Many tenants think that the rent they pay each year is calculated based on the area of the actual, physical space that they lease. After all, that seems like the most logical approach. Take the rent per square foot, multiply it by the area leased, and that should be the total rent paid for the year. Right? Not quite.
In fact, most office tenants pay rent for an area that is significantly larger than the actual space that they lease. This larger area on which rent is paid (called the “Rentable Area” of the premises) includes, not just the actual space that is leased (the “Useable Area”) but also a share of the common areas of the building.
Imagine an office building (let’s call it Building A) with two tenants, each leasing 2000 Usable Square Feet of space at $20 per square foot. The building has a lobby, shared by both tenants, with an area of 200 Usable Square Feet. If rents were based on the Usable Area of each tenant’s space, each tenant would pay $40,000 of rent per year (2000 x $20). In most office buildings, however, rents for these spaces would be based on the Rentable (not the Usable) Area of each space, which means that each tenant would pay rent, not just on its own space (2000 square feet), but, instead, on the sum of its Usable Area (2000 square feet) plus its share of the common areas (1/2 of the 200 sf lobby or 100 sf). As a result, each tenant in Building A would pay rent on 2100 Rentable Square Feet, for a total rent of $42,000 per year, instead of the $40,000 that would be due if each tenant paid rent only on its Usable Area.
Rentable Area is the standard method for measuring floor area in office buildings. Your landlord is not cheating you by using Rentable Area to calculate your rent; he or she is simply adhering to the standard practice of the real estate industry. Unfortunately, however, this standard practice often makes it difficult to compare the rents charged for different office spaces.
The first challenge, when comparing rents, comes from the fact that there are still some landlords out there (especially in small, owner-occupied buildings) who calculate office rents based on the Usable Area of the space. Space in such a building, leased at $20 per Usable Square Foot, would actually be less expensive than space, in another building, leased at $20 per Rentable Square Foot, although the rate per square foot ($20) appears to be the same. That is because, in the Usable building, the rate ($20) would be multiplied by the actual area of the Premises, while in the Rentable building, the rate ($20) would be multiplied by the sum of the actual area of the Premises plus a share of the common areas.
The second challenge, when comparing rents, comes from the fact that the difference between the Rentable Area and the Usable Area of a space is not the same in every building because the size of the common areas is not the same in every building. In Building A, for example, the Rentable Area of each tenant’s space was only 5% larger than the Usable Area (2100 = 105% x 2000). In some buildings, however, the Rentable Area of a space may be as much as 15-20% larger than the Usable Area, substantially increasing the cost of the space.
Imagine a building (let’s call it Building B) in which the Rentable Area of each space is 20% larger than the Usable Area. If you leased 2000 Usable Square Feet of space in Building B, you would pay rent on 2400 Rentable Square Feet (2000 x 120% = 2400). At $20.00 per square foot, your rent would be $48,000 per year, not $42,000, as it would be in Building A. Yet both buildings use Rentable Area to calculate rent and the actual, Usable Area of your space in Building A and Building B would be the same. The difference in cost would come solely from the fact that the common areas in Building B are much larger than the common areas in Building A.
If the size of the common areas is different in every building, and some landlords do not use Rentable Area, at all, how can you possibly compare the rents charged for different spaces and find the best deal? The answer is to do your own calculation of the cost, per Usable Square Foot, for each space you are considering. This is the true cost for each square foot of space that you will actually occupy.
To calculate this cost, you should begin by asking each prospective landlord these two questions:
- Is the area of the space (as described by the landlord) a Usable Area or a Rentable Area?
- If it is a Rentable Area, what is the Usable Area of the space?
Once you know the answers to these questions, you can calculate, for yourself, the cost per Usable Square Foot for each space. Simply divide the annual rent for each space by the Usable Area of that space. The result is the cost per Usable Square Foot for each space. For example, for Building A and B:
- Building A Rent per Usable Square Foot = $21.00 ($42,000 per year/2000 usf)
- Building B Rent per Usable Square Foot = $24.00 ($48,000 per year/2000 usf)
As you can see, in the case of Buildings A and B, although both landlords are charging $20 per Rentable Square Foot, the space in Building B would actually cost significantly more, per Usable Square Foot, than the space in Building A. Consequently, tenants need to understand exactly how their office space is measured before they can determine the trust cost of that space.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B. from Harvard University and a J.D. from Harvard Law School. She is the owner of The Gauthier Law Group, LLC, a boutique law firm that represents dentists, physicians, health care providers, professional service practices and other businesses and business owners in Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3857 or by email. To learn more about Ms. Gauthier’s background and experience, visit her Google or LinkedIn profiles.
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