What does the act of leasing office space have in common with a trip to the Fun House?
Sometimes, more than real estate professionals like to admit.
Step right up. Watch a building expand thousands of square feet — without moving a brick?
Watch a company move from a 29,000 square foot space in Building A to a 33,000 square foot space in Building B — and wind up with less space than it had before!
Watch a business lease a 30,000 square foot office, only to find 4,500 square feet of that space includes portions of the public bathrooms, the building lobby, hallways, elevator banks and stairwells. When was the last time you held a client meeting in a stairwell?
At the carnival, we pay to see such feats of prestidigitation.
As a business owner, one also pays, although sometimes dearly, as the inconsistencies caused by differing standards of space measurement, terminology of measurement, and the space efficiencies of different buildings lead to miscalculations and misunderstandings fatal to your business.
Caveat emptor! If you discover after signing a lease that you’re paying for more space than you actually have — there may be little recourse. By signing the lease, you may have agreed to pay a fixed sum of money for the space you occupy — no matter how large or small that space actually is. The square footage figure supplied by the landlord can be based on any number of different measuring standards and those may not be very reliable.
The solution?
Measure the space up front. Arrange to have it done by an independent professional. Thousands of businesses are paying for phantom footage, month after month, year after year. Don’t be one of them!
Let’s consider the tale of the rubber ruler.
THE SQUARE FOOT
We all know that a square foot is the area of a square 12 inches by 12 inches, and that we use the formula length (L) x width (W) = square feet.
So why is it so confusing to figure out the area of an office? Because a square foot is not a square foot in a lease contract!
The area of an office, its length (in feet) times its width (in feet), gives you the number of usable square feet (abbreviated USF).
Example:
An office 50 feet wide by 100 feet long measures 5,000 usable square feet.
50 feet (W)
x 100 feet (L)
5,000 usable square feet
This is the easy part.
Landlords of multiple occupancy buildings (more than one tenant) calculate square footage based upon the rentable area not the usable area. Rentable area is calculated by adding to usable area a proportionate share of common areas on the floor, such as; lobbies, public corridors, vestibules, restrooms, telephone and electric closets shared by all the tenants. Each building will vary in its ratio of common floor area to usable area. It is typical to add between 15% to 20% common area to the usable space. This percentage of common area is known as an add-on factor or load factor.
So 5,000 usable square feet, as in the example above, would inflate to 5,750 rentable square feet if we were to assume a 15% add-on factor. The calculation looks like this:
5,000 usable square feet
x 1.15 add-on factor
5,750
While add-on factors in most office buildings typically range between 15% and 20%, even higher add-on factors are often seen in the high-rise office buildings in major cities, depending on market conditions. This is mostly because of the large elevator core and the extra air shafts, risers, and conduit. In a strong landlord’s market, add-ons tend to be added on more aggressively than in soft markets, where the add-on percentage is sometimes magically reduced to keep the building competitive. Thus, the rubber ruler!
Why do landlords use add-on factors anyway? The answer is simple. It sounds a lot cheaper when the rent is $19.50 per rentable square foot than $22.43 per usable square foot. Quoting rent on a rentable square foot basis may seem somewhat confusing. It can make an inefficient floor plate appear to be cheaper. (see Chapter 2).
Secret No. 1 – Ask the landlord or landlord’s architect to state clearly the add-on factor the architect calculates and have your own architect verify the space you are renting. The landlord’s architect and your architect can usually agree reasonably quickly on a square footage number, or at least they can reduce the discrepancies to a few feet here or there.
A valuable lesson may be that just because it says so on the plan, doesn’t make it so. Tell the landlord you want the right to field measure (physically measure) the space. If you are considering a building under construction, agree to calculate the final area measurement after the building is completed.
Architects have a variety of measurement methods and standards. No two groups will ever agree completely. The standard provided by BOMA, the Building Owners and Managers Association, is one of the most commonly used today. If you are in doubt, ask the landlord what method he is using — but always do your own measuring before signing a lease!
New York City versus the Rest of the World
The rules for measuring space are quite different in New York City. When it comes to real estate, there is New York City and there is the rest of the world. It’s kind of like the famous New Yorker cartoon featuring the distorted map. New York City definitely has its own way of doing things — even its own version of the square foot!
While most areas of the country use the add-on factor method described above, New York City relies upon the loss factor.
A loss factor measures the loss of rentable area, as compared to the usable area. Confused? To calculate the rentable area using the loss factor method and, assuming a 15% loss factor, divide the usable area by .85. This, in algebra, is called the reciprocal. The formula looks like this:
5,000 ÷ .85 = 5,882.35 rentable square feet (RSF)
Notice that a 15% loss factor has a larger rentable area (5,882 RSF) than the example of the 15% add-on factor cited above showing only 5,750 RSF, so you will end up paying more rent.
Now let me tell you a secret about most New York City leases. You usually do not find the calculation of rentable square feet stated anywhere in a New York City lease. The New York City lease merely includes a little diagram showing the space being leased on the floor that becomes attached to the lease as an exhibit. The contract usually states something like, “The tenant agrees to rent the area shown crosshatched in the attached Schedule A”. In this way, the landlord can never be challenged. New York City is famous for its rubber ruler and buyer beware reputation. I am not mentioning this to put down the city of New York City, home to the nation’s largest commercial office market in midtown Manhattan. Indeed, many longtime players in New York City real estate are proud of their reputation. “If you can make it there, you can make it anywhere.”
The lesson to be learned is, when calculating square footage, do your homework. Don’t rely on what the landlord or listing agent tells you. Be aware of just how the square footage was determined — because a square foot is not a square foot! The future of your business may depend on you doing your real estate due diligence, and that starts with knowing how much space you are leasing.
Categorised in: Square Foot