Category: Info Articles

Understanding Commercial Real Estate Leases

If we consider all possible commercial real estate leases, the net and gross stand on the two extreme ends of the spectrum. 

Absolute net leases, also known as triple net leases, allocate all operating expenses of the property to the tenant. This includes property taxes, insurance, and maintenance. In addition to these costs, the tenant also pays rent, however, it is usually lower to offset the other responsibilities.

On the other hand, absolute gross leases, also known as full service leases, hold the landlord responsible for all operating expenses. The tenant is only responsible for paying the agreed rent. Of course, the base rent is usually higher with gross leases to compensate for the landlord’s elevated costs.

Between these two extremes, exists an almost infinite amount of leases that split the operating costs and responsibilities of the property. If you’re working in commercial real estate, you’ve inevitably encountered a huge variety of leases like single net, double net and triple net leases, modified gross and full service leases.

In the sections below we’ll offer a brief rundown of each and answer your most immediate questions about the different types of leases in commercial real estate, how they work and why should you choose one over the others. 

Single Net Lease

The difference between all net leases is how much of the landlord’s costs are transferred over to the tenant. 

The single net lease is the simplest form, allocating only the property taxes to the tenant, in addition to the base rent. Building insurance and maintenance remain responsibilities of the landlord.

How commercial real estate property taxes are calculated

Property taxes are charged by the local or state government and are for the most part non-negotiable. 

Residential and commercial real estate are charged very differently. For residential property, the assessment establishes property’s value in context of comparable properties on the market. Taxes are then charged on a percentage basis, decided by the local or state authority. 

For commercial properties, the calculations are more complicated. Property owners are required to submit an “Income and Expense Form” to the respective board of assessors every year. The board’s job is to assess the value of the commercial property from a business standpoint, looking into the rental income, business operations and building expenses like maintenance, repairs, cleaning, utilities, advertising, insurance, legal, management and other costs to run the property. The building will be assigned the appropriate tax according to the local budget requirements which can change every year.

Tips on Single Net Leases

Handling property taxes is usually a responsibility of the landlord. However, in single net leases, the cost of these taxes is reimbursed by the tenant. 

If you’re the tenant, you’re deeply interested in double checking the “Income and Expenses Form” before it’s submitted to the authorities, ensuring all items are properly described in their entirety. Before signing the lease, you want to look at estimations or previous year assessments of the building tax, so you can calculate a more accurate ballpark of your own cost to lease the property. Property taxes are non-negotiable, however your rent is, so you can make adjustments accordingly to offset your costs.

If you’re the landlord, you can balance the property taxes, rent and your other expenses to ensure your building is competitive and desirable to local businesses, but also profitable in the long-term, bringing sufficient cash flow for your own needs. 

Double Net Lease

The double net lease holds the tenant accountable for rent, property taxes, AND, insurance. Building maintenance remains a responsibility of the landlord.

Insurance in Commercial Real Estate

Insurance is always required by the bank or lender who funded the construction cost of the property. Property insurance protects the building and all its contents and equipment against theft, vandalism, fire, natural disaster or other damage. This includes, but is not limited to:

• The building itself
• Office furniture, computers, phones
• Machinery, equipment and tools used for manufacturing, cooking and other services
• Inventory, parts, supplies and materials kept onsite
• Accounting records and essential documents
• Landscaping and other improvements to make the facility more customer friendly
• Signs, decoration, satellite dishes, etc

 

Commercial real estate insurance is never cheap, but depending on the specific building and business, it can be an excruciating expense. The exact calculation is unique to every single scenario, but the main factors that drive the price are as follows: 

 

1. The value of the building and its contents form the base price of the policy. Is the tenant a manufacturer with multi-million processing equipment, a car dealership with dozens of vehicles in the lot, or a coffee shop? 
2. The risk of a natural disaster is linked directly to the location. Leasing a building in one of the wild fire-struck regions in California, a commonly flooded area in Miami or Central Texas will likely bear a significant risk factor.
3. The risk of a fire depends on multiple factors. What are the construction materials – wood, reinforced concrete, brick and mortar? What’s the occupation – cooking, welding, or selling shoes? Are there combustible materials in the building? Is the electrical wiring up to code? What is the quality of the fire suppression system? What is the proximity to a fire station and a hydrant? Often the insurance company will require an inspection and fire rating analysis before issuing out a policy. In some cases, if the risk is deemed too high, the business may be rejected unless implementing significant improvements.
4. The risk of theft is associated with both the location, the type of business operated and the quality of the security systems installed. Some urban areas and businesses experience more crime than others. Consumer electronics are reasonably valuable, easy to carry, and trade off in virtually any market. Industrial equipment is worth millions of dollars, but it’s useless and often impossible to steal.

Tips on Double Net Leases

In other lease types, the landlord will  pay for the building insurance, and the tenant will have to pay for a separate commercial insurance to cover their furniture, equipment, stock and materials. 

In this regard, the double net lease can be cost effective, as it allows to group both insurances under the same policy, which can offer some savings. Furthermore, the commercial insurance premium is a business expense, so it will be deducted from the taxable income and reduce the building tax also paid for by the tenant. 

Before signing a double net lease, it’s important to get an insurance estimate to ensure the costs are balanced and competitive to other properties on the market. The building might hide construction flaws that bring the fire rating down and inflate your insurance premium more than anticipated.

In either case, the rent payment should reflect on the increased expenses of the tenant.

Double Net leases can be used in a single tenant and multi tenant buildings. In the later case, the cost of building tax and insurance is divided according to each tenant’s share of the building, similar to a core factor.

Triple Net Lease

Triple net leases transfer practically all costs and expenses of the building to the tenant. The tenant pays for building taxes, insurance and maintenance. 

Maintenance is a collective name for all: 

• Repairs and maintenance – plumbing, electrical, HVAC, elevators and escalators, roofing, interior and exterior walls, structure, etc.
• Utilities – electricity, water, gas, sewage, trash collection
• Cleaning and janitorial services
• Gardening and landscaping
• Maintenance of parking lots, sidewalks and other outdoor areas
• Maintenance of loading docs, delivery areas and other commercial facilities
• Management fees
• Security services
• Advertising and marketing of the property

The cost of these varies depending on the condition, size and purpose of the building. Different services can be outsourced to an array of contractors, grouped under a management company, or even conducted internally by the tenant’s own workforce, which is usually the most cost-effective option.

Triple net leases are used when a single tenant occupies the entire building – commonly seen with national food chains or department stores – and are most often structured for extended periods of time – usually 20+ years. 

In this scenario, the tenant absolves the landlord from practically all responsibilities, allowing them to operate a so-called turnkey investment. That said, even with an absolute net lease, the landlord still sees some expenses, like legal and accounting fees related to drafting and processing the lease documentation.

The tenant gains unique benefits in that they can access premier locations and secure long-term exposure to high foot traffic. Landlords can rely on long-term predictable income from their properties. 

Tips on Triple Net Leases

With triple net leases, tenants perform all repairs and maintenance, cover all insurance premiums and submit their own building taxes to the authorities. This comes with a considerably reduced rent, compared to other lease types and can secure some savings by grouping all expenses associated with the location.

On the other hand, tenants must be very careful in assessing and predicting the maintenance costs of the building before signing the lease. Some buildings can prove too much of a burden to maintain in addition to the agreed rent. If the contract is structured as a bondable triple net lease, which landlords prefer, the tenant will not be able to break free before the termination date and will have to face these increased expenses without any rent deduction or other financial aid.

Triple net leases are considered good conservative investments for landlords who need do nothing but enjoy their passive income stream. The rent earned from a triple net lease is lower, however, it’s compensated by the lack of other running costs, reliable cash flow and the security of leasing to well established businesses.

Absolute Triple Net Leases are even more advantageous for the Landlord.  With Absolute NNN, the Tenant is responsible for the roof, structure, foundation, and parking lot.  Consequently, providing zero responsibilities for the Landlord.

That said, acknowledge that the security of tenure is only guaranteed if the business is profitable. If a tenant defaults, the landlord will be left with an empty building, whose costs they have to carry until they find another tenant. This can result in considerable losses. Investors, who plan to use a triple net contract, should spend extra time, effort and money in credit checking and background checking their prospective tenants.

Modified Gross Lease

A modified gross lease is a lease that allocates some operating expenses to the tenant and others to the landlord. The term is really vague as it simply means that both parties have responsibilities towards the operating costs of the building. 

Modified gross leases can be structured the same way as a single, double or even triple net leases. Or they can feature a unique structure, depending on how both parties negotiate. 

These leases can be used in single and multi-tenant buildings and often feature some pretty complicated reimbursement strategy. Modified gross leases must always be read in full, and if needed, taken to a legal professional to review. 

Let’s look at a couple of different scenarios all using a modified gross lease.

Tenants could simply be charged their prorated share of all operating expenses. For example, if they lease 25,000 sq.ft out of a 150,000 sq.ft building, they will pay for 1/6th of the building’s running costs – taxes, insurance and maintenance. Simple enough. 

Alternatively, tenants can be responsible for some expenses, share others and leave third to the landlord entirely. For example, tenants may have to facilitate their own maintenance and repairs in their rented space. Then, the landlord can charge them for building taxes and common area maintenance on a pro-rata basis. Finally, the landlord could cover building insurance and structural repairs. It gets tricky as the tenant has to factor multiple expenses to establish their total costs of renting space in that building. 

But it can get even more complicated. The tenant may have to pay some costs as a percentage of the total amount, but contribute flat sums towards other areas. For example, pay a pro-rata share of all property taxes, but pay $1.50 per square foot for maintenance and repairs of the building. 

Finally, if that’s not complicated enough, the landlord can implement various expense stops.

What are Expense Stops?

An expense stop defines the maximum amount of money that the landlord will contribute to the operating expenses of the building. 

For example, an expense stop of $5 per square foot means that for a 10,000 square foot building, the landlord will pay a maximum of $50,000 annually towards the running costs of the building. Anything above that sum must be covered by the tenant. 

Expense stops can be applied to individual expenses or a group of expenses. In the first case, and using the example above, the landlord will have to contribute $50,000 per year for taxes, then $50,000 for insurance, and finally $50,000 for maintenance separately. If either of these runs above the $50,000, the tenant will have to cover the difference. 

If the expense stop is applied to all operating expenses as a group, the landlord will only contribute a total of $50,000 to all running costs of the building. The expense stop will kick in much sooner and hold the tenant accountable for a way bigger sum. It makes all the difference in the world and it’s extremely important to discuss any expense stops featured in the lease to ensure you avoid unexpected costs.

