Measurement Standards in Commercial Leases and the Right to Remeasure

In 2010, BOMA revised its standard for office leases for the first time since 1996. The 1996 office standard was updated from the previous 1980 standard, which defined the rentable area by using a load factor that only included the common area of a specific floor of a building. In 1996, BOMA added additional common area to the load factor by including total building common areas and all building service areas into its calculations. Then, with the 2010 standards, BOMA further created more categories of common space, allowing for greater flexibility in defining what areas will be considered common areas. A benefit of the 2010 revisions is that the expanded categories of common areas do a better job of differentiating between floor common areas and building common areas. Floor common areas are common areas specific to a certain floor of a building, and are only allocated to tenants of that specific floor.

Additionally, the 2010 BOMA revisions added two additional methods for measuring rentable area. The first is Method A, or the Legacy Method. This method is generally the same standard as the 1996 BOMA standard with changes mentioned above, which help mitigate the volatility that occurs when remeasuring.

The second method is Method B, which allows for a single load factor to be applied on all tenants. The effect is that no matter the floor or configuration of a tenant's space, each tenant receives the same load factor that its usable area into its rentable area. The benefit of using Method B is that it simplifies the marketing and administration functions. This also solves the problems of reconfiguration, since each tenant has the same load factor. Method B, however, requires the creation of a new class of space in order to establish a single load factor: base building circulation. This can be somewhat controversial because it is interpretive in its application. Because external circulations can now be counted as Rentable Area under the 2010 revisions, a potential for an increase in Rentable Area exists when remeasuring. Finally, the 2010 revisions provide for an Alternative Method or Capped Load Factor Method, which allows for a landlord to cap the load factor below Method A or Method B to make the building more marketable. This method is attractive to landlords whose buildings have a lot of common space, which can make the load factor less competitive with other buildings' load factor. If landords cap the load factor, however, the building's financial performance will suffer as will the building's overall value.

When drafting a lease, it is important to establish what standard for measurement will be used. The tenant will typically have no say in what measurement standard is used, but needs to at least know the applicable standard so it can verify rental amounts. The following is an example of a provision from an office lease using the 1996 standard:

Demised Premises. Landlord's architect has determined the exact number of rentable square feet in the Demised Premises in accordance with the ANSI/BOMA Method (hereinafter defined). As used herein, the “ANSI/BOMA Method” shall mean the standard method for measuring floor area in office buildings ANSI/BOMA Z65.1-1996.

Landlord-oriented form office leases often give the landlord the right to remeasure the premises and/or build to recalculate the rentable area. Tenants with negotiating leverage may have the ability to either make the remeasurement right mutual or to simply agree that the rent is fixed and not subject to remeasurement by the landlord. Tenants need to understand that pushing for a remeasurement right could result in an increase in their rental payments, depending on their architect's result. To safeguard against that unintended consequence, tenants can include in their remeasurement provision a threshold percentage that needs to be exceeded before the rent and other size-specific calculations are adjusted.

Retail Leases

Standards for measurement in retail leases differ from those in office leases. BOMA also has a retail measuring standard, which was also revised in 2010. The 2010 revisions of the BOMA retail standards, known as the Retail Standard, do not calculate a Rentable Area, but instead calculate the Gross Leasable Areas, or GLA. This GLA does not include any load factors like those used in the Office Standard. Apportioning use of the common areas is typically not done in retail leasing. Instead, for retail uses, the GLA includes the total enclosed floor area used by the tenant from the centerline of any common walls to the exterior surface. Depending on the configuration of the shopping center, the total enclosed floor area could include basements, mezzanines or upper floors. No deduction is made for columns of any structural elements.

The following is an example of a provision from a retail lease describing how the gross leasable area is measured:

The gross leasable area is measured from the exterior face of any exterior walls and to the centerline of common walls and outlined in red on Exhibit “A” attached hereto and made a part hereof.

