A common trend we are noticing when representing clients in the Greater Toronto Area (GTA) in renewals and new deals alike is that the measurement criteria for space utilization can make a significant difference when evaluating office space alternatives. In certain cases, landlords have inserted wording to allow re-measurement of the premises, after the fact, which could result in an increase in overall rentable costs. To try to explain this trend further, we have written this blog from a tenant’s perspective to try and shed some light on this very important issue:
Ok, so you have sat down with your broker and space designer/planner and told them all your layout requirements for your changing business and have determined that you need 10,000 square feet of useable space. Great. But then they tell you that 10,000 sf of useable space can vary greatly depending on the building that you ultimately choose (A class, flex office, industrial, etc.) and that 10,000 square feet of useable space is really 11,900 square feet that you pay rent on.
Let’s start with the basics. All buildings vary in their overall efficiency or gross up factor which is used to calculate the rentable square footage:
- Useable Square Footage = Actual space within the four exterior walls of the unit
- Gross up factor = Percentage of each tenant’s proportionate share of common areas within the building
- Rentable Square Footage = Useable SF x Gross Up Factor —- and is used to calculate rent payable … thus a very important number!
Rentable Square Footage is calculated in accordance with BOMA and there are four different measurement allowances. Without boring you with all the details, below is a very quick high level summary of the differences between the four:
- BOMA 1980: Common areas distributed on a floor by floor basis – this means all floors in the building could have different gross up factors.
- BOMA 1996: Allows for building common areas to be distributed to all tenants – i.e. all floors will have the same gross up factor.
- BOMA 2010 Method A: Similar to BOMA 1996 however typical result: Ground floor gross-up increases, upper floor gross-ups decreases slightly
- BOMA 2010 Method B: The same gross-up is applied to all the floors by creating “base building circulation” and assigning it to all floors regardless of layout.
So what does all this mean for you as a tenant?
It can have dramatic implications when comparing space in different buildings. It can also have an impact depending when this is identified i.e. in the lease negotiation phase vs budget approvals.
Below is an example of a recent case study of a client that experienced an increase in square footage because the landlord was upgrading the lobby and common areas, which ultimately impacted tenants on an old BOMA standard. The client’s current footprint was 19,908 rentable square feet and in the final stage of our renewal process the following language was inserted by the landlord in the Premises definition;
“The area to be confirmed by the Landlord’s Architect in accordance with BOMA 1996 guidelines”.
If the Tenant were to agree to this language and firm up the deal, they would have found out in lease negotiations that their new rentable area would jump to 20,571 square feet. This was an issue as the Tenant only had executive budget approval based on 19,908 square feet, and the change represented a 3% increase, which may not sound like a lot but none the less, translated into an increase in overall rental costs when the ultimate strategy was to reduce costs in a blend and extend scenario. A couple options we discussed to get around this were a cap on any potential increase in square footage and or additional incentive (ie. Free Rent) while they had maximize leverage in the offer stages.
The key is to address these implications up front and incorporate the potential impacts on costs as part of the business case, when maximum leverage is at hand.
The GTA is institutionally controlled and a sophisticated ownership market, so likely most buildings are up to date with current standards but as buildings age and owners look for new ways to bring value to assets, measurement standards are challenged and Tenants need to do their homework.