There is also a thing called a base year stop. In this case, the landlord will assume all expenses in the first year of the lease, then calculate an expense stop using that sum. For example, if the base year operating costs were $50,000 for a 150,000 sq.ft property. The expense stop for any consecutive year comes out to $0.33/sq.ft. Anything over that sum will be compensated by the tenant.

Full Service Lease

A full service lease is just another name for an absolute gross lease. In this structure, the tenant is only responsible to pay a flat monthly rent and all operating costs are handled by the landlord. 

Usually, this means that the rent charge will be higher compared to all other lease types, but the tenant can predict their expenses perfectly and choose a property that suits their needs. Furthermore, these leases typically feature more flexibility and smaller terms, allowing the tenant to break free relatively easily if they wish.

Always Read the Lease

You can never take a lease for granted just based on a description. Commercial real estate leases are often too complex and nuanced to fit into any given type. 

Different lease types could mean different things, depending on the industry and location. In fact, neither of these definitions have any legal backing. There is no law or even universal agreement to how each lease type works. 

More often than not you’ll see full service leases that incorporate expense stops for the landlord, so tenants become liable for parts of the running costs of the building. Or single net leases which force the tenant to contribute some amount towards maintenance, even though the majority is paid for by the landlord.

So, the only way to completely understand what a specific lease entails is to read it in its entirety and where needed take it to a legal professional to decipher and break down.

Another thing to keep in mind is how your rent is being charged and how is your rented area measured. 

How Rent is Charged in Commercial Real Estate Leases

Rent in commercial properties is always calculated as dollars per square foot. For example, an office building may go for $7 per square foot per month. If you lease 10,000 sq.ft, you’ll owe $840,000 rent at the end of the year. 

The critical thing to remember here is what is included in those 10,000 square feet. Business owners could easily assume this is the space available to position office desks with, arrange dining tables, or locate manufacturing equipment like lathes and presses. This is referred to as the usable area or net leasable area. 

However, the building owner paid to construct the entire building, which includes walls, lobbies, staircases, escalators, elevators, toilet areas, maintenance rooms, risers, ducts, electrical and machinery rooms, janitors’ closets, and other features which make the building…well…functional. These add up to a considerable amount of the total area and the landlord has a right to charge rent for them, since they are really inseparable from the building itself.

Depending on your lease, your landlord is going to charge rent on the:

1. Gross area of the building, which is basically the footprint as measured from the outside surface of the external walls. 
2. Usable area and incorporate a core factor, which accounts for all areas mentioned above, except for the external walls, based on your portion of the building, if it’s shared by multiple tenants. 

You can read more about types of floor areas and core factors in our articles below:

• Understanding Commercial Lease Floor Areas – Gross vs Net Leasable Area
• Understanding Core Factor, Loss Factor and Load Factor

But just keep in mind that as a tenant, you’ll always pay for more square footage that is actually usable to conduct your business operations.

 

Understanding Hospitality Metrics ADR, RevPAR and More

The hospitality industry got a lot more complicated recently. The borders are closed, travel is suspended, there’s mass quarantine and scarcity of tourists. The law of the jungle rules in the travel and hospitality industry. Only the most prepared and adaptive businesses will survive. 

 

Your gut feeling won’t get you out of the woods and it won’t help your business pull through in a tough market. You need information in order to make the right calls. 

 

Obviously, you want higher revenues, reduced operating costs and great profit margins. However, realizing these goals requires diving deep into the data and optimizing several key performance indicators that put your business in the context of the surrounding market.

 

In this article, we’ll go through the most commonly used metrics and KPIs of the hospitality industry and explain how they work and why they matter for your business. 

ADR – Average Daily Rate

Average Daily Rate (ADR) is the most commonly used performance metric in the hotel industry. 

 

Different rooms go for different rates, depending on their size, features and furnishings. ADR gives you a single metric to compare your hotel’s prices against similarly sized and equipped competitors. 

 

You can calculate ADR by dividing the total room revenue to the number of rooms sold for the given period. For example, if you sold 56 rooms yesterday and realized $6,500 total revenue, the ADR is calculated as follows:

 

• ADR = Total Revenue / Rooms Sold

• ADR = $6,500 / 56 = $116 per room

 

You can calculate this metric for a week, month, quarter and year by multiplying the rooms to the number of days in the given tracked period and using the total room revenue for the same time frame. If the hotel scores $7 higher ADR than your main competitors, it means you’re getting better value from your property. 

ARI – Average Rate Index

This metric measures how your hotel’s ADR measures against your segment / competitors. You calculate the ARI as follows:

 

• ARI = Hotel ADR / Market ADR * 100% = some percentage

 

If you’re in tune with the market, your ARI should equal 100%. If you score higher, then you’re earning more than your direct competitors. However, ADR does not account the occupancy rate of your hotel.  You could only fill 30% of your rooms and still get a higher ADR than your competitors who’re taking in twice as many guests and have much bigger revenue and profit. In order to get a more complete picture, you need to consider how much of your rooms are occupied and how many remain empty. 

Occupancy Rate

The occupancy rate is pretty straightforward – the percentage of rooms you have full for any given period. 

 

• Occupancy Rate = Rooms Booked / Total Rooms * 100% = some percentage 

 

Obviously, a higher occupancy rate is desirable, since it adds direct revenue and has a potential of increased spending on other vicinities, such as restaurants, bars, gyms, etc. 

 

Higher occupancy also adds operating costs. 100% occupancy at dramatically reduced prices can end up losing you profit. That’s the exact opposite of your goal, so a fine balance must be achieved.

 

Of course, 100% occupancy is unimaginable for any significant period. There will be natural peaks and dips in occupancy depending on the seasonality, location and type of accommodations you offer.

MPI – Market Penetration Index

Additionally, you can observe the occupancy rate in relation to the average occupancy for your segment or local market. 

 

• MPI = Hotel Occupancy Rate / Market Occupancy Rate * 100% = some percentage

 

If your hotel hits the average market occupancy rate, the measurement should be exactly 100%. Any more and you have the edge over the competition, unless you’re unreasonably reducing your prices. 

RevPAR – Revenue Per Available Rooms

Revenue Per Available Rooms (RevPAR) is a measurement of the ability to fill all rooms in a hotel property, given the average room price. 

 

You can calculate RevPAR by multiplying the average daily rate to the occupancy rate in a given period. For example, if your ADR is $120 per room, and you have 85% of your rooms booked up, the RevPAR for your property is calculated as follows:

 

• RevPAR = ADR * Occupancy Rate

• RevPAR = $116 * 85% =  $98.6 per room

 

Only revenue from sold rooms should be considered for this calculation. Revenue from restaurants, lobby bars, tourist shops or other services should not be included.

 

RevPAR will grow proportionally to the average daily rate and occupancy rate. It’s useful to judge real world performance of the property and how effectively the rooms are priced compared to their take up rate. If everything is going great, you should see this number grow.

 

For this example, decreasing the going rate by $9 (9.3%) in order to get 9% more occupancy, will increase RevPAR to $100.6.

 

RevPAR does not account for the size of the hotel, and it’s not a measurement for the profit. More occupancy means more running costs. 

RGI – Revenue Generation Index

The Revenue Generation Index is a comparative metric measuring your hotel’s RevPAR against your market segment. 

 

RGI = Hotel RevPAR / Market RevPAR * 100% = some percentage

 

Again, just like other comparative metrics, 100% means you’re getting a fair share of your desired market. You’re aiming for a larger figure. 

TrevPAR – Total Revenue Per Available Room

TrevPAR is similar, however, it accounts for all revenue streams attached to the property – restaurants, bars, gyms, spas and other amenities. If you have a total revenue of $26,000 and 240 rooms in the property, your TrevPar is calculated as follows:

 

• TrevPAR = Total Revenue / Total Rooms

• TrevPAR = $26,000 / 240 = $108.3 per room

GOPPAR – Gross Operating Profit Per Available Room

GOPPAR gives you the big picture – how much profit you generate per room in your hotel. That accounts for all operational expenses – maids, cleaning, maintenance, rent, utilities, supplies and other costs. 

 

You calculate GOPPAR in the following manner:

• Calculate Gross Profit for the given period. For example, if you earned $7.3 million for the entire year, but paid $2.6 million in salaries and $1.1 million in supplies and consumables, your Gross Profit (before tax) would be $3.6 million. 

• Next, multiply the total room amount by the days in your measured period. In this case, let’s say we have 130 rooms and 365 days in the year, so a total of 47,450.

• Finally, divide the two figures. Your average annual profit per room is $3.6 million / 47,450 = $75.87.

 

Takeaway

Let’s quickly recap what we learned about key performance indicators in the hospitality industry: 

 

• Average daily rate – the average price of a room across your portfolio in a measured period.

• Occupancy rate – the percentage of hotel rooms sold.

• RevPAR – the average revenue generated per room in your hotel. A metric taking into account the previous two.

• TrevPAR – similar metric taking into account all revenue sources in the hotel’s facilities.

• GOPPAR – a metric that measures the profit per room in a given time frame.

 

These are not all possible performance metrics about the hospitality industry, but they should give you a great starting point to develop more sophisticated methods to collect and analyze data. 

 

The right decisions are based on reliable information about your performance in relation to the market around you. If your hotel is not collecting data, you’re already trailing behind the competition. 

 

Make that your top priority! 

ADR, RevPAR and More
The hospitality industry got a lot more complicated recently. The borders are closed, travel is suspended, there’s mass quarantine and scarcity of tourists. The law of the jungle rules in the travel and hospitality industry. Only the most prepared and adaptive businesses will survive.

Your gut feeling won’t get you out of the woods and it won’t help your business pull through in a tough market. You need information in order to make the right calls.

Obviously, you want higher revenues, reduced operating costs and great profit margins. However, realizing these goals requires diving deep into the data and optimizing several key performance indicators that put your business in the context of the surrounding market.

In this article, we’ll go through the most commonly used metrics and KPIs of the hospitality industry and explain how they work and why they matter for your business.
ADR – Average Daily Rate
Average Daily Rate (ADR) is the most commonly used performance metric in the hotel industry.

Different rooms go for different rates, depending on their size, features and furnishings. ADR gives you a single metric to compare your hotel’s prices against similarly sized and equipped competitors.

