Suppose you want to purchase a commercial real estate property (let’s say, a ten-unit office building) as part of your real estate investment plan. You must keep in mind that there are actually three square footages you must learn to identify and compute. Because, unlike most real estate investment property, when it comes to commercial real estate, commercial space is important, and not simply computed with a tape measure.
- Gross building area (GBA). This is straightforward because it is measured with a tape measure. It is the total floor area from the outer surface of exterior walls and windows, including elevator shafts, utility rooms, and basement space.
- Usable square footage (USF). This is the space contained in the tenant’s premises. We will not get into the technical terminology like “demising walls” (i.e.,the walls that separate one tenant from another) and make it simple. Usable square footage is the actual physical space a tenant occupies, even if every square footage is not actually usable to the tenant.
- Rentable square footage (RSF). This is the number of square feet on which the tenant’s rent is based, and to real estate investors the most important square footage of them all. This is not determined with a tape measure. Rentable square footage is whatever the landlord and tenant agree upon for the lease. For example, the owner would normally charge the tenant for a percentage of the “common area” (i.e., lobby, corridors, rest rooms, utility rooms, elevator shaft, etc.). Why? Because the tenant’s usable square footage depends on the commercial building owner also providing that common area space and generating a revenue would not be possible without it.
A commercial building, therefore, has an overall size called the GBA. Tenants, who will occupy most of the space (known as USF) must also pay for the common areas such as lobbies and corridors (which the landlord cannot rent). Hence, the commercial real estate owner and the tenant will typically negotiate a lease in which the tenant will be required to pay for the USF (space occupied by the tenant) plus a percentage of the common area, or rentable square footage (RSF).