Industrial Leases

BOMA also has a standard for measuring industrial buildings. Industrial buildings include warehouses, distribution centers, and factories or assembly spaces. The most recent edition of the BOMA industrial standard came in 2009. The formula in measuring industrial space is similar in concept to BOMA's office standards of usable and rentable area, with the main difference being the measure line.

The industrial standard has two different methods for measuring space for an industrial lease: Method A, or the Exterior Wall Methodology, and Method B, otherwise known as the Drip Line Methodology. Method A measures to the outside of the building's exterior walls, which is also known as the measure line, when calculating the leased area. Certain areas of an industrial building are excluded from the calculation, including unenclosed exterior staircases or fire escapes, shipping and receiving platforms, canopies, and typically anything else that exists beyond the measure line. Generally speaking, Method A is the most popular method used.

Method B is typically used for wall-less industrial buildings. It measures to the most exterior drip line at the perimeter of the roof system. Method B also excludes areas that are beyond the measure line. While Method A is generally more popular, Method B is being used more and more often by landlords who want to maximize the Rentable Area of their buildings.

Sample Provision for Remeasurement

A typical Tenant-oriented remeasurement provision, which could be used for an office, retail or industrial lease, is set forth below. The terminology would have to be adjusted based on the type of commercial space. Note that only credit-worthy tenants with significant market leverage will likely prevail in getting a larger landlord to agree to a tenant initiated remeasurement. This sample uses a threshold of 5%.

Remeasurement Right. Tenant shall have the option, exercisable by written notice to Landlord within two years after the Commencement Date, to have the Rentable Area/Floor Area of the Premises remeasured by its architect (“Tenant's Architect”) in the manner described above or any successor thereto irrespective of whether any option to expand or contract the Premises is exercised by Tenant. If the area reflected by such measurement varies from that set forth in this Lease by more than five percent (5%), then Base Rent, Tenant's pro rata share, and other relevant payments hereunder shall be appropriately adjusted. If Landlord does not request a measurement within such one year period, then the area specified in this Lease shall be deemed to be the number of leasable square feet in the Premises during the Lease Term. If Landlord disputes the measurement of Tenant's Architect, Landlord shall notify Tenant within five (5) days after receipt by Lessor of such measurement. Landlord shall then have fifteen (15) days to have an architect selected by Landlord (“Landlord's Architect”) measure the Premises using the procedures set forth herein. If Landlord's Architect disputes the findings of Tenant's Architect, both Architects shall meet in good faith for a period not to exceed fifteen (15) days and try to reach agreement on the number of leasable square feet. If the Architects cannot reach agreement within such period, the Architects shall in good faith select a third, independent architect (the “Resolution Architect”) to measure the Premises. The measurement of the Resolution Architect shall be final and binding on all parties. All fees and costs payable to Landlord's Architect shall be paid by Landlord. All fees and costs payable to Tenant's Architect, shall be paid by Tenant. Tenant and Landlord shall each be responsible for one-half of the fees and costs payable to the Resolution Architect.

John G. Kelly, a member of this newsletter's Board of Editors, is a partner with Bean Kinney & Korman, PC in Arlington, VA. His commercial leasing practice includes representing both Washington, DC, area landlords and national tenants in office, retail, government and industrial leases. This article was written with the valuable assistance of Samuel Banks. Please contact the author if you have any questions raised by the article. E-mail: [email protected].

Commercial real estate is almost always leased based on the square foot. When determining the amount of square feet to be included in the lease calculations, most landlords use what is known as the “rentable area” or “gross leasable area,” which, depending on whether the real estate use is office, retail or industrial, usually includes more square footage than the tenant actually occupies. The method used to determine the square feet directly affects the amount of rent to be paid, and is therefore of paramount importance when entering into a lease. Establishing and understanding the standard for measuring rentable space is a foundation needed when negotiating commercial real estate leases. This article briefly describes the methods used to measure the rentable area for office, retail and industrial leases and suggests sample lease language for both landlords and tenants.

