Rentable area

What Is The Rentable Area?

The tenant’s rentable area is a derived figure that is used as the basis to calculate a tenant’s total rent. The rental rate is multiplied by the rentable area to determine the period rent to the landlord.

The Rent Formula

The formula to calculate the rent is:

Per the example above, assume a tenant has occupied an office of 1,000 square feet, but is allocated an additional 250 square feet for common areas. The rentable area is 1,250 square feet. If the monthly rental rate per square foot is $2, then the monthly rent is $2,500 per month. ($2 PSF x 1,250 SF = $2,500).

Why Use A Rentable Area And Not The Area Occupied By The Tenant?

The reason the rentable area has come about is many buildings have various areas that are shared among tenants. These common areas include building lobbies, hallways and corridors, restrooms, and other shared spaces.

These common areas represent a cost to the landlord. Common areas serve the needs of the tenants of the building, such as providing ingress and egress for the tenants and their clientele. These areas were part of the construction or acquisition cost of the building, and they require continued cleaning and maintenance.

The landlord needs a way to fairly allocate the cost of these common areas to each tenant. Using the idea of a “rentable area” solves this problem. The rentable area for the tenant is derived to calculate the rent instead of basing the rent exclusively on the area occupied and leased by the tenant.

Using the rentable area approach, the costs of these common areas are distributed proportionally among the building’s tenants based on the amount of space they occupy in the building.

Use Due Diligence And Investigate Rent Calculations

The rentable area is generally the figure used when quoting rents, but this should always be verified. Furthermore, there are various methods that can be used to determine the rentable area which include applying an R/U factor, or a load factor. These methods are discussed below.

When comparing available space, it is important to investigate the rentable area and coefficients that will be used to calculate the total rent. Although one landlord may offer a lower rental rate, the total rent may be greater if the landlord is using a method that leads to a higher total rentable area, even if the space occupied by the tenant would be the same.

How Is The Rentable Area Calculated?

The principle behind the methods in calculating the tenant’s rentable area uses a factor based on the total potential area that is rentable in the building compared to the total area that can actually be leased and occupied by its tenants.

Building/Floor Rentable Area

The floor or building rentable area is the total potential area that can be leased. There are several standards in how to measure the floor’s or building’s total rentable area, but in its most simple terms, it’s the area of a floor as if a single tenant rented the entire floor. The building’s total rentable are would be the sum of all the floor rentable areas.

Some standards call for a deduction of the area of vertical penetrations through each floor since these can’t really be rented. Examples of vertical floor penetrations include stairways, elevators, and ducts that serve the entire building.

Building/Floor Usable Area

The floor or building’s usable area is the next figure we need. The usable areas are all the areas that can be leased and occupied by the tenants. These areas exclude common areas such as lobbies, corridors, and restrooms that are shared by multiple tenants.

The R/U Ratio

The R/U ratio is the proportion of the floor’s or building’s rentable area to usable area that will establish the ratio we use to find the tenant’s rentable area. The R/U ratio to use for a tenant on a particular floor would be:

Once we know the R/U ratio (Rentable/Usable Ratio), we can multiply the ratio by the actual usable space the tenant has leased to come up with the tenant’s rentable area.

To Illustrate, imagine a single story building with a 10,000 square foot floor. If the lobby, shared hallways and restrooms total 1,000 square feet, then the total usable area on the floor would be 9,000 square feet.

The R/U Factor is 1.11. Once we have the R/U factor, we can multiply the tenant’s usable area (the area that will actually be occupied by the tenant) by the R/U ratio to arrive at the tenant’s rentable area. If we assume a tenant is going to occupy 1,000 square feet of offices, then the tenant’s rentable area for lease purposes is:

If the lease is $2 per square foot per month, then the monthly lease payment will be $2,220 per month.

Load Factor

The load factor is another method that can be used to calculate a tenant’s rentable area. The load factor is a rate that is multiplied by the usable area that yields an amount that is then added to the usable area to arrive at the tenant’s rentable area.

The load factor is the difference between the rentable area and the usable area divided by the usable area. It is generally expressed as a percentage.

Using the example from above:

If a tenant will occupy 1000 SF, then 11.1% of the area will be added to the usable area to determine the rentable area. In the example, 110SF will be added to useable area to yield a 1,110 SF rentable area.

Building Measurements And Standards

The examples in this article are simplified to help understand the concepts of arriving at a rentable area to distribute building costs proportionally among tenants. In practice, building measurements can be rather complex.

There is no individual standard that is imposed on landlords in calculating areas or determining how those areas should be calculated. Landlords will tend to pick the method that they prefer that will work to their advantage.

Buildings are complex structures that evolve to the needs of their occupants. Space can be used differently over time. Building configurations can change and people can demand and use common areas in a variety of ways that change from market to market, or property type to property type.

Fortunately, there are standards that are available to landlords that help establish consistency and a level of trust in the market place. The key organizations that establish accepted standards used in commercial buildings include:

• BOMA
• REBNY
• GWCAR
• GSA

BOMA

The Building Owners and Management Association (BOMA) is the leading trade organization in the commercial real estate industry. They initially addressed the problems of building measurements over a century ago when they established the first set of standards in 1915.

Since that time, BOMA, the standards have evolved in responds to the demands of owners, tenants and industry professionals. There are several generations of standards that remain relevant today. These are the guidelines established in 1980, 1996, 2010, and 2017. Landlords tend to use one approach or another and there prevalence depends on the market.

Originally the BOMA standards were primarily used for office properties. However, standard approaches were also expanded out to apply to different types of properties such as retail and industrial. The BOMA standards are made available through purchase on their website.

REBNY

Certain markets may also have their own conventions and measurement standards that are predominantly used. In New York, the Real Estate Board of New York (REBNY) has their own set of practices and standards that landlords may apply in their buildings.

GWCAR

In Washington D.C. the Greater Washington Commercial Association of Realtors (GWCAR) is an organization the provides guidelines for commercial properties,

GSA

The Government Services Administrations(GSA) manages the real estate for the federal government. The GSA establishes its own guidelines for measuring rentable areas of properties it leases.