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For a detailed breakdown of this with a video, we wrote an article that talks about building gross up factor: A Case of the Growing Building. We also outline in our case studies a tenant who discovered a powerful savings when they found out just how much their space was being grossed up: Uncovering $135,000 for a 3,000 square foot tenant.
The Cliff Notes is that the space within individual suites is not what you pay rent on. There is an add on factor...the common areas of a building are divided up among all the tenants in a building.
The common areas are the shared hallways, washrooms, and ground floor lobby areas. It also includes landlord rooms such as janitor closets, telecommunications rooms and mechanical rooms. It excludes major vertical penetrations like elevators, ducts, and stairwells.
Let's say you find a space that is exactly 20 feet x 100 feet within the suite.
The square footage of the premises is 2,000 square feet. That is the usable area.
A normal building would have about a 15% gross up factor, so the space would be marketed as a 2,300 square foot unit and that is what rent would be calculated on. 2,300 is the rentable area and is what you pay rent on.
You could go to another building that has a suite with the exact same dimensions and if they have a larger ground floor lobby area, or if they have larger washrooms or wider hallways, the square footage could be 2,600 square feet.
In that case, it would result in you paying 13% more in rent, but no extra space that you can use for your business.
The problem with the commercial real estate industry is that gross up factors are not well understood by either tenants or commercial real estate brokers.
Often the question of "what is the gross up factor?" is not asked.
A tenant broker does not want to find out if the gross up factor for a building is not tenant-friendly because that could kill the deal. Brokers get paid when deals happen - they do not get paid for truly defending the interests of tenants.
Landlords should have space plans that are certified by independent architects.
While there can still be bias (architects that come up with landlord-favorable measurements have better odds of being retained by those landlords), they are also risking their reputations and licenses if they are coming up with measurements that are misleading.
When you tour properties, ask each landlord what the building gross up factor is, and ask to see floor plans that are certified by an architect that show both the usable area calculation and the rentable area measurement.
As a general rule, office buildings are measured in accordance with BOMA (Building Owners and Managers Association). There was a big change in 1996 from the 1980 BOMA standard. That change was the introduction of the ground floor lobby area as part of the "common area".
It was no coincidence that this introduction coincided with the bottom of the market for the 90's.
All of a sudden landlords found new square feet to lease by amortizing the lobby square footage over the tenants in the building.
Office spaces are measured from the inside and the measurement goes to the "dominant portion" of the exterior walls - in other words, if a window takes up more than 50% of the exterior surface, the space is measured to the window. There are no deductions for load bearing columns.
The only area in an office building not measured is the major vertical penetrations, so if you have a landlord of an office building that is factoring in stairwells and elevators into the square footage, this is not normal.
Industrial spaces are typically measured from the outside. This leaves less room for error - as most buildings are rectangular, the square footage is just the length x width and the useable area equals the rentable area. The tenant is penalized on the square footage of the exterior walls, but ultimately the extra square footage puts downwards pressure on the rent per square foot as each tenant evaluates buildings relative to their overall budget for rent.
Then you can divide the two numbers to know the gross up factor. 15% is a general rule, but that number can also range from as little as about 5% to as high as 35%.
In some cases if the gross up factor is very high, a landlord may have a plan in place to cap that gross up in order to be more competitive with other buildings. However, if you are unaware of what building mark up factors are, it would not likely be something a landlord would volunteer.
Space Database: Measurement Standards
Property Metrics Website: Difference Between Rentable Square Feet versus Usable Square Feet
Still feeling stuck? We can help with an online commercial lease review.