Office Leases

Generally speaking, the rentable area of office space is calculated by taking the usable space ' the space that tenants actually occupy ' and adding in additional factors (often called load factors) that proportion out pro-rata shares of the building's common areas. This allows landlords to charge tenants for the tenants' proportionate share of the building's common areas and service areas. This rentable area formula is typically calculated by taking the total space on a given floor of a building and dividing it by the usable space to get a ratio of total rentable to usable floor space. This ratio represents the factor to be added to an individual tenant's usable space to cover that tenant's share of the common area of the floor in which the tenant leases space. Additional factors can be included to calculate the factor required to cover the common area of the building as a whole. The typical standard that most commercial leases use is the one established by the Building Owners and Managers Association (BOMA). Since 1915, BOMA has been publishing a standard method of floor measurement for commercial leases.

In 2010, BOMA revised its standard for office leases for the first time since 1996. The 1996 office standard was updated from the previous 1980 standard, which defined the rentable area by using a load factor that only included the common area of a specific floor of a building. In 1996, BOMA added additional common area to the load factor by including total building common areas and all building service areas into its calculations. Then, with the 2010 standards, BOMA further created more categories of common space, allowing for greater flexibility in defining what areas will be considered common areas. A benefit of the 2010 revisions is that the expanded categories of common areas do a better job of differentiating between floor common areas and building common areas. Floor common areas are common areas specific to a certain floor of a building, and are only allocated to tenants of that specific floor.

Additionally, the 2010 BOMA revisions added two additional methods for measuring rentable area. The first is Method A, or the Legacy Method. This method is generally the same standard as the 1996 BOMA standard with changes mentioned above, which help mitigate the volatility that occurs when remeasuring.

The second method is Method B, which allows for a single load factor to be applied on all tenants. The effect is that no matter the floor or configuration of a tenant's space, each tenant receives the same load factor that its usable area into its rentable area. The benefit of using Method B is that it simplifies the marketing and administration functions. This also solves the problems of reconfiguration, since each tenant has the same load factor. Method B, however, requires the creation of a new class of space in order to establish a single load factor: base building circulation. This can be somewhat controversial because it is interpretive in its application. Because external circulations can now be counted as Rentable Area under the 2010 revisions, a potential for an increase in Rentable Area exists when remeasuring. Finally, the 2010 revisions provide for an Alternative Method or Capped Load Factor Method, which allows for a landlord to cap the load factor below Method A or Method B to make the building more marketable. This method is attractive to landlords whose buildings have a lot of common space, which can make the load factor less competitive with other buildings' load factor. If landords cap the load factor, however, the building's financial performance will suffer as will the building's overall value.

When drafting a lease, it is important to establish what standard for measurement will be used. The tenant will typically have no say in what measurement standard is used, but needs to at least know the applicable standard so it can verify rental amounts. The following is an example of a provision from an office lease using the 1996 standard:

Demised Premises. Landlord's architect has determined the exact number of rentable square feet in the Demised Premises in accordance with the ANSI/BOMA Method (hereinafter defined). As used herein, the “ANSI/BOMA Method” shall mean the standard method for measuring floor area in office buildings ANSI/BOMA Z65.1-1996.

Landlord-oriented form office leases often give the landlord the right to remeasure the premises and/or build to recalculate the rentable area. Tenants with negotiating leverage may have the ability to either make the remeasurement right mutual or to simply agree that the rent is fixed and not subject to remeasurement by the landlord. Tenants need to understand that pushing for a remeasurement right could result in an increase in their rental payments, depending on their architect's result. To safeguard against that unintended consequence, tenants can include in their remeasurement provision a threshold percentage that needs to be exceeded before the rent and other size-specific calculations are adjusted.

