Legal Briefs

Commercial Calculations

Measurement methods can make a big difference in lease negotiations.

Rent, operating expenses, tax obligations, and several other economic matters are tied to the square footage of leased premises. Generally speaking, a higher square footage yields higher rent and other payments for the leased premises. Therefore, landlords and tenants often disagree on the appropriate square footage to be used in lease negotiations.

How to Calculate

Many methods are used to calculate square footage in commercial leases. Usable square footage refers to the actual occupied area leased. Rentable square footage is the sum of the usable square footage and a portion of common areas and other non-leasable building areas allocated to the area leased (often determined by applying a percentage load factor to the usable square footage). The portion of such other areas to be added to the space's leased usable area is negotiable.

The most widely used U.S. standard for measuring office buildings is published by the Building Owners and Managers Association International. The BOMA standard was first published in 1915 and has been revised various times to reflect industry changes.

Though widely used, the BOMA standard is voluntary. Landlords may choose not to use it at all or may elect from a variety of versions of the standard to apply. The selection of the appropriate BOMA standard version to be used isn't always straightforward. And more importantly, when landlords and tenants disagree on which standard to use, the difference in rent over the lease term can be substantial. For example, in the following case, the difference in the applied standards amounted to $10 million in lease payments.

Conflicting Measurements

In California's largest office lease transaction in recent years, digital television services provider DirecTV signed a 15-year, approximately 630,000 rentable square-foot lease valued at more than $400 million for the company's corporate headquarters in El Segundo, Calif. The lease included another approximately 89,000 rentable square feet of must-take space to be delivered by the landlord and leased by DirecTV upon the expiration of the existing third-party leases. Eventually DirecTV would exclusively lease the entire three-building Kilroy Airport Center.

One major point of contention was how to measure the premises. Prior to beginning lease negotiations, both parties agreed that the 1996 version of the BOMA standard would be applied. However, a disagreement ensued regarding the application of that standard during lease negotiations.

It was the landlord's position that any full buildings leased by DirecTV should be measured as "gross building area," as defined in the 1996 BOMA standard yielding a higher square footage than other methods. The GBA measurement includes the total constructed area of a building and is computed by measuring to the outside finished surface of permanent outer building walls without deductions.

DirecTV argued that, whether or not it leased a building in its entirety, GBA was not the appropriate standard. Rather, DirecTV proposed that the 1996 BOMA standard used for multitenant office buildings be used for all portions of their premises. The multitenant application begins with the occupiable area of the premises and adds a portion of the common areas but excludes from the rentable square footage the major vertical penetrations (stairs, elevator shafts, flues, pipe shafts, vertical ducts, and the like), and other non-usable areas.

The 1996 BOMA standard provides multiple variations as to how to measure the premises when a building is leased by a single tenant. The landlord argued that the 1996 BOMA standard would not have provided for a GBA if BOMA did not intend for it to be used; GBA applied specifically to and was the most appropriate method for single-occupant buildings. In addition, the landlord argued that, where a tenant occupies all of the rentable area of a building, it is appropriate to charge a single occupant based upon the entire gross area as the entire building is dedicated to its use.

DirecTV argued that the application of GBA was not consistent with market standards and that it should not have to pay for vertical penetrations or non-usable areas simply because it was the single occupant (particularly given that the landlord did not have other single-tenant offers and would likely have to lease on a multitenant basis in DirecTV's absence).

The economic difference resulting from application of the two proposed measurement methods was approximately $10 million. Given the magnitude of the economic impact at stake, the measurement dispute led to a short stalemate in the negotiations. The parties were eventually able to consider the desirability of completing the lease and agreed to a compromise as to the stated square footage of the premises. The compromise equated economically to more than the multitenant measurement but less than the gross building area.

Delmar Nehrenberg is a partner and David Alvarado is an associate in the Century City, Calif., office of the law firm of Allen Matkins Leck Gamble Mallory & Natsis LLP. Contact them at dnehrenberg@allenmatkins.com and dalvarado@allenmatkins.com. The authors of this article represented the landlord in the discussed transaction.

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