Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Office rent is determined by multiplying the asking rent times the rentable square footage (RSF). However, many tenants don’t understand how RSF is calculated.
Usable Square Feet (USF)
One of the first steps in planning for office space is to determine how much usable space you need. These “rules of thumb” can help estimate the amount of usable square feet required for your business based upon uses.
The math is pretty simple. Determine the number and size of offices, conference rooms, etc… plus an estimate of space needed for hallways/corridors and you can roughly estimate your usable space requirement.
Simply put, usable square footage is the actual and exclusive space you occupy inside your suite where you conduct your business.
Note: Usable square footage does not include common areas of a building such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways.
Now that you’ve developed an estimate of the amount of space you’ll need, it should be pretty straight forward to identify the space alternatives that meet your size and budget requirements. But it’s not.
Because, while tenants understand and think in terms of their usable space needs and budget limitations, available office space is typically marketed as rentable square feet.
Rentable Square Feet (RSF)
Your rent will be based on rentable square feet so understanding the difference between usable square feet and rentable square feet is essential to evaluating alternatives.
Rentable square footage is your usable (actual and exclusive) square footage PLUS a portion of the building’s shared or common space (lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..). Each tenant pays for these common areas in proportion to the amount of space they lease in the building.
Load Factor (LF)
The variable in your rent equation that accounts for these common areas is called the Load Factor. Load factors are typically represented as a percentage and commonly range between 10% and 20%. The formula to calculate your rent looks like this:
Useable Square Footage + Load Factor = Rentable Square Footage
Rentable Square Footage X Rental Rate = Rent
Understanding the load factor of the alternatives that you are considering is essential to determining the best size fit and value for your office space.
While you’d think that such an essential variable in the rent equation would be included in marketing collateral and industry databases, load factor is often not.
In fact, it’s not uncommon for listing brokers to be uncertain or unaware of the building Load Factor when showing space.
Example
For example, two alternatives are marketed with the same size (10,000 RSF) and asking rent may appear equal but they aren’t. When you include the differences in load factor (20% vs 10%) you gain 757 USF (9,090USF – 8,333USF) in Option 2 for the same rent as Option 1.
10,000 RSF with 20% Load Factor = 8,333 USF
10,000 RSF with 10% Load Factor = 9,090 USF
Conclusion
So, while the two alternatives are marketed as the same size (10,000 RSF) and asking rent, Option 2 is a better value because you are getting 757 USF more than Option 1 for the same rent.
That is why load factor matters. But trust me, very few business owners know this.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, entrepreneur and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and Florida markets.
He’s earned the revered “CCIM” designation which is awarded to the top 6% of all commercial real estate brokers.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com