You can calculate ADR by dividing the total room revenue to the number of rooms sold for the given period. For example, if you sold 56 rooms yesterday and realized $6,500 total revenue, the ADR is calculated as follows:

ADR = Total Revenue / Rooms Sold
ADR = $6,500 / 56 = $116 per room

You can calculate this metric for a week, month, quarter and year by multiplying the rooms to the number of days in the given tracked period and using the total room revenue for the same time frame. If the hotel scores $7 higher ADR than your main competitors, it means you’re getting better value from your property.
ARI – Average Rate Index
This metric measures how your hotel’s ADR measures against your segment / competitors. You calculate the ARI as follows:

ARI = Hotel ADR / Market ADR * 100% = some percentage

If you’re in tune with the market, your ARI should equal 100%. If you score higher, then you’re earning more than your direct competitors. However, ADR does not account the occupancy rate of your hotel. You could only fill 30% of your rooms and still get a higher ADR than your competitors who’re taking in twice as many guests and have much bigger revenue and profit. In order to get a more complete picture, you need to consider how much of your rooms are occupied and how many remain empty.
Occupancy Rate
The occupancy rate is pretty straightforward – the percentage of rooms you have full for any given period.

Occupancy Rate = Rooms Booked / Total Rooms * 100% = some percentage

Obviously, a higher occupancy rate is desirable, since it adds direct revenue and has a potential of increased spending on other vicinities, such as restaurants, bars, gyms, etc.

Higher occupancy also adds operating costs. 100% occupancy at dramatically reduced prices can end up losing you profit. That’s the exact opposite of your goal, so a fine balance must be achieved.

Of course, 100% occupancy is unimaginable for any significant period. There will be natural peaks and dips in occupancy depending on the seasonality, location and type of accommodations you offer.
MPI – Market Penetration Index
Additionally, you can observe the occupancy rate in relation to the average occupancy for your segment or local market.

MPI = Hotel Occupancy Rate / Market Occupancy Rate * 100% = some percentage

If your hotel hits the average market occupancy rate, the measurement should be exactly 100%. Any more and you have the edge over the competition, unless you’re unreasonably reducing your prices.
RevPAR – Revenue Per Available Rooms
Revenue Per Available Rooms (RevPAR) is a measurement of the ability to fill all rooms in a hotel property, given the average room price.

You can calculate RevPAR by multiplying the average daily rate to the occupancy rate in a given period. For example, if your ADR is $120 per room, and you have 85% of your rooms booked up, the RevPAR for your property is calculated as follows:

RevPAR = ADR * Occupancy Rate
RevPAR = $116 * 85% = $98.6 per room

Only revenue from sold rooms should be considered for this calculation. Revenue from restaurants, lobby bars, tourist shops or other services should not be included.

RevPAR will grow proportionally to the average daily rate and occupancy rate. It’s useful to judge real world performance of the property and how effectively the rooms are priced compared to their take up rate. If everything is going great, you should see this number grow.

For this example, decreasing the going rate by $9 (9.3%) in order to get 9% more occupancy, will increase RevPAR to $100.6.

RevPAR does not account for the size of the hotel, and it’s not a measurement for the profit. More occupancy means more running costs.
RGI – Revenue Generation Index
The Revenue Generation Index is a comparative metric measuring your hotel’s RevPAR against your market segment.

RGI = Hotel RevPAR / Market RevPAR * 100% = some percentage

Again, just like other comparative metrics, 100% means you’re getting a fair share of your desired market. You’re aiming for a larger figure.
TrevPAR – Total Revenue Per Available Room
TrevPAR is similar, however, it accounts for all revenue streams attached to the property – restaurants, bars, gyms, spas and other amenities. If you have a total revenue of $26,000 and 240 rooms in the property, your TrevPar is calculated as follows:

TrevPAR = Total Revenue / Total Rooms
TrevPAR = $26,000 / 240 = $108.3 per room
GOPPAR – Gross Operating Profit Per Available Room
GOPPAR gives you the big picture – how much profit you generate per room in your hotel. That accounts for all operational expenses – maids, cleaning, maintenance, rent, utilities, supplies and other costs.

You calculate GOPPAR in the following manner:
Calculate Gross Profit for the given period. For example, if you earned $7.3 million for the entire year, but paid $2.6 million in salaries and $1.1 million in supplies and consumables, your Gross Profit (before tax) would be $3.6 million.
Next, multiply the total room amount by the days in your measured period. In this case, let’s say we have 130 rooms and 365 days in the year, so a total of 47,450.
Finally, divide the two figures. Your average annual profit per room is $3.6 million / 47,450 = $75.87.

Takeaway
Let’s quickly recap what we learned about key performance indicators in the hospitality industry:

Average daily rate – the average price of a room across your portfolio in a measured period.
Occupancy rate – the percentage of hotel rooms sold.
RevPAR – the average revenue generated per room in your hotel. A metric taking into account the previous two.
TrevPAR – similar metric taking into account all revenue sources in the hotel’s facilities.
GOPPAR – a metric that measures the profit per room in a given time frame.

These are not all possible performance metrics about the hospitality industry, but they should give you a great starting point to develop more sophisticated methods to collect and analyze data.

The right decisions are based on reliable information about your performance in relation to the market around you. If your hotel is not collecting data, you’re already trailing behind the competition.

Make that your top priority!

The concept of ownership is fairly simple. However, when dabbling in commercial real estate, the question of “Who owns what?” becomes significantly more complex.

For instance, multiple individuals or legal entities can have interest in the same parcel of land. Adding to that, their rights will vary depending on the type of estate (interest) each party holds.

Finding it difficult to follow already? Let’s start at the beginning.

An estate in land describes the interest or rights of a person in a defined parcel of land. There are three main types of estates in commercial property:

• Freehold estates
• Leasehold estates
• Concurrent estates

In the article below, we’ll describe each estate type, how they differ, and reasons to choose one type of commercial property estate type over another.

What is a Freehold Estate?

A freehold estate is the absolute ownership of an area of land. The owner of the freehold estate owns the land in its entirety for all time. This is the highest form of ownership an individual or a company can achieve.

The freehold estate owner is free to do as they please with their property including develop buildings and industrial facilities, erect and demolish structures, improve the land, and perform other activities.

The freehold owner can sell, lease, gift, or donate the land as they see fit, bound only by the established laws, building codes, and regulations in their area.

There are, of course, several types of freehold estates, each with various rights and responsibilities of the owner.

Fee Simple

When you buy a parcel of land for a new development project, what you’re really doing is acquiring the “fee simple absolute” interest. This type of interest in an estate provides you unrestricted rights to the property, within the extent of the law. It’s also inheritable, meaning if at the end of your life you have not distributed the land to anyone specific, it will automatically be inherited by your heirs.

The fee simple ownership is inheritable, transferable, sellable, and subject todonation, gifts, and leases. The fee simple owner is free to construct or develop the land without any permission, except for the government.

Life Estate

A life estate is a type of ownership which only extends to the end of your life. In other words, after you pass away, your interest in the property reverts back to the fee simple owner. Life estates are commonly used for estate planning and residential property with practically no application in commercial real estate.

Other types of freehold estates exist, however, they have phased out of modern practices.

Why Should You Buy a Freehold Ownership?

Freehold ownership guarantees you the freedom to develop your commercial project in any way you want. All buildings and structures you erect on your property also belong to you and you’re free to use and modify them without limitations or conditions.

Here are some other benefits to buying a freehold estate:

• You won’t have to deal with anybody (except the authorities and building inspectors)
• You’ll amass equity that can be used as collateral to secure bank loans or other financial services
• You can build appreciation and possibly profit from a future sale

Keep in mind, though, that all of this freedom comes with a steep price tag. Buying a freehold estate is the single most expensive way to purchase a property. As the freehold owner, you’re also responsible for taxes, maintenance, repairs, insurance, and all other costs associated with the land.

Notice, ownership and possession are two different things. You don’t always need to purchase the land in order to be able to use it for your commercial project.

In fact, some states like Hawaii will not allow you to obtain a freehold interest in the land, no matter how much money you’ve got.

What is a Leasehold Estate?

A leasehold estate is a type of land tenure where one party (the lessee or tenant) pays the owner (the lessor or landlord) for the right to use the land for a specified amount of time.

A leasehold is obtained by a type of ground lease, which can be configured differently, depending on the needs and wishes of both parties. In doing so, the freehold owner transfers some of their rights to the leasehold owner, such as the right to occupy, the right to exclude others, the right to operate a business, and so on.

The lease term is typically for a long duration – anywhere from 30 years all the way up to 999 years. However, these leases are usually set for above 50 years. Because of this, a leasehold can last practically forever, giving the lessee possession of the land to develop commercial buildings and operate businesses on the premises.

With a leasehold estate, the lessee does not own the land, however, and their rights are limited. Every project is pre-approved by the landowner. Modifications to the structures, improvements of the land, and significant changes to the type of business operations at the facilities must also be approved by the landowner.

This limits the flexibility of the leasehold owner to adapt to changing conditions. Depending on the specific lease structure and cooperation of the freehold owner, this may or may not be a significant concern. However, if there is any disagreement between both parties, they are bound to the wording of the lease contract.

Therefore, it’s absolutely necessary to have the contract analyzed by a legal professional to ascertain whether enough provisions are in place to protect the leaseholder’s interest in the property.

Despite not owning the land, the leasehold owner can own the buildings, structures, and improvements they develop on the property. After the lease expires, this immovable property usually reverts back to the freehold owner, together with the land. Depending on the terms, the leasehold owner can be responsible for demolishing the buildings and returning the land to its original state.

The leasehold owner usually has a right to sell and transfer the leasehold to a different person or legal entity during their term.

Throughout the lease, rent is paid periodically – typically monthly or annually, with the rental period specifically defined in the contract. The rent structure can vary. It usually starts as a flat fee which can increase over time to adjust for inflation or can follow a more complicated percentage-based system.

Another problem leaseholders face is obtaining bank loans and other financial services. Since they do not own the land, banks can be reluctant to provide funds, especially if the term of the leasehold is below 50 years.

Why Should You Buy a Leasehold Ownership?

At first glance, it seems that obtaining a leasehold interest is sticking your hand into a hornet’s nest since many of your rights are dependent on provisions in the lease contract.

This is correct, however, there is one significant reason why you should consider a leasehold interest – cost.

Buying the freehold interest in a piece of land is very expensive and requires a huge capital investment before first sod. This often necessitates a hefty mortgage loan, which banks may or may not be willing to extend to you.

