Why does the concept of “rentable” area exist at all? When one purchases a gallon of gas, one gets a gallon; when one purchases a ton of wheat, one gets a ton; when one purchases a yard of fabric, one get a yard. So why, in real estate, do we all speak of the rentable area of a building or a portion of a building? Does it make sense that we do so? To me, no, it does not.
It seems to be generally accepted (although I’ve never seen it documented) that the concept of “rentable” area emerged when some newly-constructed office buildings began to be air-conditioned, especially buildings in which one or more entire floors were devoted to air-conditioning equipment.
To oversimplify, two 21-story buildings each with a 20,000 square foot floor plate might stand opposite one another:
- one with 21 floors of office space (420,000 SF) available to let; and
- one with 20 floors of office space (400,000 SF) available to let plus one floor devoted to air-conditioning equipment.
It must have occurred to the owner of the 20+1 building that he ought to and that, given the superiority of his building, it would be fair to allocate the one non-leasable floor to the other 20 floors, and market each of those 20 floors as being 21,000 rentable square feet, resulting in that building having a “rentable” area of 420,000, the same as the area of the building across the street.
By 1968 this approach had been embraced and codified by the Real Estate Board of New York in its Standard Method of Floor Measurement for Office Buildings (1968), which provided that in order to determine the rentable area of a floor, one took the gross area of the floor, deducted certain areas, and then added an allocable share of “all air-conditioning floors and other areas throughout and within the building”. It even provided that if an air-conditioning floor was twice as tall as a regular floor, it should be counted twice when computing rentable area. Thus, under the 1968 REBNY Standard Method, two buildings with equal usable areas could have different rentable areas depending on the size of the air-conditioning plant hidden within.
This is all very neat and mathematical but, I would argue, it didn’t and doesn’t make much sense because a tenant wants to know how much usable space it is getting, not how much space the building’s architects and engineers needed for the air-conditioning plant.
The Real Estate Board of New York first started to abandon this approach in 1982 when it adopted its 1982 Standard Method, which included the following in its opening paragraph:
In order to facilitate a comparison of the cost of space among buildings, The Real Estate Board of New York, Inc. recommends that owners use standard definitions of gross area and usable area, and clearly explain how the definitions are used to calculate rentable area. Architectural plans and calculations should be displayed to the tenant, if requested.(emphasis added)
While this new Standard Method seems to assume that gross area will be taken into account in computing rentable area, it doesn’t flatly require that, and so represents REBNY’s first acknowledgement that gross area might in fact be irrelevant.
REBNY acknowledged just this when it published its 1987 Standard Method, which is still in use today (with minor modifications) and which does away altogether with the concept of gross area. It states:
In order to facilitate a comparison of the cost of space among buildings, The Real Estate Board of New York, Inc. recommends that owners use a standard definition of usable area, and that they clearly explain how rentable area is calculated based upon such usable area. Architectural plans and calculations should be displayed to the tenant if requested. (emphasis added)
. . .
Because of dissimilarities among buildings, calculations of rentable area may vary. If requested, owners should disclose to prospective tenants the loss factor used for spaces under consideration. (emphasis added)
In effect, in 1987 REBNY recognized that while rentable area figures are expected by market participants, what’s really important is usable area and owners ought simply to tell prospective tenants how to derive the usable area from the stated rentable area.
The term “loss factor” used by REBNY and now throughout the New York real estate industry is initially misleading because it suggests that rentable area is real and that something has been lost, which is not the case at all. However, once understood as simply expressing the relationship between the purely fictitious rentable area and the real usable area, the term works well.
Under the REBNY 1987 Standard Method, a landlord is free to use any loss factor it desires. One landlord might use a 27% loss factor (meaning that 730 usable square feet of its building has a rentable area of 1000 rentable square feet) and another might use a 30% loss factor (meaning that 700 usable square feet of its building has a rentable area of 1000 rentable square feet). The choice is completely arbitrary and, so long as disclosed and understood, meaningless. In order to compute usable area from REBNY rentable area all one must do is multiply the rentable area by one minus the loss factor. For example, in the case of a 27% loss factor, multiply rentable area by 1 minus .27 = .73.
So, at least in New York, market participants have essentially abandoned the notion of rentable area as an actual concept with substance or meaning.
Of course when a landlord determines the rentable area to be published for a given space, it must work the other way: measure the usable area and then divided by 1 minus the chosen loss factor in order to arrive at the rentable area.
Another attractive feature of the REBNY 1987 Standard Method is its brevity; it fits easily on two pages and is easy to understand by all market participants.
One hears wisecracks that in New York buildings “extend onto the sidewalk” (i.e. because rentable area is often larger than gross area) or “grow as they age” (i.e. because when the market permits landlords increase their loss factors), but these are hardly valid criticisms of a measurement method which so easily yields up the information market participants truly ought to focus on, and ignores irrelevancies (such as how big or small are the building’s central HVAC machine room, the building electrical rooms, the fire control room, etc.)
The REBNY Standard Method is much to be preferred over its leading and, in much of the country, dominant competitor: the methods issued by Building Owners and Managers Association and approved by the American National Standards Institute, which cling to the notion that rentable area ought to equal usable area (referred to by BOMA as occupant area) plus an allocation of common areas (referred to by BOMA as service areas).
BOMA’s latest effort — issued in 2009 and entitled Office Buildings: Standard Methods of Measurement — is a 64 page masterpiece of precision and complexity available on the BOMA website for $94.50 with a very serious Do Not Copy warning (and so the preceding link takes you to the purchase page not to a copy). The methods themselves run from page 6 through 18 and the associated definitions run from page 19 to 29. One shudders at the cost of complying with this method.
But even more seriously, because BOMA continues to embrace the conceptual flaw that REBNY began to eliminate in 1982 and fully eliminated in 1987 there is no simple formula for deriving usable area from a BOMA rentable area, nothing comparable to simply multiplying by 1 minus the loss factor, and so the REBNY Standard Method is both simpler and preferable.
Commercial Tenant Notes 