Rentable Square Footage

What is Rentable Square Footage?

Rentable Square Footage (RSF) is a critical measurement in commercial real estate, representing the total area a tenant pays rent on. Unlike Usable Square Footage (USF), which is the space exclusively occupied by the tenant, RSF includes the tenant's USF plus a pro-rata share of the building's common areas. This measurement is fundamental for calculating base rent, determining a tenant's share of operating expenses (like Common Area Maintenance or CAM charges), and for property valuation.

For real estate investors, understanding RSF is paramount for accurate financial analysis, lease negotiations, and comparing investment opportunities. It directly impacts the income-generating potential of a commercial property and influences how tenants perceive the value they receive for their rent.

Key Components of Rentable Square Footage

Rentable Square Footage is derived from two primary components:

• Usable Square Footage (USF): This is the actual space within a tenant's leased premises that they occupy and use exclusively. It includes offices, conference rooms, storage areas, and internal restrooms or kitchens that are solely for the tenant's use. USF is measured from the inside finished surface of the permanent outer walls to the center of demising walls separating the tenant's space from other tenants or common areas. For a tenant, this is the space where their business operations physically take place.
• Common Area Factor (CAF) or Load Factor: This is a multiplier applied to the USF to account for a tenant's pro-rata share of the building's common areas. Common areas are spaces within the building that benefit all tenants but are not part of any single tenant's exclusive space. Examples include lobbies, hallways, shared restrooms, elevators, stairwells, mechanical rooms, and building management offices. The CAF essentially distributes the cost and area of these shared spaces among the tenants.

How Rentable Square Footage is Calculated

The calculation of Rentable Square Footage typically follows a standardized methodology, most commonly the Building Owners and Managers Association (BOMA) standards. While BOMA offers various methods depending on the property type (e.g., office, retail, industrial), the core principle remains consistent: allocate common areas proportionally.

The general formula for calculating Rentable Square Footage is:

• Rentable Square Footage (RSF) = Usable Square Footage (USF) × (1 + Common Area Factor)

Alternatively, it can be expressed as:

• Rentable Square Footage (RSF) = Usable Square Footage (USF) + Tenant's Pro-Rata Share of Common Areas

The Common Area Factor (CAF) itself is derived by dividing the total common area of a building by its total usable area. For example, if a building has 10,000 square feet of common area and 90,000 square feet of total usable area, the CAF would be 10,000 / 90,000 = 0.1111 or 11.11%.

Importance in Real Estate Investing

For real estate investors, understanding Rentable Square Footage is not just an academic exercise; it has direct implications for profitability, valuation, and risk management.

• Revenue Generation: Base rent for commercial properties is almost universally calculated on RSF. A higher RSF for a given USF means more revenue for the landlord per square foot of actual occupied space. This directly impacts the Gross Potential Rent and, subsequently, the Net Operating Income (NOI) of the property.
• Property Valuation: When valuing a commercial property using methods like the Capitalization Rate (Cap Rate) approach, the income stream is often tied to RSF. Accurate RSF calculations ensure that the property's income potential is correctly assessed, leading to a more precise valuation.
• Operating Expense Allocation: Many commercial leases, particularly Net Leases, require tenants to pay a pro-rata share of the building's operating expenses (e.g., property taxes, insurance, utilities, maintenance). This share is almost always determined by the tenant's RSF relative to the building's total RSF. Miscalculations can lead to disputes or under-recovery of costs for the landlord.
• Lease Negotiations: Both landlords and tenants use RSF as a key metric during lease negotiations. Landlords aim to maximize their rentable area, while tenants need to understand what they are truly paying for and ensure the load factor is reasonable compared to market standards.
• Market Comparables: When analyzing comparable properties, investors must ensure they are comparing apples to apples. Different buildings might use different measurement standards or have varying load factors, which can significantly skew per-square-foot rent comparisons if not properly adjusted.

Practical Examples and Scenarios

Let's explore several real-world scenarios to illustrate how Rentable Square Footage is applied.

• Example 1: Single-Tenant Office Building

• Scenario: An investor owns a standalone office building with a single tenant. The building has a total interior area of 15,000 USF. It includes a small lobby, a shared breakroom, and restrooms that are considered common areas for the building, totaling 1,500 square feet. The tenant occupies the entire building.
• Calculation: In a single-tenant building, the tenant often pays for the entire building, including all common areas. Therefore, the USF for the tenant is effectively the entire building's usable space. The common area factor is calculated based on the building's total common area divided by its total usable area. If the entire building is 15,000 USF and 1,500 SF is common, the total usable area for calculation purposes is 15,000 SF. The common area factor would be 1,500 / 15,000 = 0.10 or 10%.
• Tenant's USF = 15,000 SF
• Common Area Factor = 0.10
• RSF = 15,000 SF × (1 + 0.10) = 15,000 SF × 1.10 = 16,500 RSF
• Outcome: The tenant pays rent on 16,500 RSF, even though their exclusive usable space is 15,000 SF. If the base rent is $25.00 per RSF, the annual rent would be $16,500 × $25.00 = $412,500.