In comparison, leasing the land is relatively cheap and most importantly, you pay as you go. Any upfront payment required is usually negligible and the investor can funnel their money directly into the development phase.

Depending on your project, a leasehold estate can be the perfect method of acquiring the land to build on.

Freehold vs Leasehold

Now that we have explained exactly what a freehold estate and leasehold estate is, let’s do a more direct comparison.

	Freehold Estate	Leasehold Estate
Ownership Rights	Owns the land outright and may do anything without restriction with it	Leases, or rents the land to use, develop buildings, and operate a business
Lease Term	Retains rights to the land forever or until it is transferred to another party	Is bound by the lease term length (usually 30-999 years) specified in the lease agreement
Authority	Maintains absolute authority over the land, needing no approval or permission to construct, develop, modify, renovate, or demolish existing structures (save for building inspectors and related authorities)	Must abide by the conditions outlined in the lease agreement and must receive permission from the freehold owner to make any changes
Right to Transfer	Maintains complete rights to transfer, sell, give away, or exchange the land as they see fit	Will need explicit permission before transferring interest in the property or land
Cost	Requires a large capital investment and can be extremely costly	Typically requires no upfront costs and is paid in monthly installments, making it affordable
Financing	Readily financed by banks since the freehold estate can act as collateral and guarantee the investment	Financing based on a number of factors and is dependent on individual circumstances

What is a Concurrent Estate?

The final form of ownership is the concurrent estate.

A concurrent estate is created when multiple individuals or legal entities own the same property at the same time. Co-owners are also referred to as joint tenants to the property.

There are several types of concurrent estates, the most common being:

Joint Tenancy

The joint tenancy ensures complete equality of rights between all owners of the property. Each tenant has a complete interest and possession of the property as a whole. The ownership is held under the same title and extends in time equally for all tenants. This means that ownership and tenure of the property ends for all tenants at the same time with neither party being able to sell or transfer their share.

Joint tenants have a right to survive each other, with the last survivor receiving complete ownership of the property.

Tenancy By the Entirety

This tenancy is formed between married spouses for their jointly acquired property. It’s practically identical in nature to a joint tenancy.

Tenancy in Common

This form of ownership allows different parties to own different shares of the same property under different titles.

Each co-tenant can freely operate with their share of the property and sell, trade, or mortgage it at will, without input of the other tenants.

Wrapping Up

Whether you’re a landowner or an investor looking to kickstart your next commercial project, it’s imperative to know the difference between all these forms of ownership and how your rights change from freehold, to leasehold, to concurrent estate owner.

Do you have a piece of land or property you’d like to offer as a freehold, leasehold, or concurrent estate? Then check out CREOP, the advanced online software designed to make marketing your land and property, negotiating deals, and finalizing sales a cinch. Get in touch with us today and see how we can help you advertise your parcel and get it sold right away.

So, you’ve developed a commercial property and you’re ready to capitalize on all your hard work?

Before investors or tenants hand over their hard earned cash, you’ve still got to do a little marketing if you want to convince them you’ve got the right property for their business.

In order to do that, you’ll need to gather your marketing assets, which include property listings, an immersive website, and even professional looking real estate flyers.

Though you may think in this digital world that real estate flyers are unnecessary, think again. Though you may not want to stand on the corner and hand out pieces of paper to potential investors or tenants, one thing you will want to do is create digital real estate flyers that are easily shared across the web and given out to people in person.

That’s why today we’re going to convince you that real estate flyers are a necessary marketing component for any property owner looking to sell or lease. Plus, we’re going to give you some surefire ways to ensure your commercial real estate flyers attract the right people and convert.

Why You Should Use Commercial Real Estate Flyers in 2020

Advanced web technology has irreversibly changed how we market everything, including commercial real estate. Yet, there is still a spot for more traditional marketing materials, such as flyers, brochures, and offer memorandums. In fact, this type of marketing still exists, just with varied forms so business owners can reach wider audiences than ever before.

In the commercial real estate world, properties exchange hands for millions and sometimes billions of dollars, and yet, interactions are still mostly conducted face to face. We’d even go so far as to say there’s a long time before we learn to entrust life-changing transactions consisting of lots of money to the computer.

Handing somebody a physical flyer promoting your property gives you another touch point to use and influence the buyer’s decision. In fact, a flyer with the property’s core information and benefits can complement a verbal presentation and give your potential investor something to remind them later about the property long after they’ve walked away.

Think about it.

Our fingers remember the distinct feeling of cheap glossy flyers we’re handed from fast food restaurants. Handing somebody a piece of premium paper that feels solid and expensive to the touch is going to leave an impression – just like a firm hand shake does.

This type of marketing, though often pushed aside and replaced with digital means of advertising, gives you an edge over the competition.

Now that you know you’re going to need a commercial real estate flyer for your piece of real estate, let’s take a look at how you can create highly attractive and converting flyers for your properties.

1. Create Integrated Experiences

Any decent marketer will tell you that marketing today is all about offering an integrated experience, no matter what means you take to market your brand. Your marketing efforts must interact seamlessly with what you’re offering and take potential investors on a journey that leads to a transaction. If not, you’ll never generate a sale or have a signed lease agreement in hand.

Because of this, it’s best to think of your real estate marketing materials as extensions of you, and insist that they come in all forms – print, online, and in-person interactions.

This process starts with handing someone a beautifully designed and informative flyer. From there, the conversation moves online, where a detailed website neatly presents all the compelling reasons to pick up the phone and request a meeting.

This then takes us to our next point.

2. Consistently Represent Your Brand

Every flyer, brochure, business card, email, or social media post is a representation of your business.

There are a million and one downloadable templates for any type of commercial real estate property you have. There are also many design apps that allow you to customize and modify premade layouts for just about everything you need.

It’s important to consider how the design of your real estate flyers and other marketing materials correlate with your brand and the message you’re trying to get across. This is true even for property owners that have one piece of real estate they want to sell or lease.

If you’re going to leave a lasting impression on potential investors, you need your marketing materials to be consistent with one another and stay true to the values your brand is known for.

Of course, a commercial real estate flyer is all about the property that’s available. However, even if you can’t land the transaction right now, nailing down the visual presentation will entice potential investors to come back around and take another look. And eventually, you’ll land a sale.

3. Follow the Design Rules for Commercial Real Estate Flyers

In order to push ahead of the competition, you need to follow a handful of design principles when creating your commercial real estate flyers. And the best part is, whether you plan to make these marketing materials available for in-person interactions, or as an immersive experience on your website, the same best practices will come into play.

Layout

If you’re picking a ready-made template, choose a layout that has all the core elements of a commercial real estate flyer:

• Building name and address
• Square footage and price
• Photograph
• Map
• Text area / Featured benefits / Highlights section
• Contact information, company name, and logo

From there on, different types of real estate will be marketed differently.

For example, an office space flyer will inform tenants about nearby transportation options, as well as nearby amenities such as parking spaces, cafes, restaurants, bars, gyms, and anything else people like to do after a hard day’s work.

On the other hand, an industrial complex flyer will emphasise property features such as 3-phase power, climate controlled warehouses, railway infrastructure, and proximity to the highway network.

Lastly, a property owner with a piece of retail space will want to promote to prospective business owners the amount of foot traffic going through the premises, the population of the nearby areas, and the amount of money typical customers spend when they frequent the area.

In the end, just make sure the layout of your commercial real estate flyer speaks to the property you’re advertising.

Images

Nothing turns off potential buyers or tenants like a bad quality photo that takes up half of your real estate flyer.

One of the best marketing investments you can make is having your property professionally photographed.

Premium quality photographs can mean the difference between someone finalizing a purchase and going elsewhere with their business. You want to make sure to highlight your property’s best angles and entice people to come check it out in person.

Typography and Colors

Ideally, you want to match the fonts and colors of your flyers, brochures, and website.

In doing so, vsitors will have an easier time recognizing your consistent branding and style and recalling previous information they read or emotions they felt about your brand.

If you can’t match the style exactly, focus on making the flyer easy to scan and effortless to read. Use colors to outline or contrast other design elements, keeping the reader’s eye pinned to the flyer.

Content

All the fancy presentation of a real estate flyer is pointless if you fail to create solid content for it. Sure, a commercial real estate flyer is mostly a visual piece of marketing material. However, this means the written text you do include on the flyer is even that more important.

The key to winning a potential buyer or tenant over is being able to tell them in 5 lines or less why they should buy or lease from you.

Remember, it’s all about selling or leasing out the property you have available. It’s not there to advertise your business, so don’t emphasize your brand too much. Instead, use demographic data, market statistics, and projections to present a compelling business case about the property and make people feel that if they don’t jump in and buy or lease now, they’ll regret this missed opportunity later.

Of course, don’t forget to put your name, contact information, logo, and website on the flyer, so those interested can look you up later.

If you want to take it a step further, you can always add a QR code that leads people from your flyer directly to your website, where all the compelling benefits you listed will be matched with even more detailed information about the property and your business.

Again, if you match the design of your flyer and website, you can offer a seamless transition between both mediums, thus giving the reader reassurance they’re looking at the same property and company.

4. Strive to Hire a Qualified Marketer

Of course, any advice provided in this article cannot compensate for the years of experience and practical knowledge of a professional marketer.

The person designing your marketing material should not only have vast understanding of the property and your industry, but also the ability to convey the values of your project to the target buyers or tenants you want to attract.

Not able to hire a professional marketer quite yet? Don’t worry. At CREOP, we understand the importance of marketing properties to interested buyers and tenants. At the same time, we know that property owners don’t necessarily have the time, money, or skills needed to create “professional” real estate flyers.

That’s why we strive to provide a user-friendly online platform that helps any property owner, regardless of marketing or design skills, to create stand out real estate flyers, offer memorandums, and other advertisement materials.

5. Study Your Competition

If the right person is already responsible for marketing your properties, they’ll understand the need to research the competition and study their designs in detail.

After all, your potential investors will likely meet some of these other developers (who are your competition) and will be handed their real estate flyers in addition to yours.

Of course, the goal is to copy (or worse, plagiarize) your competition’s marketing materials. Rather, the goal is to study what they’re doing that’s working, tweak what isn’t working, and make your materials even better than theirs.

Doing this will leave lasting impressions on all interested buyers or tenants, no matter how many other property owners they consult.

Wrapping Up

Your commercial real estate flyer does not live in isolation; and it never should.

