What’s in the Price Per Square Foot?
In the most simple terms, the price per square foot is calculated by dividing the price of a building or a lease rate by the square footage of the space being negotiated. But the price per square foot figure is actually more complicated than many people realize, and understanding it is crucial for anyone investing in commercial real estate.
Usable vs. Rentable Space
When you’re leasing a building, pay attention to both the usable square feet and rentable square feet. The usable portion is the part you’ll actually occupy, but the rentable square footage includes your share of common areas like stairwells, lobbies and elevators. If you’re sharing your building with other businesses, each of you will be charged a proportionate share of the expenses for these common spaces, so it’s important to know how much of your square footage is actually yours to occupy. Otherwise, you may end up unpleasantly surprised when your rented space seems much smaller than the square footage you were counting on.
The practice of adding common areas to the usable square feet is also known as the load factor. The load factor usually increases in price at a rate separate from any rent increases for the usable square feet, so you may find yourself negotiating both. Ask your landlord up front whether you’re being quoted the usable or rentable square footage; if the quote is for usable square feet, the space may still be a good buy, but it requires you to investigate the rentable square feet and load factor further to determine how much you’ll actually pay altogether.
These standards are set by the Building Owners and Managers Association (BOMA International), which lobbies on behalf of building owners and develops industry guidelines for floor measurement in a variety of space types. This ensures that everyone using the standards speaks a common “language” of measurement.
Why It’s Important
It’s crucial to be on the same page as your realtor or landlord when it comes to buying or leasing commercial real estate. Misunderstanding the different types of measurements and pricing can result in an unhappy experience for both you and your commercial real estate firm, and you need to have a firm grasp on all of the real estate terms you’ll run into in order to negotiate effectively.
As you shop for space, keep in mind that the price per square foot typically doesn’t reflect the expected, number or type of units, or the physical condition of the space, so further research on these points is required. This information paired with a good understanding of measurement methods and usable vs. rentable square feet will give you a good basis for negotiating. Be sure to study the types of leases as well if you’re planning to lease – you don’t want to sign the contract and then discover that the terms of the lease make you responsible for maintenance, property insurance, or taxes, which the landlord usually pays in other lease types.
Don’t be afraid to ask questions until you’ve got a good grasp on what’s in your agreement. Knowing what it will cost you to house your business is the first step in finding the perfect place to set up shop.
For all of your leasing questions, contact Craig Byers at 319-360-7017.
