Net Rental Area

Definition of Net Rental Area (NRA)

Net Rental Area (NRA), also frequently referred to as Net Leasable Area (NLA), is the total floor space in a commercial building that is available for the exclusive use of a tenant and for which that tenant pays rent. Unlike the total gross area of a building, the Net Rental Area focuses specifically on the revenue-generating square footage of a property.

In the context of commercial real estate and mortgage underwriting, NRA is the specific metric used to calculate the earning potential of a property. It typically includes the actual office, retail, or industrial space occupied by the tenant, measured from the internal face of external walls and the centerline of partitions separating one tenant's space from another.

Key Components of Net Rental Area

To accurately determine the NRA, certain portions of a building are included while others are strictly omitted. Generally, the Net Rental Area includes:

• Private offices and work areas.
• Dedicated storage rooms or closets within a leased suite.
• Kitchenettes or breakrooms located inside the tenant’s specific unit.
• Internal corridors that serve only that specific tenant.

The Net Rental Area typically excludes common areas that are shared by all tenants or used for the building's operation, such as:

• Main building lobbies and atriums.
• Public restrooms located in common hallways.
• Stairwells, elevator shafts, and mechanical rooms.
• Maintenance crawl spaces and electrical closets.

Importance in Commercial Mortgages

Lenders and underwriters place a high priority on the Net Rental Area when evaluating a commercial mortgage application. It serves as the foundation for several critical financial metrics:

1. Calculation of Rental Income: Since most commercial leases are priced on a "per square foot" basis, the NRA determines the total potential gross income of the property. A discrepancy in NRA measurements can significantly alter the projected revenue of a building.

2. Valuation and Appraisals: Commercial property value is often derived from the income it produces. Appraisers use the NRA to compare the subject property against "comps" (comparable properties) in the market to ensure the valuation is accurate.

3. Net Operating Income (NOI): Lenders calculate the NOI by subtracting operating expenses from the income generated by the Net Rental Area. This figure is the primary indicator of the property's ability to remain profitable.

4. Debt Service Coverage Ratio (DSCR): The DSCR is a benchmark used by lenders to determine if the property generates enough cash flow to cover the mortgage payments. Because this ratio relies on the income produced per square foot of NRA, any overestimation of leasable space could lead to a loan default risk.

5. Efficiency Ratio: Lenders look at the ratio of Net Rental Area to the Gross Building Area (GBA). A high efficiency ratio suggests that more of the building is being utilized for profit rather than being taken up by non-revenue-generating common spaces or structural elements.

Standardization of Measurement

In the commercial mortgage industry, it is standard practice to measure Net Rental Area according to guidelines set by BOMA (Building Owners and Managers Association). These standards provide a consistent methodology for measuring space, ensuring that borrowers, lenders, and appraisers are all using the same data when discussing square footage and property value.