Negotiate Specific Measurement Method for Office Space

April 25, 2011

Two measurements—of the “rentable area” and the “usable area”—of office building space are critical because they are used to calculate the “load factor”—the percentage of the space that is not usable by tenants. Together, the rentable area, usable area, and load factor of a space determine the amount of rent that you can reasonably charge a tenant for it. Be aware that the way you measure your space could work for or against you, depending on which measurement standard you use.

Understand Terms

Although methods of measurement vary, the most common standard used industry-wide is the Building Owners and Managers Association (BOMA) standard, which was created to simplify and standardize the measurement of office space. The usable area is the actual space that the tenant can use as office space for its furniture, equipment, and employees. The rentable area is the tenant's gross square footage on the entire office floor, plus the tenant's pro-rata share of the building's common areas. The difference between the rentable area and the usable area in the building is the load factor.

“The choice of a measurement standard has real dollars-and-cents consequences for owners and tenants,” says California real estate attorney Brandon M. G. Williams. “That's where BOMA comes up,” he notes. BOMA standards are an objective, well-accepted, and fair way to measure space. But a BOMA standard can also cause an individual space or an entire building to tilt in favor of an owner or tenant. If you know about the standards, you'll be able to maximize your financial position on a deal, he says.

PRACTICAL POINTER: BOMA doesn't have a standard for shopping centers or strip malls, so it's important for center owners to choose—and then explain to retail tenants—a reliable standard to measure space.

Follow Method that Fits Overall Strategy

The measurement standard you choose should depend on your overall strategy for effectively leasing the entire building, says Williams, of Sacramento-based law firm Downey Brand LLP. In 1996 there was a single BOMA standard for measuring office space, he points out. For example, to measure a floor in a high-rise office building, the owner would calculate the square feet of the rentable area, and then the square feet of the usable area (taking into account the common areas on that floor and the office space that can actually be used), to come up with the floor's load factor. The measurements can be used to determine the amount of rent.

A floor with a lower load factor is usually more attractive to tenants because it means that a greater part of the tenant's rent would be allocated to their usable area than to the common areas. And owners may like lower load-factor floors because they can charge higher rental rates. But the variety of load factors from floor to floor can leave you with floors with higher load factors that are less attractive to tenants and are harder to lease. “Floors with a higher load factor can create a situation where you have one floor being leased faster than another and can hinder your effort to lease up the entire building,” says Williams.

In response to this concern, BOMA created its 2010 measurement standards that give owners two options. Method A is very similar to the 1996 standard that allows a floor-to-floor load factor; Method B allows owners to apply a single load factor to the entire building. That is, every floor will have the same load factor, helping to avoid diverging rental rates based on a diverging load factor from floor to floor, Williams explains. “Either method can potentially work to the owner's benefit in terms of leasing up space, depending on its overall leasing strategy,” he adds.

The 2010 standards are still relatively new and untested, but you should choose the method that fits your overall strategy for your building. If you want to have a level of certainty as to how space is going to be measured, then Method B is a good choice because you'll have one load factor that is imposed on the building now and that will be true even as time goes on, new tenants come in, and space gets reconfigured.

“This will give you consistency if you can successfully impose it on the building,” says Williams. Method B fits an overall strategy where the main priority is getting the entire building rented as soon as possible, because it will help you avoid having some less attractive spaces with high load factors that slow down the leasing process. Method B's consistency over time as to how rentable area and usable area are calculated can avoid situations that become messy because of arguments over how CAM is being calculated when tenants come and go and space is reconfigured. “Method B makes it easier for an owner with that strategy,” says Williams.

However, be prepared for tenants to argue that space should be measured using Method A. “Many tenants don't like Method B with uniform load factors because they don't get the advantage of paying less for common areas and getting more usable space for their money from renting a lower load-factor floor,” notes Williams. Determine your strategy and negotiate to use the measurement standard in accordance with it.

Don't Use “Applicable” Standards

Some leases say that “applicable” BOMA standards will be used to measure the space, but they don't define the specific BOMA standards—1996, 2010 Method A, or 2010 Method B. “You may see BOMA standards that are more than 20 years old in form leases,” says Williams. “References to ‘applicable’ BOMA standards could be used as a blank check for one party to pick whichever standards it wants, which may have significantly different results from what the other party wants or expects,” warns Williams.

Use Ambiguity to Your Advantage

It's important to be aware of how these different measurement standards could affect you and watch out for ambiguity in which one will be used.

Keep in mind that, if you have a right to remeasure the space later, then ambiguity is desirable because it gives you the flexibility to choose whichever BOMA standard is advantageous to you at the time. You can use ambiguity to your advantage that way. But if you would like to be reciprocal, then it's in everyone's best interest to understand how each of the methods of measurement is going to affect the bottom line.

“When I'm drafting a lease and I see some vague reference to ‘BOMA standards’ or ‘applicable BOMA standards,’ whether it's in the context of initial measurements or the right to remeasure, it sets off an alarm,” says Williams. “This is a problem especially with 2010 standards where no one would know what it means to say ‘2010 standards’ because there's more than one method in them,” he warns. Whichever BOMA standard you choose to use—BOMA 1996, BOMA 2010 Method A, BOMA 2010 Method B—you must be precise and know what you are identifying as the standard to be used in your lease, he stresses.

Vague measurement standards also come up when there are rights to remeasure space and adjust CAM costs/expenses based on that remeasurement. This can potentially result in a substantial increase in the cost of a tenant's lease. Be prepared for a tenant with a right to remeasure in the lease to fight a vague right to remeasure based on “applicable” BOMA standards or “the most recent BOMA standards.” A tenant will argue that it could potentially end up with a rental rate that's very different from what it had before.

Adjust Price per Square Foot, Not Standard

“A prospective tenant, especially one with leverage, could argue that regardless of the method you are using for the other spaces in your building, it wants a different method. This is an issue usually with Method B, where you've imposed a building-wide standard that a new tenant doesn't like. But using a different standard for that tenant could create inconsistencies in the way the building is administered and how expenses and rent are allocated,” explains Williams.

“At the end of the day, what everything amounts to is rent and common area maintenance costs,” he adds. Adjusting the price per square foot for a tenant that's concerned about rental rates, instead of making an exception to your measurement standard that would save it money, could help.

Let the tenant know that the current standard is nonnegotiable and will be applied to all tenants, but rent can be lowered on a square-foot basis instead of using a standard that's more advantageous to the tenant. Otherwise, there's no way to stop tenants from negotiating the measurement standard on every single space in the building.

Remember that BOMA standards are not the last and final word on rental rates; you can adjust other factors to get the end result that everyone wants.

Avoid Conflict with Specific Standard

With the shift to BOMA 2010, a clause in a standard form lease that says to use the most recent BOMA standards isn't going to work, because the most recent 2010 measurement standard has two parts—“and those need to be specified,” Williams emphasizes. “There isn't a most recent standard; there are two,” he adds.

Measurement standards are a critical factor for owners' bottom lines. Be aware of which standards are governing your lease and how they will affect you in the short and long term.

“On a day-to-day basis, the BOMA standards you use are going to have a greater impact on your profit than some of the other points you might spend time arguing about,” says Williams. “There isn't necessarily any one standard that owners should always use, but you should certainly know what you're getting into,” he adds. “‘BOMA’ is not enough; you have to be wise about what you pick and make that choice intentionally,” he advises.

Insider Source

Brandon M. G. Williams, Esq.: Downey Brand LLP, 621 Capitol Mall, 18th Fl., Sacramento, CA 95814; www.downeybrand.com.

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