In the Spotlight: Square Footage in Leasing Transactions

Because square footage has a real monetary impact on the parties to a lease and is generally a part of almost every lease transaction, one might assume that the determination of square footage of leased space has been standardized by the industry. The fact is, it has not! There are so many different ways to determine a tenant's square footage and, interestingly, different measuring techniques benefit different parties. For instance, most tenants would prefer to include only the useable square footage (the USF) of a premises in the square-footage measurement, meaning measurements are made to the inside face of a tenant's enclosing walls.

However, landlords would prefer to measure the gross square footage (the GSF) of the premises, which includes the thickness of the exterior walls along with interior stairs and shafts. A third technique, which is also preferable to landlords rather than tenants, measures the rentable square footage (the RSF) of the premises, which measures a premises but also includes the tenant's pro rata share of the square footage of the building's common areas, such as the lobbies, hallways, bathrooms and storage areas (this is called the “loss factor”). This concept of measurement was developed to give landlords a way to recover the cost of maintaining common areas on behalf of the tenants.

The type of building often dictates how a landlord will measure the premises. For example, office buildings or shopping centers, which both typically have multiple tenants and common areas, are often measured using a RSF whereas GSF is logically more often used for measuring warehouses and industrial buildings where there are often single tenants and/or no shared spaces.

Re-Measurement

One way to guarantee a tenant knows how much it is paying for the USF of its premises is to simply measure the dimensions of a space with a measuring tape. By measuring the square footage manually, a tenant can calculate the rental rate per USF. Another way would be to negotiate into the lease a so-called “re-measurement” clause. Although most landlords will hesitate to include such clauses, tenants should insist upon the right to have the premises re-measured by an independent third party (usually an architect). This should typically be done shortly after possession, but certainly prior to the time that the tenant begins to pay rent.

A re-measurement clause is especially crucial when tenants are leasing space in a building to be newly constructed. Although a tenant can rely to a certain extent on the plans and specifications drawn up prior to the construction of a space, the post-construction square footage is likely going to vary from what had been promised to the tenant. In fact, a tenant moving into a newly constructed building would be well advised to try and bargain for language in the lease ensuring that the rent is re-calculated in accordance with the actual square footage constructed along with a right to terminate the lease if the landlord delivers a space significantly different from what the tenant was promised prior to the construction. As one would suspect these are often hotly negotiated provisions.'

Standards for Measuring

Although measurement methods are not regulated, there are published standards that landlords choose to rely on. In many parts of the United States the method published by The Building Owners and Managers Association (BOMA) is employed. BOMA measures the USF by measuring the actual occupiable area of a floor or tenant space. Over the years there have been different BOMA methods, but what most landlords use is the 1996 model, which allows landlords to incorporate a loss factor that includes all of the common areas in the building, rather than just those on the tenant's floor, in a tenant's square footage.

However, different regions of the country rely on other standards. In the New York region, for example, many landlords use the Real Estate Board of New York (REBNY) standards. REBNY, unlike BOMA, allows a landlord to use GSF (measuring to the finished exterior surface of the building), which means additional profits for landlords because the tenants are paying for the thickness of the walls. However, REBNY does not allow a landlord to include any “floor penetrators,” such as elevator shafts and public stairwells, in a tenant's square footage.

Conclusion

No matter which market a tenant leases in, or what standard is employed, understanding the method of measuring the square footage in a premises can save a tenant significant occupancy costs. In other words, if a premises is being measured using GSF, a savvy tenant, aware that it is paying for more space than it is actually occupying, is in a better position to negotiate a lower rental rate per square foot. By appreciating how space is measured, tenants and their attorneys can ensure that the tenants are getting what they bargained for.

Samuel M. Walker, a partner in Blank Rome LLP's New York office, maintains a national real estate practice with clients that include private equity funds, public companies, real estate investment funds, financial institutions, developers, landlords and tenants. Abigail Lamb is an associate in the firm's New York office.

Square footage is an important concept in leasing because, more often than not, the agreed-upon amount of square footage in a leased premises will dictate the economic terms of the deal, including the base rent and the operating expenses and taxes (so called CAM or OpEx) owed by a tenant. In determining base rent, landlords and tenants often agree to pay fixed rent on a cost per square foot. Additionally, with respect to the CAM or OpEx, tenants generally pay their percentage share, which is determined by dividing the square footage of the tenant's premises by the total square footage of the building.