Just like every other marketing tool, a real estate flyer will represent your business, attract the right target audience, and drive sales. If you take the time to create informative, original, and highly attractive real estate flyers representing the properties you have available, you’re sure to get more business in no time.

This is especially true if you use a cloud-based software like CREOP. Providing property owners the tools to design and manage a property marketing campaign in no time, CREOP is as effective as hiring a professional marketing – without the hefty price.

So, get in touch with us today and see how we can help you create real estate flyers, offer memorandums, proposals, and full-fledged marketing packages to advertise your available property for the highest sales prices or rent rates possible.

When it comes to negotiating a commercial retail lease, there are plenty of lease provisions you should be aware of before signing on the dotted line. After all, it’s your responsibility as a tenant to understand what your landlord expects from you. And sometimes, that’s more money than you might expect to pay each month.

Though this doesn’t always happen, there are times when a percentage rent clause becomes part of a commercial lease agreement. As a way to ensure they receive great value from the business you run, landlords often charge a percentage rent in addition to the base rent you agreed to pay to lease the property.

If you’ve never heard of percentage rent in commercial lease, keep reading. Today we’re going to explain to you what percentage rent is, how breakpoints work, and ways to negotiate with your landlord so you get the best deal possible.

Let’s get started!

What is Percentage Rent?

Percentage rent is extra rent you pay your landlord that is ties to the sales you generate from your business. By charging a percentage rent, landlords are able to share in your growing success.

Though this seems unfair to tenants trying to run a business, it’s important to note that owning a commercial building comes with plenty of expenses that go beyond the square footage that’s being leased to you. For example, things like maintenance, marketing, and continuous improvement of not only the building but common areas surrounding it are things your landlord typically handles. For a landlord leasing a shopping mall, this ends up being quite costly.

By charging tenants a percentage rent, landlords are able to tap into the success business owners are reaping as a result of their hard work. And honestly, a tenant is always going to do more business in a busy commercial building as opposed to a deserted unit in a remote part of town.

So, in an effort to generate more revenue for themselves, and provide you the best commercial space possible, it’s possible your landlord might include a percentage rent clause in your lease agreement.

Commercial Lease Rent: A Breakdown

Rent as part of a commercial lease can be broken down into two parts: base rent and percentage rent.

Base Rent

The base rent  of a commercial lease is a flat amount the tenant owes each month, regardless of whether their business is generating a profit or operating on a loss.

The base rent is usually calculated based on the floor area of the property. However, the base rent can also be a flat rate based on your business’ gross sales.

Base rent is helpful for business’ like fast food chains or coffee shops, both of which have fairly consistent and predictable revenue. In fact, their base rent would be loosely associated with their projected annual revenue.

On the other hand, businesses who have peak seasons (e.g. Thanksgiving or Christmas) may not be able to afford a consistently high base rent every month of the year. As a solution, a low base rent is charged, allowing the business to sustain a healthy cash flow during its slow months. However, you can bet business’ with a low base rent and seasonal sales will also have a percentage rent clause in their commercial lease agreement.

Percentage Rent

If a lease has a percentage rent clause, the percentage part of the rent is charged only after a business exceeds a specific amount of revenue that exceeds its gross sales. This is called the breakpoint.

The average percentage rent in the retail industry is 7%. That said, this value is not set

in stone and can be negotiated. In fact, different industries also find applications for percentage rent, where the value can differ significantly.

Breakpoints

When your business’ gross sales surpass a specified amount agreed to by both you and your landlord, your rent hits what’s called a breakpoint. From there, any sales you generate are subject to the percentage rent amount in your lease agreement.

Breakpoints ensure that businesses are not overburdened with high rent rates at low periods

of the year. At the same time, they allow landlords to profit when a business is doing well and turning a high profit.

A Practical Example of Percentage Rent

If this all seems like a lot to you, don’t worry, you’re not the only one. Let’s take a look at a real-life example to make things clearer:

You operate a consumer electronics store and you’re offered a retail space in a new strip mall. The contract includes a base rent of $5,000 per month and a percentage component of 7% of the gross sales, which is applied for every dollar above $150,000 – measured in gross income.

• In July, when shopping is typically down, the store generates $80,000 in revenue. This means only the base revenue of $5,000 is charged.
• In November, there’s Black Friday, and as a whole, shopping activity in your store peaks. The electronics store generates $250,000 in gross sales. The breakpoint is $150,000, so on top of the base rent (which is 5,000), the store also owes 7% of the $100,000 excess, equal to $7,000. Therefore, the total rent you owe for November is $12,000.

As you can see, when you have a percentage rent, the monthly rent you owe largely depends on your sales and can vary greatly from month to month. That’s why it’s important to understand your commercial lease in order to negotiate the best deal for your business.

What Is Included and Excluded When Calculating Percentage Rent?

Percentage rent is calculated from the gross sales of your business each rental period. This includes both cash and credit card sales at the time of merchandise delivery or performance of services. With credit sales, the risk of collecting (or specifically, not collecting) the revenue falls onto the tenant. In other words, if you process a transaction, but fail to invoice and collect for that transaction until next month, you might still owe your landlord a percentage rent.

Any discounts, refunds, credits, allowances, or price adjustments extended to individual customers are not accounted for when calculating percentage rent. If a sales tax is attached to the price of the product or service, it is also usually excluded.

How to Calculate the Natural Breakpoint of Your Percentage Rent?

A natural breakpoint in a percentage rent commercial lease is the amount of gross revenue at which the base rent becomes equal to the percentage rent.

For our consumer electronics store example, we have a base rent of $5,000 and a percentage of 7%. The natural breakpoint is $71,428.57, because 7% of $71,428.57 is $5,000.

You can calculate the natural breakpoint by dividing your base rent by your percentage rent. If we express the percentage as a fraction, the calculation is really easy.

$5,000 /(7/100) = $5,000 * 100 / 7 = $71,428.57

In a lot of commercial leases, the percentage rent breakpoint is simply the natural breakpoint. This ensures the landlord always receives a fixed percent of gross revenue or more in rent.

When the tenant suffers a lack of sales for the month, the base rent is still charged and it represents a larger percentage of the tenants’ gross income. In other words, the business faces a greater relative charge when they have the least amount of business.

For our example, if the electronics store only yields $45,000 in revenue, the base rent of $5,000 represents 11.11% of their gross income.

If the agreed breakpoint in the lease is higher than the natural breakpoint, the business benefits from a reduced rent compared to their gross income.

For our example, if the electronics store yields $75,000 in revenue, but the breakpoint is set at $80,000, then the base rent of $5,000 is only 6.67%.

Rent Periods and Sales Auditing

Since percentage rent is directly calculated from the gross income of the business, the landlord will expect the tenant to provide sales reports either monthly, quarterly, or annually.

If reported monthly or quarterly, usually a final annual report is required to nullify any previous errors and adjust the percentage rent accordingly.

The tenant’s sales records must be made available for audits by the landlord. Usually the landlord will request an annual audit by a certified external accounting company.

Tips for Negotiating Percentage Rent

Oftentimes your prospective landlord will provide a ready-made lease contract configured with their preferred base rent, percentage rent, and breakpoint. However, that does not mean these figures are set in stone.

You can and should negotiate.

Tenants should strive for the lowest possible base rent and percentage rent, while also seeking the highest possible breakpoint. There’s no magical leverage to help you achieve that, but you can balance the terms to better suit your business.

New or Slow Businesses

Businesses that have just opened their doors, or project a slow revenue growth can benefit from a higher base rent and a higher breakpoint.

For example, consider a base rate of $5,500, percentage of 7%, and breakpoint at $90,000 (naturally at $78,571.42). Right up to that breakpoint, the business can benefit from a rent equal to just over 6.11% of their gross sales.

Highly Seasonal Businesses

Alternatively, highly seasonal businesses with volatile monthly revenue can gain an advantage from a low base rent and a higher percentage rate.

For example, a base rate of $4,500 could secure businesses some extra cash flow when sales are slow. If we increase the percentage rent to 8.5% and set the breakpoint at $60,000 (naturally at $52,941.18), the business would still save a significant amount of money, even during the strong months.

If November and December yield gross sales of $100,000, the tenant would need to pay $3,200 in additional percentage rent, or a total of $7,700 per month. That’s an increase of 71%, but there is enough revenue to absorb the extra cost and return profit for the business.

Wrapping Up

In the end, percentage rent in commercial leases is not a difficult concept to grasp. Though it is more complex than a flat rent arrangement, it shouldn’t be too difficult for any business owner to figure out. That said, the devil is in the details and understanding your commercial lease agreement before you agree and sign is crucial to the overall success of your business. After all, your landlord isn’t the only one looking to generate a profit.

Are you ready to advertise your commercial space as available to tenants and want to make sure they understand all the details, including the percentage rent clause that you intend to add to the agreement? Then take advantage of the beginner friendly online platform CREOP. Designed to make marketing commercial properties a breeze, complete with everything a potential tenant would need to know before agreeing to lease from you, this advanced software makes your job easier, so you can concentrate on more important things, like getting lease agreements signed.

Get in touch today and see how we can help you lease your commercial space with ease.

When talking about commercial real estate, everything is calculated based on floor space. For example, development costs, how much area can you lease, and even the potential annual revenue are all dependent on the square footage of the property.

But how do you accurately measure your floor space?

Unfortunately, measuring floor space is not as straightforward as you might think. In fact, there are many different ways to measure a building and its floor space. From the total footprint of a building to the area available for commercial tenants, it’s important you know exactly what someone means when they say a building is X number of square feet.

Whether you’re a developer, investor, tenant, or buyer, it’s crucial you understand commercial lease floor areas and how they relate to your financial goals.

Seems complicated?

Let us clear things up for you.

Types of Floor Area

In architecture, construction, and real estate, floor area (also known as floor space) is the area taken up by a building or part of it, and is measured in square feet or square meters. Of course, as we mentioned above, things are more complicated than that. One must consider whether external or internal walls, corridors, stairwells, lift shafts, and more are calculated into that measurement.

Here’s a look at the different types of floor area.

Gross Floor Area (GFA)

Gross floor area is the total area of the building measured all the way out to the external face of the external walls.

In other words, it’s the total footprint of the building, multiplied by the number of floors.

Features excluded from the gross floor area vary, though they often include the roof, covered walkways, terraces, porches, chimneys, air shafts, roof overhangs, trenches for piping, and other utility connections.

