Building Class Standards in Commercial Leasing

Building classes are also employed routinely in the same manner in various other contexts, including permitted use, tenant accounting, common-area maintenance cost accounting, and insurance standards. Depending on the context, the standards may be used for the benefit of the landlord or the tenant.

Several sets of standards exist to facilitate comparisons between office properties. The most prominent of these standards are those promulgated by the Building Owners and Managers Association, commonly referred to as “BOMA.” The term, “BOMA Standard” is better known in commercial leasing as a standard for space measurement (the Standard Method of Floor Measurement for Office Buildings was first published in 1915 and has since morphed into a six-volume suite of publications relating to various asset classes). However, the BOMA Building Class Standards constitute the preeminent tool for qualitative evaluation of office properties.

Prior to the establishment of the BOMA class standards, real estate professionals had few resources to document subjective evaluation criteria. BOMA promotes the building classes as “a subjective quality rating of buildings which indicates the competitive ability of each building to attract similar types of tenants.” The emphasis on attraction of tenants underscores that the standards are designed to predict the potential business impact of the criteria, as opposed to a mere reflection of taste. BOMA is careful not to characterize the standards as a set of hard-and-fast rules; rather, they seek to “encourage standardization of discussion concerning office markets, including individual buildings and to encourage the reporting of office market conditions that differentiate among the classes.”

Two categories of building standards have been issued by BOMA: Metropolitan and International. The Metropolitan alternative is intended for use within a particular office market, and employs the nomenclature “Class A,” “Class B” and “Class C.” The International base is designed as a tool for investors evaluating assets across multiple markets. It grades properties as “Investment,” “Institutional” and “Speculative.” The Metropolitan base is most commonly utilized in the context of commercial leasing, and will be the focus of the discussion here.

With this backdrop, one might imagine the class standards to be defined in great detail, allowing the user a predictable, if not formulaic, analysis of a property's classification. However, BOMA offers relative general guidance in each category.

“Class A” buildings are defined as follows:

[The] most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.

“Class B” buildings are defined as follows:

Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.

“Class C” buildings are defined as follows:

Buildings competing for tenants requiring functional space at rents below the average for the area.”

The Class C definition encompases essentially all buildings that are neither Class A nor Class B.

The immediate distinction between the initial clauses of the Class A and Class B definitions is the emphasis on the type of tenant and rent the building is likely to attract. Class A buildings compete for “premier users” at “above average rents,” whereas Class B properties compete for a “wide range” of users at “average” rents. Of course, an evaluation of an office property based upon rents alone would be inadequate, for rental data is often unavailable. Even when it is available, it is of little use if unaccompanied by an analysis of the market conditions at the time of the applicable lease transaction.

In the secondary clauses of the Class A and Class B definitions, BOMA introduces the terms “finishes” and “systems,” which allow the user to take inventory of a building's features for the purpose of comparing them to others in the market. Each of these terms implicitly addresses a series of criteria ' some objective, others subjective ' that may be used in the evaluation process.

The term “Finishes” refers to aesthetic features of the building in question, both within the leasable space and in common areas. These may include hardware, paint, carpet, lighting, water features, landscaping and signage. The visual appeal and quality of materials used in lobbies and elevators are also part of this evaluation. Qualitative judgment is required, but brokers and other professionals within any market will profess that they “know Class A when they see it.” A property featuring high-quality wood and marble lobby surfaces, sophisticated security, valet parking and a diverse food court will likely achieve Class A status, as opposed to one without opulent finishes, little or no security and no on-site parking or food and beverage options.

The term “Systems” refers to the more technical aspects of the base building. These include infrastructural elements such as plumbing, electrical and mechanical systems available to both leasable space and common areas. HVAC proficiency, structural capability and elevator performance may all factor into this evaluation as well. Recently, technological elements such as Wi-Fi capability have gained particular prominence in this formula. An evaluation of Systems is largely quantitative, which facilitates a delineation between Class A, Class B and Class C.

Omitted from the BOMA definitions are “amenities.” Increasingly, owners seek a competitive advantage over their competition by offering on-site benefits for the use and convenience of all tenants, usually at little or no charge beyond what is included in rent. Amenities offered in office properties may include building security, concierge services, fitness centers, child care, restaurants, coffee shops and food courts, copying capabilities, express shipping and document services, tailors and dry cleaning. Simply put, Class A buildings will feature more, and better, amenities than the lesser classes. In most large metropolitan central business districts, an office building is not understood to be Class A without indoor parking, an on-site concierge and a fitness center available to all tenants.

Other elements may factor into any class rating. Predictably, newer or recently renovated buildings are more likely to receive a higher rating. Contemporary architectural elements and advanced environmental rating or LEED certification will benefit a property's classification as well. Proximity to retail, parks and public transportation is included in this consideration, and the mother of all evaluation criteria ' property location ' is always an essential factor. Generally speaking, a newer building on a main thoroughfare in a prime location will almost always bear a superior rating compared with an aging building on a lesser street or one outside of the central business district, notwithstanding its interior and infrastructural features.

Non-BOMA Raters

Others in the industry have created building class standards that vary from those issued by BOMA. For example, the NAIOP Research Foundation has created Office Building Classifications, which include a class of “Trophy Buildings” that are considered more desirable than Class A buildings. Likewise, CoStar promulgates a Building Rating System that includes independent criteria and definitions for office, industrial, multifamily and retail properties. Though not employed as commonly as the BOMA standards, each of these systems is supported by extensive research and insight.

Conclusion

Although building classes may have been initially established to facilitate brokerage and pricing of commercial leases, they have significant utility in defining other lease terms. Landlords and tenants are now able to use them to better define rights and liabilities, and generally set expectations, in a variety of areas. Notwithstanding that many of the criteria underlying the most commonly used standards require a subjective determination, building standards allow leasing professionals to speak a common language and guide parties much closer to a “meeting of the minds” than they would be able achieve in their absence.

David P. Resnick is a member of this newsletter's Board of Editors. He is a shareholder at Robbins, Salomon & Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development and finance.