How many ways can there be to measure square feet? Just one. Right?
No. At a minimum, there are at least five.
A square foot is a simple thing: twelve inches on a side. It has been that way since feet and inches came into being. One square foot has got to be the same as the next. How can it be that such a simple thing as a square foot can become complicated?
The complication doesn't come from measuring any one square foot. The complication is in how to count the total. On that, there is anything but agreement. One architect's 850-square-foot office condominium is a broker's thousand square feet of net rentable area. The same space can have those two very different numbers applied to it. The difference can be 15% or more. And if a comparison is made on a faulty basis - say, if two ways of measuring square feet are confused in an analysis - then whoever owns a property may be either shortchanged or advantaged by 15% or more.
Here are the most common methods of measurement.
Gross Building Area - This method derives a building's area from exterior dimensions. Let's say a building has a footprint of 25' by 20' and is two stories tall. The gross building area is 1,000 square feet (25' x 20' x 2 stories = 1,000). If the building has an unfinished attic and an unfinished basement, some people would include the areas of those in the gross building area as well. Others would not. Whether or not the basement and the attic are included can result in a difference in building area of as much as 40%. When some source informs a researcher that a building's gross area is so-and-so-many square feet, the source also needs to provide the information about what is included in that measurement and what is not. Is the covered loading dock on an industrial building included or excluded? Is the recessed entry on a retail storefront included or excluded? Accuracy matters. Sometimes the only way for a researcher to get a number that can be trusted is to put aside other people's numbers and make a calculation from scratch.
Locally in New England, it is customary for Assessors to provide building measurements and for the real estate industry to take the Assessor's numbers as definitive. Assessors provide two numbers: a "gross building area" and a "living area." The living area excludes the unfinished basement, the attic, the loading dock, and the recessed entry. The gross building area does not. That would clear the air if it weren't for the fact that most people in the industry take the "living area" and use that number as the gross building area. Again, it is important to get clarity as to how a calculation was made.
Net Rentable Area - This is usually similar to the gross building area that excludes unfinished spaces. It is an important number in commercial real estate and not in residential. It typically is a couple of percentage points less than the gross building area. It includes the area occupied by each tenant as well as a proportionate share of walls and common spaces like lobbies and common corridors. This is the most common method of measurement for office space.
This is a method of measurement that is well defined by BOMA (the Building Owners and Managers Association) and others. But in practice, on occasion, it can be mangled. As part of a data request, a borrower recently provided this appraiser the information that the net rentable area for a two-tenant, one-story office building was 8,000 square feet. But from exterior dimension, the building contained only 7,000. When asked about the discrepancy, the information source said that each tenant had 3,000 square feet, and both used a 1,000-square-foot common area. Each effectively had the use of 4,000 square feet. So, 4,000 plus 4,000 equals 8,000. Of course!
Usable Area - This is the space that is private to a tenant. If a tenant's office space is 500 square feet and another 100 square feet of common area are out in the corridor, the common area is not part of the calculation, and the usable area is 500 square feet. This method of measurement is common in older, low-rent office and mill buildings where vacancy is high and the advantage in negotiation and measurement goes to the tenant.
Condominium Area - Condominium unit areas are measured as the area that is exclusive to each occupant. Like the usable area, the condominium area does not include any proportionate share of common spaces.
Government Methods - States and the federal government have their own methods of measurement, which typically exclude common areas. State or federal regulations may require that an appraiser apply the government's method of measurement, introducing an element of confusion into a market where all the other participants may be thinking and talking in terms of net rentable area.
Others - An architect once provided this appraiser with the information that a gymnasium had an area of 20,000 square feet. But its footprint was only 10,000 square feet. When asked, the architect replied that the gym was more than double height. Its volume was more than double that of any other space at the school. And so, presto, ten thousand square feet became twenty thousand.
How does all this matter? It matters when an analyst makes the mistake of comparing space that has been measured by one method to space that is measured by another.
In a suburban office market, the market rent for ordinary office space may be $25.00 per square foot of net rentable area. Let's say an ordinary office condominium, measured by the condominium method, has an area of 1,000 square feet. Its annual rent ought to be $25,000, right? No. Because the 1,000 square feet of condominium area is the equivalent of 1,150 square feet of net rentable area, and the annual rent ought to be $28,750 (1,150 square feet x $25.00 = $28,750). Someone was about to be shortchanged 15% because the analyst was mixing apples and oranges.
For an appraiser, it is important to take all information with a grain of salt. It is important to spot check measurements to see that they are accurate both in terms of the square foot area and in terms of the method of measurement.
In any appraisal, a great deal of effort goes into getting an accurate measurement of the rent per square foot or the price per square foot that should be applied. The other half of the equation is the square foot area, and that ought to be the easy part. But often it is glossed over.
It pays not to assume that everyone involved in feeding information to the appraiser is speaking the same language about the method of measurement. The goal, to best serve our clients, is simply to be accurate. And accuracy does not leave any room for "glossing over."
24 Thorndike Street
Cambridge, MA 02141
Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.
24 Thorndike Street
Cambridge, Massachusetts 02141