Here’s why gross floor area is important:

• It’s the public number that brokers use to advertise available space or calculate previous sales numbers
• The city uses this number to determine planning numbers like the building’s density or floor space index
• It’s used to calculate applicable levies
• Construction companies need to know how many walls and floors they need to build and will look to the gross floor area first when creating their plans

Though this area does not always drive development costs or the amount of revenue you stand to gain from leasing the space, it’s an important one to know when starting a new commercial development project or investment endeavor.

Gross Internal Area (GIA)

Gross internal area is the total area of the building measured only to the internal face of the external walls.

Since the external wall area is excluded, this measurement provides the total useful area contained in the building.

Some of this space will be dedicated to common building features and facilities, such as stairs, escalators, lifts, machinery rooms, pumping rooms, plumbing, ducts, vents, public toilet areas, and other service or maintenance rooms.

Net Internal Area (NIA)

Net internal area is the usable area available to occupants of the building. It’s calculated by taking the gross internal area and subtracting floor areas being used by:

• Lobbies
• Machinery rooms on the roof
• Stairs/escalators
• Lifts
• Columns
• Toilet areas
• Ducts
• Risers

Tenants leasing a commercial property like a store or office space are only interested in the usable space of the premises, since that’s where they can fit displays, storage units, computer desks, and equipment. Everything else is not important. In other words, when someone is looking to buy or lease a commercial property, they want to know what the net internal area is.

Commercial Leases and Building Measurements

Commercial leases are almost entirely based on the leased area. However, that area can be measured differently and can even include additional areas not contained within the boundaries of the leased property. This makes the lease more expensive, though not necessarily more usable.

Because of this, investors look for properties with the maximum net internal area for the smallest given gross floor area.

In other words, they look for properties with the most usable space within the smallest building possible. Doing this will allow them to charge premium rent rates that tenants are willing to pay because there is plenty of usable space for tenants to use to run their businesses.

Ideally, tenants only want to pay for the net internal area. After all, the net internal area is the space that they get to use and will generate them revenue. However, this rarely happens.

If investors charge tenants just for the net internal area, there are large amounts of building space, though unused by the tenants, sitting idle and not generating the investor any money. Remember, the investor pays for that unusable space. By not charging tenants for that same space, they lose money, making the project unsustainable.

In the end, commercial tenants always pay for more area than they physically get to use.

What is Gross Leasable Area (GLA)?

After learning about the different types of floor area, you might be asking yourself what is gross leasable area then? The gross leasable area is the total area designed for exclusive use by a commercial tenant plus common areas, elevators, common bathrooms, stairwells, and other parts of the building the tenant doesn’t actually occupy.

If the building is leased to a single tenant, then the gross leasable area is equal to the gross floor area. Simple enough.

If there are multiple tenants leasing different parts of the building, the gross leasable area is calculated based on the shared walls between them, plus those extras mentioned above.

To get the gross leasable area for one tenant, you would measure from the center of the common wall (shared with another tenant) to the outside face of the external wall. The external wall can be a shopfront, a window display, or just a flat wall. Regardless, it is included in the gross leasable area. Similarly, though the area occupied by the shared wall is not usable, it is also included in the gross leasable area of both tenants.

Any structural members – columns, arches, or truss structures –  that are enclosed within the boundaries are also included in the gross leasable area.

Retail leases will commonly use gross leasable area as a basis for rent calculations. The problem is, many tenants think they’re leasing X amount of square feet for their business only to find out that the actual square footage is quite smaller.

What is Net Leasable Area (NLA)?

The net leasable area is the space within the leased unit that’s actually available to the tenant for use.

This area excludes the external walls, as well as common areas and utility rooms, which are not contained within the unit. However, it does include basements, storage areas, mezzanines, upper floors, and other floor areas which can be used by the tenant.

Unlike most retail leases, office leases typically base the rent rate on the net leasable area rather than the gross leasable area. However, there’s a catch – office tenants still need to pay fees for the common areas.

These areas do not fall within the boundaries of any leased units and are not used directly by business owners on a daily basis. However, they are used by the businesses, their employees, and their customers at some point.

Furthermore, these common areas require a fair share of maintenance and building services such as lighting, electrical/elevator maintenance, plumbing, cleaning, gardening, and more. These cost a considerable amount of money each year and are not going to be paid for by investors; that burden is placed on tenants leasing the space.

Core Factor/Pro-Rated Share of Space

The core factor is also referred to as a load factor or a pro-rated share of space.

If the entire building is leased by a single company, the calculation of the core factor is really simple – it’s 100%.

When multiple tenants share the same building, the shared areas are added in proportion to the net area leased by each tenant.

Let’s make this easier to understand by considering the following office lease scenario: 

You rent 10,000 sq.ft (net) in an office building that has 5,000 sq.ft of net leasable area and another 5,000 sq.ft of common areas and service rooms.

You have 20% of the building for your exclusive use. Your core factor is 20%, which means you’ll pay for 1/5th of the common areas.

Therefore, your rent will be calculated based on 10,000 sq.ft of net leasable area and 20% of 5,000 sq.ft of common areas, for a total of 11,000 sq.ft.

This is important when a tenant is looking to lease a commercial space. If a tenant does not understand the differences between the areas, or doesn’t know about the core factor calculation, they could end up overspending on rent without even realizing it.

BOMA Standard for Measurement

When drafting or negotiating a commercial lease agreement, it’s important to include and look for the standard which defines how the floor area will be measured. Remember, though the gross leasable and net leasable areas are widely used calculations in commercial leases, the GFA, GIA, and NIA have the potential to vary.

The Building Owners and Managers Association – BOMA – is the widely accepted authority for building measurements. BOMA has specific standards for different commercial buildings including office spaces, retail stores, industrial facilities.

The information above is derived from the BOMA standards, although the literature includes extensive details on how to calculate building area for a wide variety of conditions. Please visit the BOMA website for more information on building measurement standards.

Wrapping Up

In the end, it’s important to understand common terms related to commercial leases and building sizes, whether you’re an investor or tenant looking to lease a space and run a business. Not knowing the differences, or how rent is being calculated, can cause a lot of financial strain, quickly put you in a hole, and ruin your investment or business dreams.

Are you ready to advertise your commercial property as available to tenants and want to ensure potential business owners know all the different measurements? Then be sure to use our highly advanced and easy to use online platform, CREOP, designed to make marketing commercial retail space visually appealing and informative. Get in touch today and see how we can help you lease your property faster, with highly qualified tenants you can rely on.

One of the first and most critical steps to realizing a new development project is securing the land to build on.

In this case, there are only two options – buy it or lease it.

Though many developers frown upon the idea of renting a parcel of land to build on, it is an attractive alternative that comes with lots of possibilities. That’s why today we’re going to share with you what a ground lease is and what the pros and cons are to having one.

So, let’s get started!

What Is a Ground Lease?

A ground lease, also known as a land lease, is a lease agreement that allows you to rent a piece of undeveloped or developed land for a long period of time. This land your leasing can be used for development and commercial purposes.

In other words, a ground lease is an agreement that lets you lease the land you want to build your next commercial property on.

With a ground lease, the following happens:

• A landowner leases the land (rather than selling it) to a developer for anywhere between 35 and 99 years
• The developer (or tenant) pays rent to the landowner and retains the right to develop buildings and operate business ventures on the premises
• All responsibilities and associated costs related to the land, such as taxes, insurance, development permits, and maintenance fall onto the developer

When a developer signs a ground lease agreement, they do not own the land; they are only renting it. However, any structure or facility that the developer builds on the land is owned by the developer, not the landowner.

When the ground lease expires and is not renegotiated, the land, as well as any improvements created by the developer, reverts back to the landowner.

Ground leasing enables a developer to obtain a piece of land that’s too expensive to buy or is otherwise inaccessible and make something profitable out of it. For example, government properties are often too expensive for an investor to buy. That said, renting a piece of government property is much more doable.

In addition, a ground lease enables the landowner to benefit from the property they’re leasing to developers without having to sell it or make major investments to develop the site.

In the end, it’s a win-win situation for both the landowner and developer.

A Practical Example A Ground Lease

Large franchise chains like McDonald’s frequently operate using a ground lease. The land is usually purchased by the corporation and leased to the local franchise to develop the building, set up the operation, and run the business.

Every ground lease agreement contains specific terms and provisions for the usage of the land. In this case, the land is only provided for the development of a McDonald’s restaurant. The developer is bound by the lease agreement and cannot switch 10 years down the road and open a KFC joint.

Types of Ground Leases

A development project is rarely paid for in cash. In fact, there are different kinds of loans or mortgages available to finance the construction and/or improvement of the land. In order to grant the exorbitant amounts of money required to develop a commercial project, banks will require some collateral in the event the business defaults.

Should the business fail, there is a hierarchy of who gets to claim the assets to recoup their investment.

Top priority is usually either the bank providing the loan or the landowner. From here stem two basic types of ground leases – subordinated or unsubordinated.

Subordinated Ground Lease

With a subordinated ground lease, the landowner agrees to forfeit the top priority claim to the land should the developer default on the loan.

Banks are much more willing to finance a business venture if they’re guaranteed the right to claim first. As such, the landowner effectively pledges their land as collateral in the event the business goes bankrupt.

This means that a subordinated ground lease creates a significant risk for the landowner, which is usually compensated for by charging the developer a higher rent.

Unsubordinated Ground Lease

An unsubordinated ground lease gives the landowner the ability to claim their land back should a developer default – guaranteed.

This is a preferred option by many landowners who do not wish to incur the risk of losing their land.

However, it makes it difficult for the developer to secure the necessary funds for development, as banks are reluctant to approve a loan if not given top priority to claim should the loan go into default.

To offset this challenge and make it worthwhile for developers, unsubordinated ground leases typically come at a reduced rate and yield less profit for the landowner.

Ground Leasing vs Other Commercial Leases

Though still related to commercial real estate, ground leasing differs dramatically from other forms of commercial leasing.

Gross Leasing

Similar to renting an apartment, in a gross lease the investor (or tenant) pays the landowner an agreed rent amount to use the facilities for conducting their business. There is usually an already erected building such as an office space, grocery store, or workshop that the investor simply leases.

The investor assumes no other responsibility with a gross lease other than the scheduled rent payment. Taxes, permits, insurance, and other costs fall onto the landowner. However, the investor has very little freedom to modify or upgrade the facilities without prior consent.