Retail Leases

Standards for measurement in retail leases differ from those in office leases. BOMA also has a retail measuring standard, which was also revised in 2010. The 2010 revisions of the BOMA retail standards, known as the Retail Standard, do not calculate a Rentable Area, but instead calculate the Gross Leasable Areas, or GLA. This GLA does not include any load factors like those used in the Office Standard. Apportioning use of the common areas is typically not done in retail leasing. Instead, for retail uses, the GLA includes the total enclosed floor area used by the tenant from the centerline of any common walls to the exterior surface. Depending on the configuration of the shopping center, the total enclosed floor area could include basements, mezzanines or upper floors. No deduction is made for columns of any structural elements.

The following is an example of a provision from a retail lease describing how the gross leasable area is measured:

The gross leasable area is measured from the exterior face of any exterior walls and to the centerline of common walls and outlined in red on Exhibit “A” attached hereto and made a part hereof.

Industrial Leases

BOMA also has a standard for measuring industrial buildings. Industrial buildings include warehouses, distribution centers, and factories or assembly spaces. The most recent edition of the BOMA industrial standard came in 2009. The formula in measuring industrial space is similar in concept to BOMA's office standards of usable and rentable area, with the main difference being the measure line.

The industrial standard has two different methods for measuring space for an industrial lease: Method A, or the Exterior Wall Methodology, and Method B, otherwise known as the Drip Line Methodology. Method A measures to the outside of the building's exterior walls, which is also known as the measure line, when calculating the leased area. Certain areas of an industrial building are excluded from the calculation, including unenclosed exterior staircases or fire escapes, shipping and receiving platforms, canopies, and typically anything else that exists beyond the measure line. Generally speaking, Method A is the most popular method used.

Method B is typically used for wall-less industrial buildings. It measures to the most exterior drip line at the perimeter of the roof system. Method B also excludes areas that are beyond the measure line. While Method A is generally more popular, Method B is being used more and more often by landlords who want to maximize the Rentable Area of their buildings.

Sample Provision for Remeasurement

A typical Tenant-oriented remeasurement provision, which could be used for an office, retail or industrial lease, is set forth below. The terminology would have to be adjusted based on the type of commercial space. Note that only credit-worthy tenants with significant market leverage will likely prevail in getting a larger landlord to agree to a tenant initiated remeasurement. This sample uses a threshold of 5%.

Remeasurement Right. Tenant shall have the option, exercisable by written notice to Landlord within two years after the Commencement Date, to have the Rentable Area/Floor Area of the Premises remeasured by its architect (“Tenant's Architect”) in the manner described above or any successor thereto irrespective of whether any option to expand or contract the Premises is exercised by Tenant. If the area reflected by such measurement varies from that set forth in this Lease by more than five percent (5%), then Base Rent, Tenant's pro rata share, and other relevant payments hereunder shall be appropriately adjusted. If Landlord does not request a measurement within such one year period, then the area specified in this Lease shall be deemed to be the number of leasable square feet in the Premises during the Lease Term. If Landlord disputes the measurement of Tenant's Architect, Landlord shall notify Tenant within five (5) days after receipt by Lessor of such measurement. Landlord shall then have fifteen (15) days to have an architect selected by Landlord (“Landlord's Architect”) measure the Premises using the procedures set forth herein. If Landlord's Architect disputes the findings of Tenant's Architect, both Architects shall meet in good faith for a period not to exceed fifteen (15) days and try to reach agreement on the number of leasable square feet. If the Architects cannot reach agreement within such period, the Architects shall in good faith select a third, independent architect (the “Resolution Architect”) to measure the Premises. The measurement of the Resolution Architect shall be final and binding on all parties. All fees and costs payable to Landlord's Architect shall be paid by Landlord. All fees and costs payable to Tenant's Architect, shall be paid by Tenant. Tenant and Landlord shall each be responsible for one-half of the fees and costs payable to the Resolution Architect.

John G. Kelly, a member of this newsletter's Board of Editors, is a partner with Bean Kinney & Korman, PC in Arlington, VA. His commercial leasing practice includes representing both Washington, DC, area landlords and national tenants in office, retail, government and industrial leases. This article was written with the valuable assistance of Samuel Banks. Please contact the author if you have any questions raised by the article. E-mail: [email protected].