What You Should Know about Renting Nonresidential Space for the Real Estate License Exam - dummies

What You Should Know about Renting Nonresidential Space for the Real Estate License Exam

By John A. Yoegel

There is a somewhat unique situation that happens when you rent nonresidential space. The Real Estate License Exam may ask you about it, regardless of whether you encounter it in your future profession. It’s a perfectly legal and accepted practice, but the fact is you may not actually get what you paid for.

Non-residential building layouts

Think about the last office building you visited or the one you work in. Maybe it has a nice spacious lobby, some elevators, wide hallways, men’s and ladies’ rooms, and finally many separate offices housing doctors and lawyers and accountants and other businesses or professionals.

The same goes for the last shopping mall you went to, only this time the space is divided up into stores instead of offices. It’s logical that each of the tenants in the building pay for their individual office space. But they and their clients use the lobby, the hallways, the washrooms and the elevator. Who pays for that?

Commercial property landlords and tenants understand that the so-called common spaces in these buildings have value and are necessary for the building to function properly. It would be relatively easy for the landlord to simply recoup the costs as part of the rent, the way apartment landlords do, if the individual rented space was more or less the same size.

But a tenant renting a 1,000-square-foot office would feel that it’s unfair if he has to pay the same for the use of the common space as a tenant renting 5,000 square feet. What has developed to solve this problem is the concept of rentable and useable space.

Rentable space

Rentable space is the space that a tenant pays for when renting non-residential space, say in an office building or shopping mall. It generally contains more square feet than the tenant is entitled to use exclusively and takes into account the common spaces used by the tenant and the tenant’s visitors.

The rent is stated as so many dollars per square foot annually (even though it might be paid monthly) and is multiplied by the number of rentable square feet to arrive at the total annual base rent.

Useable space

Useable space is the square footage that the tenant is allowed to use exclusively. It’s the space behind the door to the hallway. It’s invariably less than the total square footage the tenant pays for.

Adding on and taking away

The difference between the rentable space and the useable space is called the add-on factor or the loss factor, depending on which way you do the calculations. It’s pretty easy to remember. The add-on factor is added to the useable square footage to arrive at the rentable total square footage.

The loss factor is subtracted for the rentable square footage to arrive at the useable total square footage. Both are usually stated as a percentage.