The size of a commercial property is typically measured in square feet. But, not all square feet are the same. Some of the square footage is leased to rent paying tenants while other portions of it are used for common areas like hallways, lobbies, bathrooms, and elevators. For this reason, it is important for potential investors to distinguish between a property’s total square footage and the square footage that is available to be rented by tenants.
In this article, we are going to discuss the real estate metric used to describe the space leased to tenants, Gross Leasable Area or GLA for short. We will describe what it is, how it is calculated, why it matters, and how it compares to other metrics commonly used to measure the area of a building. By the end, readers will have the tools needed to incorporate this calculation into their pre-purchase due diligence process.
At First National Realty Partners, we specialize in the acquisition and management of grocery store anchored retail centers. As part of our own due diligence effort, we are always careful to calculate both the total square footage of the property and the gross leasable area. If you are an accredited investor and would like to learn more about our current investment offerings, click here.
Gross Leasable Area Definition
Gross Leasable Area is the space within a commercial property that is designed for the exclusive use of one or more tenants. This real estate term is most commonly used in Office, Retail, and Industrial properties where it is necessary to distinguish between the areas that are part of the lease square footage calculation and those that are not.
How is Gross Leasable Area Measured?
The exact measurement of Gross Leasable Area is defined in the BOMA Standards (Building Owners and Managers Association), which attempts to set a standardized way of measuring floor space. The calculation is generally measured as the floor area of the tenant that is “measured to the outside face of exterior walls and the centerline of demising internal walls separating tenants. In addition, it typically includes basements and mezzanines.
For the purposes of performing due diligence on a potential real estate investment, the gross leasable area is typically described in detail in each commercial lease for the property.
Prior to making a purchase or investment, it is a best practice to review the Gross Leasable Area calculations described in each lease, for each tenant, because these are important inputs into a proforma financial model.
Gross Leasable Area in Gross Potential Rent GPR) Calculations
If the Gross Leasable Area is the total amount of space that is available for the exclusive use of a tenant, then the gross potential rent is the amount of money that the property could potentially produce, assuming that all of the gross leasable area is rented (full occupancy) at market prices. In other words, the formula used to calculate gross potential rent is:
Gross Potential Rent = Gross Leasable Area (in SF) x Market Rent (per SF)
This is an important real estate metric because it represents potential income that a property could produce and it serves as a starting point from which to deduct operating expenses to determine other important metrics like Net Operating Income.
Gross Leasable Area vs Other Measurement Metrics
Gross Leasable Area is just one of several real estate metrics used to measure the space in a commercial property. Below it is compared to other commonly used options.
Gross Leasable Area vs. Gross Internal Area
The Gross Internal Area of a building is the total area of a building, as measured to the internal face of the outside walls. It represents the total useful area contained within a building. But, it does not necessarily mean that all of this space will necessarily be leased to tenants. Some of it could be used for restrooms, stairs, escalators, stairwells, storage areas, lobbies, or hallways.
Gross Leasable Area vs. Gross Floor Area
The Gross Floor Area (GFA) if a property is the total amount of floor space as measured to the external face of the outside walls.
It may only seem like a slight distinction from Gross Internal Area, but GFA is important because this is typically the number used by brokers to advertise space and calculate sales figures. In addition, cities or municipal authorities may use this number to determine a building’s allowable density or to calculate taxes due.
Gross Leasable Area vs. Net Leasable Area
The Net Leasable Area (NLA) is the amount of the space that is actually available for tenants to rent. As such, it typically excludes other features of the property like common areas and utility rooms. But, it includes basements, storage areas, mezzanines, and upper floors.
Retail leases typically use the GLA as the key measurement metric whereas office building leases use the net leasable area.
Why Investors Need to Understand the Gross Leasable Area
Again, real estate investors should understand Gross Leasable Area as a concept because it is necessary to get to an accurate estimate of the potential rent that a property could produce. From this point, expenses, and the debt service on the commercial mortgage can be backed out to get to “Net Operating Income” which is the amount of money a property produces on an operating basis.
Thus, by extension, it also helps investors calculate the potential return that a property has the ability to produce.
Both figures are outlined in a property’s proforma, which is a projection of income and expenses over a defined holding period for a property.
GLA and Investing Through Real Estate Syndications
Calculating the differences between Gross Leasable Area, total floor area, and net rentable area can be tricky and requires a detailed understanding of the nuanced differences between these metrics. For individual investors, this can be incredibly time consuming and outside their area of expertise.
For this reason, individual investors may prefer to partner with a professional real estate firm to deploy commercial real estate investment capital. In a typical scenario, individual investors provide capital while the firm handles all of the hard work of identifying the property, completing the due diligence (including all of the area calculations), and managing the asset once purchased. In other words, they get all of the benefits of real estate ownership without the hassle of actually finding and managing the properties.
Summary of Gross Leasable Area in Commercial Real Estate
In a commercial property, Gross Leasable Area is the total amount of space that is available for the exclusive use of a tenant.
It is one of several measurement metrics, the details of which are standardized by the Building Owners and Managers Association (BOMA), that investors can use to determine the amount of available space to be leased in a commercial asset.
Other potential metrics include Gross Internal Area, Gross Floor Area, and Net Leasable Area.
It is important for investors to be aware of how each of these metrics are calculated and what they represent in order to make the most accurate investment proforma possible.
Because the calculation of each of these metrics can be nuanced and tricky, investors may prefer to partner with a professional commercial real estate firm when deploying investment capital. Doing so leaves all of the hard work of acquisition and management up to the firm, while investors collect their share of the property’s income.
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