CHAPTER 43
Calculation 37: Building Measurements—Gross Building Area, Usable Square Footage, Rentable Square Footage, Loss Ratio, Net Rentable Area
What It Means
You typically rent out commercial space by the square foot, and for this reason, the measurement of commercial space is important. One would think that a square foot is a square foot and that would be all there is to it. But no, there are different kinds of square-foot measurements in commercial leasing, and you should know what each means. Because these various measurements are closely interrelated, we’ll consider them together in this one chapter.
The first of these measurements, gross building area (GBA), is perhaps the most straightforward. GBA represents a building’s total floor area, as measured from the outer surface of exterior walls and windows, and includes elevator shafts, utility rooms, and basement space.
Usable square footage (USF) is the actual space contained within a tenant’s (or all tenants’) premises. In the terminology of commercial leasing, it is the space contained within the tenant’s “demising walls.” The demising walls separate a tenant’s space from that of other tenants and from public corridors. In the plainest terms, usable square footage is the actual physical space that the tenant occupies, even if not every square foot is truly usable.
Rentable square footage (RSF) is the number of square feet on which the tenant’s rent is based. This is where geometry usually leaves off and creativity begins. A number of organizations in the commercial real estate industry have attempted to establish standards for the computation of RSF, but it remains a fuzzy notion. Ultimately, the RSF is whatever number the landlord and tenant agree on for purposes of their lease. If a commercial tenant occupies a space of 1,900 USF and agrees to a lease that defines the space as 2,000 RSF, then the rent will be based on the 2,000 RSF.
Why would a landlord consider it necessary to base the tenant’s rent on more than the tenant’s USF? Because, in order to provide the usable area, the commercial building owner must also provide so-called common area that does not generate revenue: lobby, corridors, restrooms, utility rooms, elevator shafts, etc. The loss ratio is the percentage of the GBA that is not USF. In other words, it is the percentage of the building that is common area.
The owner will typically take a percentage of the square footage that makes up the common area and add that to the USF to make what is called the net rentable area (NRA).
These are a lot of new terms for one chapter, seemingly designed to camouflage some fairly straightforward ideas. The short version of commercial space measurement might read like this:
A commercial building has an overall size, called the GBA. Tenants are able to occupy and use most of that space—the USF—but there remain common areas such as lobbies and corridors that cannot be rented. The percentage of the building that cannot be rented is called the “loss percentage.” Typically, the owner takes a portion of that loss and tacks it onto the usable space to make the NRA. Effectively, the landlord says to the tenant, “I’m going to base your rent on the space you actually use, plus a portion of the space that is available in common to everyone, and we’re going to call that combination the rentable square footage.”
How to Calculate
Gross Building Area = Total area of all floors, including basement
Usable Square Footage = Actual space occupied by a tenant;
for an entire building, Gross Building Area less Common Area
Rentable Square Feet = Defined by lease, but often USF + an allocated
portion of Common Area
Loss Ratio = Common Area / Gross Building Area
Example
A commercial building contains 24,000 total square feet. Common area is 4,800 square feet. What is the GBA? What is the USF? What is the loss ratio?
By definition, the GBA is the total square footage, given as 24,000.
Usable Square Footage = Gross Building Area less Common Area
Usable Square Footage = 24,000 – 4,800
Usable Square Footage = 19,200
Loss Ratio = Common Area / Gross Building Area
Loss Ratio = 4,800 / 24,000 = 20%
Test Your Understanding
A commercial building has nine floors plus a basement. The building dimensions are 60' × 80'. Common area is 8,640 square feet.
1. What is the GBA? What is the USF? What is the loss ratio?
2. A tenant occupies 4,000 square feet. The tenant’s RSF will be based on USF plus 7% of the common area. What is the tenant’s RSF?
3. The tenant will pay $20 per RSF per year. What is the tenant’s annual rent?
Answer
The building has 10 levels, each 60' × 80'.
1. Gross Building Area = 60 × 80 × 10
Gross Building Area = 48,000 square feet
Usable Square Footage = Gross Building Area less Common Area
Usable Square Footage = 48,000 – 8,640
Usable Square Footage = 39,360
Loss Ratio = Common Area / Gross Building Area
Loss Ratio = 8,640 / 48,000
Loss Ratio = 18%
2. Tenant allocation of Common Area = 7% of 8,640
Tenant allocation of Common Area = 605 square feet (rounded)
Rentable Square Feet = USF + allocated portion of Common Area
Rentable Square Feet = 4,000 + 605
Rentable Square Feet = 4,605
3. Tenant’s annual rent = rate per RSF × RSF
Tenant’s annual rent = 20 × 4,605
Tenant’s rent = 92,100