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Redefining Space

Office tenants typically pay little attention to their building lobbies and care even less about what’s behind the drywall surrounding their office spaces. That’s about to change, however, now that a new way of computing usable and rentable square footage is gaining popularity among landlords here and elsewhere.

First, let’s cover what have been the traditional definitions of usable and rentable space. Usable space is just that: the office space that the tenant has exclusive use of as a condition of his or her lease. Rentable space, on the other hand, includes the usable square footage as well as the tenants’ pro-rated portion of common areas such as hallways, restrooms and the elevator lobby, all of which typically are located on the same floor as the tenants’ usable space. It should surprise no one that rents are based on the rentable space factor.

In 1996, the Building Owners and Managers Association introduced a new measurement system that, in effect, expands the definitions of both usable and rentable square footage. Girded by a sustained robust office market in which demand exceeds the supply of Class A space, this new methodology adds to the definition of rentable space things never before factored into a tenant lease.

For example, under BOMA’s new measurement scheme, the building’s main lobby is now prorated into each tenant’s rentable space. Floor measurements are no longer confined to the carpeted or visible areas. “Usable” space now extends behind the drywall, to the midpoint inside the interior walls. Same thing applies to windows. Even the unusable column space gets factored in. Space measurements under the new BOMA system extend to the window line, regardless of whether there is usable flooring adjacent to or underneath the window. In some cases, the tenant is paying for space extending to the window exterior — outside, where birds fly by.

An inch here, a couple of inches there don’t seem to add up to much, but in fact, they do. On average, BOMA’s highly creative — even imaginative — measurement system adds, on average, an additional 5 percent to an office building’s rentable space. What once was a 500,000-square-foot building now has 525,000 square feet of rentable space under the new BOMA space-measurement criteria. Using a $2 per-square-foot lease rate as an example, the landlord of the above building is able to obtain an additional $50,000 a month in lease income, or $600,000 a year without moving a wall, painting, repairing or replacing one single thing in the building. Using a typical capitalization rate to compute the building’s value, the 5 percent pop in rentable space adds about $7.5 million to the market value of the building. The last time I checked, that was a lot of money.

My purpose here is not to confront or protest, rather to inform and put the new measurement practice in perspective. We live in an economy where, like it or not, we are conditioned to pay $2 per gallon for gas and $8 for a two-hour movie. If you want to drive, you pay the price. If you want to see “American Beauty” on the big screen, you pay the price.

Likewise, the new BOMA system is conditioning businesses and organizations that need to lease office space to pay the price for more space than they have had to in the past. The office market locally is very tight. Landlords now have a smooth, virtually risk-free and, I hasten to add, legitimate way to glean additional rental income out of an office building without lifting a finger to improve the asset.

Sadly, most tenants are unaware of this new measurement system that surfaced locally about two years ago. Today, it is a fact of life in about three out of four Class A buildings in downtown San Diego and in newer buildings elsewhere. Even fewer tenants have any idea that many office leases allow the landlord to use the new BOMA space definitions to remeasure the usable and rentable space and pass along the resultant higher rent to the new or renewing tenant.

This is yet another case in point that tenants not only need to be educated about the growing complexities of leasing office space, but to have their interests protected and properly represented as well.

Jason Hughes is chairman, CEO, and owner of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.

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