Net Leasing

Net leases allow investors to assume some of the landowner’s responsibilities to varying degrees. Because of this, the investor has more freedom to improve and modify the facilities.

The exact structure of a net lease is up to the landowner and investor to negotiate and agree on.

A special kind of net lease, called a triple net lease, transfers most of the landowner’s costs and responsibilities to the investor, including construction cost, property taxes, insurance, and more. Since these are costs the investor is now responsible for, this type of lease usually comes with a lower base rent.

Absolute Net Lease

Absolute Net leases are similar to triple net leases but go a step farther by placing 100% of the responsibilities onto the Tenant’s shoulders.  This includes structural items such as the roof, exterior walls, and parking lot.

Advantages of Ground Leasing

Ground leasing is not the perfect solution for every real estate development project. However, it’s becoming increasingly popular in the United States and offers a number of advantages for both developers and landowners.

Pros of Ground Leasing for Investors

The biggest advantage for property investors using a ground lease is that they don’t have to buy the land to operate their business and make a profit. Acquiring the land for a development project can be the biggest hurdle holding an investor back from successfully running a business.

In fact, acquiring land involves massive upfront costs, and many times, the perfect site is just not accessible. For example, oftentimes the landowner doesn’t want to sell or the land may be public property that cannot be obtained or is uneconomical to do so.

Ground leasing helps you avoid upfront costs and frees up resources to be used on improvements instead. And to top it off, rent payments are tax deductible, which is always good news.

Pros of Ground Leasing for Landowners

Arguably, ground leasing is more advantageous to the landowner than the investor leasing the land.

The owner of the land retains ownership, and sometimes, a significant portion of control over how property is utilized. Depending on the case, the ground lease may include extensive documentation for the type of facilities built, the purpose of the business, and details on how business will be conducted.

Once the ground lease agreement is signed, the landowner can enforce the provisions found in the contract. Any changes to the development or use of the land must receive the land owner’s permission.

In addition, ground leasing is a great way to establish a passive income stream for landowners. This is because the owner of the land doesn’t need to invest in developing the real estate themselves. They just collect rent payments.

If a landowner were to sell their land, they would receive capital gains and owe a significant amount of taxes to the government. After all, rent payments are considered regular income and are subject to taxes. However, it can be financially advantageous to pay income taxes rather than capital gains taxes.

Finally, the owner of the land inherits all buildings, structures, and improvements at the end of the ground lease term. If the current ground lease is not extended or renewed, the investor must simply forfeit their immovable assets unless there is a clause in the ground lease that mandates the developer to demolish and remove all structures and return the land to its original stage when the lease is up.

Disadvantages of Ground Leasing

Like most things, there are disadvantages to ground leasing that both investors and landowners need to consider.

Cons of Ground Leasing for Investors

While investors pay for the right to develop and operate businesses on land with a ground lease, the project and design must first be negotiated with the landowner.

Of course, investors always seek the most lenient use provision so they can operate their business as they see fit.

However, sometimes that’s not possible and the ground lease may contain a specific schedule and timeline for the execution and development of the project. Investors who don’t uphold the schedule can face financial repercussions. These limitations are often hard to overcome and investors may face huge burdens to complete the project.

No matter how good your initial design is, in practice it’s often required to make changes and alterations. Depending on the use provisions, every significant change to the project must receive approval by the landowner, which can create points of friction and lead to lost time during the development process.

With a ground lease, the investor pays rent to the landowner. However, they also incur all other financial costs related to the land such as taxes, construction, improvements, permitting, insurance, and more. All of this can become very expensive over time.

Not to mention, in some cases long-term rent can prove to be more expensive than buying the land outright. Sure, sometimes that’s just not possible or economical to do. However, total cost must be taken into account before agreeing to a ground lease.

Cons of Ground Leasing for Land Owners

While not immediately obvious, there are a fair number of disadvantages to ground leasing for landowners.

To start, every development project faces the risk of not succeeding. Businesses fail for a million and one reasons. If the investor defaults, they usually cannot pay the rent they owe, meaning the landowner is out a lot of money.

If the business is bankrupt before even finishing construction, there is usually a long list of unpaid contractors which will begin litigation to recoup their money. This can affect the landowner and compromise their interest in the property.

The worst part is when a leasehold mortgage or another finance structure is involved. The relationships between the finance provider, the land tenant, and landowner become very complex, very fast.  If no protections are in place protecting the landowner, they may end up accountable for their investor’s business failure and lose the land.

In addition, though partially mitigated by the use of proper insurance, there is always some element of risk associated with incurring liability for injured third parties at the site or environmental damage caused by the investor. And while the landowner is not directly responsible for such injuries or damage, they may be held partially accountable.

Finally, landowners must carefully consider the rent structure of the ground lease. Since it encompasses decades, the market can and will change dramatically, rendering a fixed rent structure irrelevant within just a few years.

The rent structure must change just as the market does and account for inflation and the state of the market, so that the landowners always receive a fair rent for their property. There are even some ground leases that tie the rent rate to the performance of the business. So, if the business excels and becomes very profitable, the landowner also gets a proportionate share of that profit.

Wrapping Up

In the end, a ground lease is a complex, though highly advantageous solution for developers looking to start a commercial project without having to invest a ton of money upfront. Plus, the benefits awarded the landowner make leasing land for a long period of time a fairly easy process that allows both parties to win.

Are you a land owner looking to promote your piece of land to developers, or a developer looking to lease the property you just erected thanks to a ground lease? Then be sure to check out our highly advanced and easy to use online platform designed to help you design stunning marketing packages that entice people looking for a business opportunity without a lot of hassle. Get in touch today and see how we can help you with your next commercial property endeavor.

It is estimated that there are 109 million people, or 36% of the population, currently renting in America. And this only accounts for residential properties. When it comes to commercial buildings, there are well over 5.5 million spanning the country. And you can bet a lot of them are being leased.

Needless to say, there is a lot of opportunity available for investors of all kinds to build a successful real estate business.

Investors in the market looking to expand their commercial building portfolios are always on the hunt for the best deals and the most profitability. However, determining whether a potential investment property is a good one or not takes some know-how.

If you’re an investor looking to build a bigger portfolio with properties that have a high ROI and tenants willing to pay premium prices, you’re going to need a quick way to vet, compare, and analyze potential listings. That’s why today we’re going to teach you about one of the best resources investors rely on to gauge the value and profitability of potential investment properties: gross rent multiplier – A.K.A. gross income multiplier (GIM).

What is Gross Rent Multiplier?

Gross rent multiplier (GRM) is a calculation used by real estate investors to determine the value and estimated profitability of a property before taking the plunge and buying.

Experienced investors always have a plate full of potential properties they’re considering when trying to build their portfolio. But prioritizing which ones to invest more time and resources into for analysis quickly becomes difficult, especially if the properties are not exactly comparable, as is often seen with commercial properties. That’s where calculating the gross rent multiplier comes in handy.

Why Gross Rent Multiplier is Important

It’s not enough to know that the gross rent multiplier is useful in determining the potential profitability of an investment property.

A successful investor will understand why calculating this value, as opposed to others, is so important, especially in the beginning stages of purchasing:

• Quickly and efficiently decide which properties are worth your time analyzing further
• Compare properties that are similar and determine which ones stand to generate the most annual revenue
• Buy the right property at the right time, regardless of the status of the housing market using gross rental income values in your calculation
• Avoid falling victim to the versatile housing market by using fair market value to determine potential annual rental income – use GRM instead
• Easily convince lenders of your ability to repay a loan upon approval
• Determine how the property’s condition and possible rent rate compare to the competition
• As a commercial investor, easily differentiate between very different properties and let the numbers guide your efforts
• GRM / GIM is a more pure metric compared to cap rate as there is less room for error by the Broker or Seller.

Of course, there is no magic formula that will guarantee what a potential investment property will yield the first year or any year thereafter. The point of calculating the gross rent multiplier is to quickly weed out properties you know will not be profitable and focus your attention on those you are seriously considering investing in.

How to Calculate Gross Rent Multiplier

Gross rent multiplier is a mathematical formula used to calculate an investment property’s potential rent income based on the ratio of the property’s fair value market (or purchase price) to the expected gross annual rent income.

In other words, to calculate the gross rent multiplier of any property, you have to have a value assigned to the property and know the amount of rent you can expect to collect each year from it.

You can get the GRM for an investment property using the following equation:

Market Value (or purchase price)/ Annual Gross Rental Income = Gross Rent Multiplier

Let’s say you want to purchase an investment property listed at $300,000 and you know the annual gross rental income is $30,000. Calculating the GRM would look like this:

$300,000/$30,000 = 10.0 GRM

Of course, this means nothing to you right now; it’s just a number. However, if you were to take a comparable property, also listed for $300,000, but with an expected annual gross rental income of only $25,000, you would now have a GRM of $300,000/$25,000 = 12.0 GRM.

Comparing the two example properties, you now realize that you stand to make much more money with the first property as opposed to the second based on the gross rent multiplier. In fact, the lower the gross rent multiplier, the higher the likelihood that the property will yield more profit.

Of course, the gross rent multiplier does not account for things like:

• Cost of vacancies
• Annual taxes
• HOA fees
• Insurance
• Maintenance and repairs
• Utilities you cover

Remember, GRM relies solely on the gross annual income. To really determine whether an investment property is worth your time and money, you’ll have to do more research.

Want to take a potential property’s GRM and estimate the market value?  Simply use this formula:

GRM x Annual Gross Rental Income = Approximately Value Market              

What a GRM is Not

Gross rent multiplier is an excellent tool for quickly comparing properties and gauging whether you should continue your research or not.

That said, GRM is not the end all calculation you should use to make an investment decision. Many other factors play into the profitability of a property that go far beyond the expected annual gross income.

In addition, the gross rent multiplier is not a calculation that should be used to determine the time it will take for you to pay off an investment property. Unfortunately, many investors are misinformed and are led to believe that if a property has a GRM of 10.0 that means it will take approximately 10 years to pay off the property in full and begin generating nothing but profit.

The problem with this thinking is that the gross rent multiplier does not take into account any other expenses related to a property that an investor will be in charge of. Not to mention, the gross rent income is an estimate, not a surefire number that will remain static over time. All of these things have the potential to play into how long it takes you to pay off your investment property and begin generating pure profit.

Want to get an idea how much the related costs of owning an investment property might be each year? Choose one of the following to get an idea:

• 1% of the purchase price of the property
• $1 per square foot of the property

Knowing this information and the GRM will give you a better idea how much profit you stand to gain from an investment property each year.

