the “rentable area” or “usable area,” or what the “loss factor” was. How can I avoid this problem in the future?
A As an office building owner, it's important for you to understand the standard measurement methods that are used to determine the actual square footage that tenants can use and the terms for the three types of measurements that are taken when calculating the size of office building space. This way, you know which measurement figure to advertise as being available to prospective tenants.
Understand Standard Measurement Methods, Terms
Although methods of measurement vary, the most common standard used industry-wide is the Building Owners and Managers Association (BOMA) standard, says Alan Whitson, RPA, president of the Corporate Realty, Design and Management Institute and chair of the Model Green Lease Task Force. Created to simplify and standardize the measurement of office space, the BOMA standard relies on three important terms: “usable area,” “rentable area,” and “loss factor.”
The usable area is the actual space that the tenant can use as office space. This is the area in which you can place actual furniture, equipment, and employees.
The rentable area is the tenant's gross square footage on the entire office floor, plus the tenant's pro-rata share of the building's common areas, such as the lobby, corridors, and restrooms. The rentable area does not include the balconies, pipe shafts, vertical ducts, elevator cores, stairwell areas, flues, and other similar columns and projections. The rental area typically is the square footage the tenant will pay rent on.
The difference between the rentable area and the usable area in the building is the “loss factor.” The loss factor is the percentage of space in a building that's not usable. For example, if it's determined that 20 percent of the building is dedicated to common area space, 20 percent will become the loss factor for every lease in that building.
Note that BOMA doesn't have a standard for shopping centers or strip malls. Because BOMA is not the authority on measurements for retail, it is important for center owners to choose a reliable standard to measure space and then explain the terms of that standard to avoid a misinterpretation by retail tenants.
Advertise Rentable Area, Quote Usable Area
More than likely, you or your property manager have used the BOMA standard to measure space and have based your rental rates on the rentable, not usable, area. The tenant in your case should have asked whether the space advertised was the rentable area, subject to a loss factor, and if so, what the loss factor was. However, if a tenant does not know about measurement methods and their terms, it will assume that the rentable area that you have advertised represents the full space available to it once it has moved in.
To avoid confusion and a situation like this one, where the tenant's space is not useful to it after it moves in, you may want to advertise the rentable area, because that is the standard figure that owners use to describe their space. But then explain what the rentable area, usable area, and the loss factor are to inexperienced tenants. You can explain that when it is quoted the rentable area, the tenant can get an accurate measurement of the space that it will actually be able to use for its business by dividing the rentable area by the loss factor plus 1 (that is, if the loss factor is 20 percent, add “1” to get 1.20).
Calculating the Actual Offer
If you had taken these steps with your current tenant, you would have quoted it the following offer: 10,000 rentable square feet at $10 per square foot, with a 20 percent loss factor. When it applied the BOMA standard, the tenant would have divided 10,000 square feet by the loss factor of 1.20, to determine the usable space of 8,333 square feet. Next, the tenant would calculate the rent by multiplying 10,000 square feet by $10 per square foot, to arrive at $100,000 per year, or $8,333.33 per month. Then the tenant would have realized that, although the rental rate fit its budget, it would be renting a space that was impractical for its employees and equipment.
Insider Source
Alan Whitson, RPA: President, Corporate Realty, Design and Management Institute, Chair of Model Green Lease Task Force, 4850 SW Scholls Ferry Rd., Ste. 203, Portland, OR 97225; (503)274-7162; awhitson@squarefootage.net.