• Example 2: Multi-Tenant Office Building (Floor-Specific Common Areas)

• Scenario: A multi-story office building has a total of 100,000 USF across 10 floors. Each floor has 10,000 USF. Tenant A leases 5,000 USF on the 5th floor. The 5th floor also has a shared hallway, restrooms, and a small kitchenette, totaling 1,000 square feet of floor-specific common area. The building also has a main lobby, elevators, and stairwells (building common areas) totaling 10,000 square feet.
• Calculation: BOMA standards often use a two-tier load factor system: a floor load factor and a building load factor. For simplicity, we'll combine them here for the tenant's perspective.
• Floor's Total Usable Area = 10,000 USF
• Floor's Common Area = 1,000 SF
• Floor Load Factor = 1,000 / 10,000 = 0.10
• Building's Total Usable Area (excluding floor common areas) = 100,000 USF
• Building's Common Area = 10,000 SF
• Building Load Factor = 10,000 / 100,000 = 0.10
• Combined Load Factor (approximate) = (Floor Common Area + Building Common Area) / Total Building Usable Area = (1,000 + 10,000) / 100,000 = 0.11
• Tenant A's USF = 5,000 SF
• Tenant A's RSF = 5,000 SF × (1 + 0.11) = 5,000 SF × 1.11 = 5,550 RSF
• Outcome: Tenant A pays rent on 5,550 RSF. If the rent is $30.00 per RSF, the annual rent would be $5,550 × $30.00 = $166,500.

• Example 3: Retail Space in a Shopping Center

• Scenario: A retail investor owns a shopping center with various stores. Store B leases 2,000 USF. The shopping center has shared parking lots, outdoor walkways, common restrooms, and a central management office, totaling 20,000 square feet of common area. The total usable area for all retail units in the center is 80,000 USF.
• Calculation: The common area factor is calculated for the entire shopping center.
• Total Common Area = 20,000 SF
• Total Usable Area = 80,000 SF
• Common Area Factor = 20,000 / 80,000 = 0.25
• Store B's USF = 2,000 SF
• Store B's RSF = 2,000 SF × (1 + 0.25) = 2,000 SF × 1.25 = 2,500 RSF
• Outcome: Store B pays rent on 2,500 RSF. If the base rent is $40.00 per RSF, the annual rent would be $2,500 × $40.00 = $100,000. Additionally, Store B would pay 2,500 / (80,000 + 20,000) = 2.5% of the total operating expenses for the common areas.

• Example 4: Industrial/Warehouse Space with Office Component

• Scenario: An industrial investor owns a multi-tenant warehouse complex. Tenant C leases a unit with 8,000 USF of warehouse space and 2,000 USF of integrated office space. The complex has shared truck courts, a common loading dock area, and external security, which are considered common areas. The total common area for the complex is 15,000 SF, and the total usable area for all units is 150,000 SF.
• Calculation: The common area factor is applied to the tenant's total usable space.
• Tenant C's Total USF = 8,000 SF (warehouse) + 2,000 SF (office) = 10,000 SF
• Total Common Area = 15,000 SF
• Total Usable Area = 150,000 SF
• Common Area Factor = 15,000 / 150,000 = 0.10
• Tenant C's RSF = 10,000 SF × (1 + 0.10) = 10,000 SF × 1.10 = 11,000 RSF
• Outcome: Tenant C pays rent on 11,000 RSF. If the blended base rent is $12.00 per RSF, the annual rent would be $11,000 × $12.00 = $132,000. This example highlights that even in industrial properties, common areas can contribute to the rentable square footage, especially in multi-tenant complexes.

Common Pitfalls and Considerations for Investors

While RSF is a standardized concept, investors must be aware of potential nuances and pitfalls:

• Varying Measurement Standards: Although BOMA standards are widely used, some older buildings or specific markets might use different measurement methodologies. Always verify the standard used and, if possible, obtain a copy of the building's measurement report.
• Load Factor Discrepancies: Load factors can vary significantly between buildings and even within different floors of the same building. A high load factor means a tenant pays for a larger share of common areas relative to their usable space. Investors should compare load factors of target properties against market averages to ensure competitiveness.
• Changes in Common Areas: Renovations or reconfigurations of a building can alter common areas, potentially changing the load factor and, consequently, the RSF. Lease agreements should address how such changes impact tenant rent and expense allocations.
• Effective Rent vs. Stated Rent: Tenants often focus on the stated rent per RSF. However, investors should analyze the effective rent per USF to truly understand the cost efficiency for the tenant and the revenue generation for the landlord. A lower rent per RSF might still result in a higher effective rent per USF if the load factor is very high.
• Due Diligence: During property acquisition, thorough due diligence must include reviewing floor plans, measurement reports, and existing lease agreements to verify RSF calculations and ensure consistency. Discrepancies can lead to unexpected revenue shortfalls or tenant disputes.

Conclusion

Rentable Square Footage is more than just a number; it's the foundation of commercial lease economics. For real estate investors, a deep understanding of RSF, its components, calculation methodologies, and market implications is essential for making informed investment decisions, accurately valuing properties, and effectively managing tenant relationships. By scrutinizing RSF figures and load factors, investors can gain a competitive edge and optimize the performance of their commercial real estate portfolios.