Landlord fairy tales: The Gross/Net floor area conundrum
This month the story of Little Red Riding Hood will help us explain and provide a solution for the bamboozlement caused by numerous modes of measuring the size of a building or individual unit.
Last month we made a case for the separation of energy charges and building management fees in commercial premises by likening ‘green’ posturing by building owners to that of the emperor and his new clothes. Next month we will be looking into the waste caused by reinstatement requirements. This month however, we look at the Net/Gross floor area conundrum. It appears that the confusion may not be mere disorganisation but rather outright fluffing of the facts. The facts of the case can be likened to the well-known fairytale, Little Red Riding Hood.
Briefly, a young girl in a red cap sent off to visit her Grandmother, being warned not to be distracted and to go directly to her house. Along the way the girl meets a wolf who seems very gentlemanly and invites her to look at the flowers and dawdle. He finds out where she is going and races ahead. He eats the grandmother dresses up in her clothes and confuses the little girl who knows something is wrong but doesn’t quite get it until she becomes dinner. A passing wood chopper comes in cuts open the now sated wolf and rescues the traumatised, but just about whole, grand-mother and the little girl. The practice of diversion and making reasons for concern appear advantageous (“these big ears? All the better to hear you with, my dear”) is perhaps something that the property industry is accused of on an all too regular basis. However, in markets where governments or general practice led by professional bodies have not stepped in, this most basic of problems is most pronounced. Tenants and buyers don’t actually know how much space they are paying for.
Much of the confusion lies in the area of definitions for gross, net, lettable, usable, saleable, carpet and other areas. David Faulkner of Colliers International is amazed at the number of ways that exist regionally to measure gross floor area (GFA) which at its most basic level is the total floor area as measured round the building perimeter. However, generally the GFA is defined by government and so varies across the region. Many governments include refuge floors and car parks in this area, others such as that of the HKSAR do not. Faulkner says that there are different characteristics between various geographies. In China in strata title buildings, the government will issue a separate GFA certificate for each floor.
Strata title purchasers and lessees will prefer to work from the amount of space they will actually be able to occupy and use, often called the net floor area (NFA). Faulkner explains that generally this will exclude the public areas and common areas such as the lift lobbies the corridors and the common washrooms. There are a lot of ways to measure net space and it has many other names. In addition savvy tenants will try to increase the space that they have available to them by claiming part of a lift lobby or exclusivity over washrooms when negotiating the lease. For hotel and retail occupiers the problems associated with lack of standardisation of net floor area measurement is less acute as spaces are valued on different metrics.
Efficiency of a building is the net area on the GFA. Faulkner points out that low efficiency is often caused by things like large lobbies and avant guarde architectural styles. In Hong Kong efficiencies are some of the highest in the region at 80 and 90 percent. China has some of the lowest usually between 60 and 80 percent. It happens that landlords will sneakily pass on the cost of the inefficiency of their buildings because no standardised system NFA measurement system exists. As governments are unlikely to agree on a standardised GFA measurement the industry agreeing on a common NFA is what Faulkner describes as the “low hanging fruit”.
Faulkner was not the only member of the industry who answered “Yes, Please!” when asked whether he would advocate a region-wide standardised system. He pointed to the work being done by the Royal Institute of Chartered Surveyors (RICS), whose 6th Code of Measuring Practice Code describes Net internal Area as “useable area within a building measured to the internal face of the perimeter walls at each floor level an area is useable if it can be used for any sensible purpose in connection with the purposes for which the premises are to be used”.
Clive M J Warren, in an article entitled Benchmarking Corporate Real Estate; Fundamentals of Measurement, says that within the European, Australian and UK codes the agreements in NFA definition excludes common areas, fire stairs, lift lobbies, common corridors, escape routes and similar structures. There are also inconsistencies —under the UK code chimneys or fireplaces are excluded while the Australian one makes no mention of them. So the whole calculation process could become very detailed. As Faulkner explains, one of the reasons that a unified regional system is yet to be pushed by RICS is they are currently in the information gathering stage. For example, researchers need to discover whether NFA in Singapore generally does or does not include fireplaces. Reason being that a code which follows standard practice is more likely to be accepted.
John Goddard, J Goddard & Co. is a previous Director of the Facility Management Association of Australia. He occasionally advises clients in Asia but does most of his work in Australia where registered surveyors are obliged to follow the Property Council of Australia guide for measuring space. He is a strong believer in the guide and says it would work any where, saying that all offers or correspondence regarding space will be premised with “subject to PCA measurement”. He feels NFA is the only really useful measure for tenants and that any standardisation should definitely focus on that space used by a tenant.
In many markets this might be tough. A standard practice has developed of confusing tenants with misdirection and mystification, and it appears that the wolves have gained the upperhand. Rajiv Mohan, Managing Director, Cherryhill Interiors, explains that India has no national NFA or GFA standard. Landlords only calculate rent on the gross area, known as the ‘super area’. They “never agree based on carpet area” says Mohan. Quite the opposite: in many cases a tenant will ask for a certain amount of space, say 10,000sqf, and the developer will negotiate the price. After this the developer will manipulate the super area based on how much the tenant offered.
So shouldn’t the agent be stepping in here? Technically yes, but as Mohan points out that if the agent were to be clear about what was happening the client would run. The fact that they don’t is not really a poor reflection on them — it is their job to make a deal, they argue, and the situation is unlikely to be different with another landlord. They might ask themselves: If this building fulfils the other criteria then why not just accept that the cost per square foot is deliberately confusing fiction but not let on to the potential tenant? The real estate agent is Little Red’s Grandmother: basically she got eaten first. Just remember that at the end of the day the wolf ends up with his stomach cut open. As in most situations in life, being continuously unscrupulous will not pay off in the long run. An agent and a building owner in this scenario can choose to be the wood chopper who walks away with a lovely fur coat and two indebted individuals. Even better, government and industry associations could do so. If there were a standard code to which all industry participants adhered, buildings could sell themselves quicker and on criteria that actually matter to tenants, such as location prestige and, god forbid, price per net square foot.