Since all of the economic terms are tied to square footage, it is critical that tenants and their attorneys understand how such square footage is calculated. For example, a tenant may believe that it is getting a fair rental rate per square foot for the leased space, but not realize that the square footage of the premises is inflated to include space beyond the four walls of the premises. Although the focus is often on the rate that a tenant will get per square foot, tenants and their attorneys should also pay close
attention to how the square footage of the premises is actually measured in the lease, because it is often not as simple as one might believe.

Measuring Square Footage

Because square footage has a real monetary impact on the parties to a lease and is generally a part of almost every lease transaction, one might assume that the determination of square footage of leased space has been standardized by the industry. The fact is, it has not! There are so many different ways to determine a tenant's square footage and, interestingly, different measuring techniques benefit different parties. For instance, most tenants would prefer to include only the useable square footage (the USF) of a premises in the square-footage measurement, meaning measurements are made to the inside face of a tenant's enclosing walls.

However, landlords would prefer to measure the gross square footage (the GSF) of the premises, which includes the thickness of the exterior walls along with interior stairs and shafts. A third technique, which is also preferable to landlords rather than tenants, measures the rentable square footage (the RSF) of the premises, which measures a premises but also includes the tenant's pro rata share of the square footage of the building's common areas, such as the lobbies, hallways, bathrooms and storage areas (this is called the “loss factor”). This concept of measurement was developed to give landlords a way to recover the cost of maintaining common areas on behalf of the tenants.

The type of building often dictates how a landlord will measure the premises. For example, office buildings or shopping centers, which both typically have multiple tenants and common areas, are often measured using a RSF whereas GSF is logically more often used for measuring warehouses and industrial buildings where there are often single tenants and/or no shared spaces.

Re-Measurement

One way to guarantee a tenant knows how much it is paying for the USF of its premises is to simply measure the dimensions of a space with a measuring tape. By measuring the square footage manually, a tenant can calculate the rental rate per USF. Another way would be to negotiate into the lease a so-called “re-measurement” clause. Although most landlords will hesitate to include such clauses, tenants should insist upon the right to have the premises re-measured by an independent third party (usually an architect). This should typically be done shortly after possession, but certainly prior to the time that the tenant begins to pay rent.

A re-measurement clause is especially crucial when tenants are leasing space in a building to be newly constructed. Although a tenant can rely to a certain extent on the plans and specifications drawn up prior to the construction of a space, the post-construction square footage is likely going to vary from what had been promised to the tenant. In fact, a tenant moving into a newly constructed building would be well advised to try and bargain for language in the lease ensuring that the rent is re-calculated in accordance with the actual square footage constructed along with a right to terminate the lease if the landlord delivers a space significantly different from what the tenant was promised prior to the construction. As one would suspect these are often hotly negotiated provisions.'

Standards for Measuring

Although measurement methods are not regulated, there are published standards that landlords choose to rely on. In many parts of the United States the method published by The Building Owners and Managers Association (BOMA) is employed. BOMA measures the USF by measuring the actual occupiable area of a floor or tenant space. Over the years there have been different BOMA methods, but what most landlords use is the 1996 model, which allows landlords to incorporate a loss factor that includes all of the common areas in the building, rather than just those on the tenant's floor, in a tenant's square footage.

However, different regions of the country rely on other standards. In the New York region, for example, many landlords use the Real Estate Board of New York (REBNY) standards. REBNY, unlike BOMA, allows a landlord to use GSF (measuring to the finished exterior surface of the building), which means additional profits for landlords because the tenants are paying for the thickness of the walls. However, REBNY does not allow a landlord to include any “floor penetrators,” such as elevator shafts and public stairwells, in a tenant's square footage.

Conclusion

No matter which market a tenant leases in, or what standard is employed, understanding the method of measuring the square footage in a premises can save a tenant significant occupancy costs. In other words, if a premises is being measured using GSF, a savvy tenant, aware that it is paying for more space than it is actually occupying, is in a better position to negotiate a lower rental rate per square foot. By appreciating how space is measured, tenants and their attorneys can ensure that the tenants are getting what they bargained for.

Samuel M. Walker, a partner in Blank Rome LLP's New York office, maintains a national real estate practice with clients that include private equity funds, public companies, real estate investment funds, financial institutions, developers, landlords and tenants. Abigail Lamb is an associate in the firm's New York office.