When a prospective tenant speaks to a landlord about leasing space, one of the major points of discussion is usually the amount of square footage to be leased. The tenant will naturally need to rent sufficient space for the operation of its business, and the parties will often base the rent and common expense charges upon the square footage. However, although the parties may both use the term “square footage,” they may not be talking about the same thing. As a tenant, the natural inclination is to think of square footage as the amount of space you can actually use for your business. This is often called the “usable area.” In contrast, the landlord may view square footage as the amount of space for which he can charge his tenants rent. This is referred to as the “rentable area” or “net leasable area.”
To avoid misunderstandings, the parties need to be certain that they are talking about the same thing when discussing square footage. The Building Owners and Managers Association (BOMA) International promulgates a standard methodology to calculate both usable and rentable square footage; however, landlords are not required to use the BOMA standard and may instead use their own square footage calculation methods. As such, the parties should be aware of the following general definitions when negotiating a lease:
“Rentable Area” or “Net Leasable Area” is the amount of space for which the tenant will be charged rent and a proportionate share of common expenses.
“Usable Area” is the amount of space the tenant can actually use for its personnel, furniture or retail operations. The Usable Area will be less than the rentable area because it will not include areas such as utility closets, stairwells and other common areas.
When evaluating the Rentable Area and Usable Area available in different buildings, the following terms are frequently used:
“Loss Factor” means the percentage of Rentable Area that is not usable. A high loss factor may indicate an inefficient design or large common areas.
“Load” or “Add-on” is the percentage of common area added to the Usable Area to determine the Rentable Area.
Keep in mind that the precise means of calculating the Rentable Area and Usable Area may vary based on the locality or the parties involved. Therefore, it is important to set forth the basis for the calculations in the lease agreement. Having an understanding of the general definitions of these commonly used terms before negotiating a lease will help ensure landlord and tenant are speaking the same language. In some instances it makes sense to include the electrical closet in the calculation, in other situations it does not. Additionally, the tenant may want to reserve the right to verify the landlord’s square footage calculations to ensure the tenant is getting all the space it requires.