Wrapping Up

In the end, all real estate investments come with a certain level of risk, no matter which calculations you use to make a final purchasing decision. That said, the gross rent multiplier of a property is an excellent tool to have on hand for quickly vetting and comparing properties so you can focus your efforts on properties that are likely to generate you the kind of annual income you want.

Have you recently purchased a prime piece of commercial real estate and want to advertise it as available? Take advantage of our comprehensive commercial real estate online publisher (CREOP) tool.

Simply input the details of your property and let the CREOP software crunch all the numbers and generate a professional looking marketing package that you can quickly email or print and deliver to clients and brokers. Get in touch with us today and let us help you get started with advertising your prime piece of real estate.

Floor area ratio (FAR) is the ratio of a building’s total floor area (zoning floor area) to the size of the piece of land upon which it is built.
Calculate the FLOOR AREA RATIO: Divide the GROSS FLOOR AREA by the BUILDABLE LAND AREA. The result is the Floor Area Ratio (FAR).
STEP BY STEP:
STEP 1.
Determine the total BUILDABLE LAND AREA, in terms of square feet, for the site. The buildable land area is that portion of a development site where construction can legally and reasonably occur – so public streets and rights-of way, wetlands and watercourses, and other constraints would not be included. Buildable Land Area (B) = (Parcel Width x Parcel Depth) – Square feet of undevelopable land (if applicable).
STEP 2.
Determine the FLOOR AREA of each story of the building. Calculate the area of each story (floor) of the building, typically measured between the exterior walls. Those portions of each story above the ground surface prior to any manipulation or grading are usually included in the calculation.
STEP 3.
Determine the GROSS FLOOR AREA of the Building. Gross floor area is the sum of the floor area of each story. Gross Floor Area (G) = Floor Area of 1st Story + Floor Area of 2nd Story… for all floors above the ground.

Understanding BOMA Standards – Measuring Commercial Real Estate

When renting an office space or other commercial real estate, it’s not always immediately obvious what you’re paying rent for. 

There are several types of commercial leases, each with their nuances about the rights and responsibilities of the tenants and landlords. Just as a quick overview, here are the most common types:

1. Net lease – This lease allocates building costs and responsibilities between the landlord and tenant. The most common type is the triple net lease, where the tenant pays all taxes, insurance and maintenance for the building, in addition to the monthly rent.
2. Gross lease – The landlord pays for all repairs, building taxes and insurance. The tenant is only responsible for paying rent, however, it is usually elevated to account for all these expenses.
3. Modified gross lease – These are commonly found in real life situations. Landlords keep some responsibilities, like paying the taxes, insurance, and major repairs (for example roof renovations). However, the tenant is responsible for maintenance and minor repairs, like painting and decorating.

Regardless of the lease type, rent is always calculated from the square footage of the leased floor area. As a tenant, you will always try to negotiate the best (lowest) rent price. However, it’s just as important to have a complete understanding of how this area is being measured.

• Do you measure from the outside wall or the inside wall? 
• Are support columns excluded from the area?
• Are electrical, mechanical and janitorial rooms excluded or included? Why? 
• What about the toilets and staircases? 

 

Depending on where you put the tape measure, you’ll get slightly different square footage. Multiply that by all the floors in the building and you get a wild discrepancy, that’s directly linked to your rent. 

There is no universal, legally defined method to measure a commercial building. However, there are the BOMA Standards. 

BOMA Standards

BOMA stands for Building Owners and Managers Association. Over 100 years ago, in 1915, BOMA created and published the first standard for measuring floor area in commercial real estate. In the last century, the standards have evolved parallel to the industry and BOMA has established itself as the global authority in building measurement. 

BOMA standards are not a regulatory requirement. They are entirely voluntary, however, they are recognized and trusted by the American National Standards Institute (ANSI). Therefore, the majority of commercial landlords, developers and lease contracts use them regardless. 

Today there exist several different BOMA standards for measuring various types of commercial property: 

1. Industrial
2. Gross Area
3. Multi-Unit Residential
4. Retail
5. Mixed-Use
6. Office

 

You can purchase the latest edition from the BOMA website. Each is designed in accordance with the specific needs of that industry as well as the specific architecture of the measured buildings. Below, we’ll take a look at the standards that are used for measuring an office building.

 

Measuring an industrial building using the BOMA Industrial Standard

In 2019, BOMA updated its Industrial Standard. 

The previous version, published in 2012, gave different recommendations for single-story, multiple-story, single-occupancy and multiple-occupancy buildings. The old standard furthermore defined two different methods for measuring buildings – the External Wall Method – Method A and the Drip Line Method – Method B, each of which contained multiple exclusions. This created considerable confusion for landlords and tenants who had to navigate complicated scenarios to pick out the most appropriate method for measuring a building. 

The new 2019 BOMA Industrial Standard combines all the best features from both deprecated methods and offers a single unified way to measure an industrial building.

The new method measures all areas used to conduct “Industrial activities” that are also covered by a permanent roof. The measured area is practically the same as when measured via Method B (Drip Line Method) from the old standard, as it measured the external footprint of the roof and anything within the perimeter was included. 

However, since Method A was more popular and commonly used for enclosed buildings with solid exterior walls, new areas are now included such as covered loading docks, therefore increasing the rentable area of the buildings. 

“Industrial Activities” are defined in such a way to allow more styles of buildings to be measured using the 2019 version of the standard, compared to previous versions, which offered limited support.

Measuring an office building using the BOMA Gross Area Standard

In 2018, BOMA updated it’s Gross Area Standard to define four new methods of measurement that replace the older definitions. The two most relevant for negotiating commercial leases are Gross Area 1 and 4. 

BOMA Gross Area 1 – Leasing Method

Gross Area 1 – Leasing Method replaces the deprecated Exterior Gross Area or EGA. 

Gross Area 1 defines all areas inside of the building, as measured from the outer edge of the external walls. The standard also accounts for areas that fall outside of the building, but are developed and provided to the tenant for their exclusive use. 

This method was specifically designed for cases when the entire building is leased by a single tenant. If both parties agree to use the method, much simpler measurements are needed to calculate the floor area of the building and therefore the rent price.

 

Gross Area 1 – Leasing Method sums up all following areas as measured from the outer edge of their exterior walls. Spaces are classified as follows: 

• Space Classification A: Floor Area, Parking Area, and Connectors
• Space Classification B: Balconies, Exclusive Use Covered Galleries, and Finished Rooftop Terraces
• Space Classification C: Unenclosed Occupant Circulation and Roofless Structured Parking

If you’re negotiating a lease based on the BOMA Gross Area 1 method, consider that many areas that are not usable for conducting business will be charged with rent – the area of the external walls, restrooms, corridors and hallways, maintenance areas, electrical and mechanical rooms, elevators, staircases, etc. Keep that in mind when negotiating the rent charge. 

BOMA Gross Area 4 – Construction Method

BOMA Gross Area 4 – Construction Method replaces the deprecated Construction Gross Area or CGA.

Gross Area 4 defines a larger area, that includes Gross Area 1, as well as any areas within the property that are not enclosed structures, but have a floor, or are covered under a roof or canopy. This measurement method gives a more complete look at the building in terms of construction and replacement costs. However, it is not typically used to calculate rent in commercial leases.

Gross Area 4 – Construction Method sums up all following areas as measured from the outer edge of their exterior walls. Spaces are classified as follows: 

 

• Space Classification A: Floor Area, Parking Area, and Connectors
• Space Classification B: Balconies, Exclusive Use Covered Galleries, and Finished Rooftop Terraces
• Space Classification C: Unenclosed Occupant Circulation and Roofless Structured Parking
• Space Classification D: Public Use Covered Galleries and Sheltered Area (Industrial)
• Space Classification E: Building Voids
• Space Classification F: Other Rooftop Areas, Unenclosed Connectors, Decks, and Plazas

Measuring an office building using the BOMA Office Standard

In order to understand how this standard works, we need to make two important definitions: Usable Area and Rentable Area

Usable Area

Usable area is the physical area that tenants can use to conduct their business. This is space to locate desks, working stations, furniture, equipment and personnel. The usable area is measured from one of three points:

• The office side of the common corridor wall 
• The inside of the external wall of the building 
• The middle of partition wall, separating two adjacent tenant spaces

The usable area does not include: restrooms, elevator shafts, fire escape stairwells, public corridors, janitor rooms, maintenance rooms and other functional areas that are not available for business purposes.

Many tenants will make the assumption they are paying only for the usable area and don’t need to care about all the deductions listed above. And they will be wrong. 

All these common areas are an integral part of the building. You can’t have a roof if there are no walls and you can’t run an office if there are no toilets, electricity or running water. The landlord has no choice but to pay for building and maintaining these areas, so the law gives them the right to include them in the rentable area. 

Rentable Area

Rentable area is all the interior space of the building, except for the elevator shafts and fire escape stairwells. 

The rentable area is measured from the:

• Inside surface of the exterior building wall
• Office side of walls of major penetration – stairs, elevators, escalators, flues, pipe shafts, and vertical ventilation ducts

Since the last update in 2017, the BOMA Office Standard now also lists balconies, terraces, and roof spaces as rentable space, because these amenities are highly desirable by office workers for resting.

The majority of commercial leases are structured based on the rentable area of a building and this creates the need to define one more parameter – load factor.

Load Factor

The load factor of a building is simply the percentage difference between the rentable and usable space. When the building is leased to a single, this calculation is very easy to make. If there are multiple tenants sharing the building, then the load factor is calculated based on their respective shares of rentable space. 

 

We have a separate guide about Understanding Core Factor, Loss Factor and Load Factor

 

BOMA Standards also use another metric, called the R/U Ratio. This the ratio of rentable space to usable space and you calculate it by dividing the former with the later. You get a number like 1.03 or 1.17. The higher this number is, the more rentable space is lost to common and service areas. So, as a tenant, it’s beneficial to look for a building with a lower R/U ratio.

Why should you care about building measurements

Tenants who are not aware of these building measurement standards could make the mistake of renting an inadequate space for their business, assuming that all rentable space is available for use, or paying much more than anticipated to rent the space they actually need. 

It’s critically important to discuss and verify with the landlord which building measurement method is used to define the area. Before signing the lease, it’s recommended to have the building measured by a professional surveyor to verify the numbers provided by your landlord. 

These extra steps will help you avoid confusion, disappointment and potential disputes with the landlord.