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Office Building Common Area Factor

When leasing office space, as part of the building comparison process, the area or space measurements should also be considered in order to properly evaluate the cost of your space. This is generally referred to as the office building's common area factor (not to be confused with common area maintenance CAM charges view here) or load factor. I prefer not to use the term "load" factor because it may be confused with the building's floor load or the actual physical weight the office building's upper floors can sustain. However, this is the term that BOMA the Building Owners and Managers Association uses, and is also the organization that sets the standards on such things. They have just recently redefined the definition on building measurements. If you're interested, you can get it here. The two basic terms referring to the physical measurement of the space that is commonly used are "add-on factor" and "loss factor".

If I were writing this article to the readers in most major office markets, my approach would be pretty straightforward. However, in the commercial real estate markets that I predominantly service, namely the New Jersey Counties of Monmouth and Ocean, nothing is straightforward or what it appears to be. Most of the tenants in my market are made up of professional and entrepreneurs running practices and small to medium size businesses. The landlords are made up of much of the same or small developers who have carved out a niche. So when the conversation about common area comes up with a tenant, it's not unusual for me to hear "Oh, my landlord doesn't charge me for common area".

While in some cases this may be true, a red flag pops up in my mind and I question as to whether the landlord is being forthright with his tenant. Think about it. Most landlords obtain a mortgage on their building. The lender will only lend based upon the rental stream that you, the tenant, is providing. The only way the lender can properly verify the income is by what is stated in the leases. If the landlord is not charging for the lobby, stairs, bathrooms, etc., he can't finance 100% of his building. Let's say the common area in the building is 20%. The landlord will lose 20% of value because he's not receiving income on 20% of the space. That's a lot of money to leave on the table. Tax free! The same would hold true if he were to sell the building, except for the tax free part.

The landlord is either unsophisticated or more likely the common area charge is buried in the rent. Either way it's important for you to know, because as we'll see there is a cost.

One other thing to consider is if the space is accurately measured. In my thirty years in the office leasing business I've seen the same space grow as if it had been binging on ice cream and donuts. One landlord I know, when confronted about his ever expanding building declare it a "miracle!". In reality it's that old "rubber ruler trick". Unfortunately, unless you're willing to go through the expense of hiring an architect to field measure and certify the square footage of the space, there's little hope in proving your case. And there's still no guarantee that the landlord will accept your argument and agree to lease the space to you.

So what's the point of all of this? It's important to include this along with the myriad of other factors to be considered when comparing the cost of one space to another. There are two space measurements when leasing office space; rentable and usable square feet. Rentable square feet includes all of the common elements in the building. You know, the space your landlord says he's not charging you for. Usable square feet is the space that you physically occupy. It's sometimes referred to as "carpeted area" for clarification. The tenant typically pays a per square foot rental rate on the rentable area. As part of the financial lease analysis, calculating the rent on the USABLE square feet will give you a more accurate picture as to the true cost of your physical space. I have laid out the formulas and calculations for you on the board.

Common Area Calc Click image to enlarge.

Keep in mind that although from a financial perspective one space may be more cost effective over another, how your furniture lays out in the space and workflow efficiency is also an important factor to include in your analysis.

 

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