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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.