A Guide To Renewing Your Office Lease
If you are renting a commercial office space, at some point, you will have to think about whether you want to renew your lease or move offices. A future lease... Read More
6 ways to save $$$ on your office space.
Learn more >February 26, 2020 | by Melissa Landon
Reviewed by real estate expert Jonathan Tootell
Say you’re in the market for new office space, and you think you need to rent about 5,000 square feet of commercial space. You may end up paying for 7,000 square feet. And that’s not because the landlord is overcharging: instead, the increased cost results from something called loss factor. Loss factor significantly impacts the amount of space you get and how much you’re paying for it.
All tenants should know what loss factor is, how it’s calculated, who decides how it’s calculated, and how it affects the search for suitable office space.
Simply put: loss factor—sometimes referred to as load factor or core factor—is office space square footage you pay for but cannot use. For example, you might be paying for the square footage that comprises the restroom or electrical closet. Though those are necessary spaces, you obviously can’t put desks or conference tables in there. Loss factor areas are sometimes also called “common area factors” or “add-on factors” because they include spaces that tenants share. Other examples include fire stairs, elevator lobby, parking garages, utility rooms, cafeterias, stairwells, lobby space, and rooftop terraces.
The average office building in New York City has a loss factor of around 27%. To find out how much legitimate, bona fide, you-can-set-up-an-employee square footage you have in a commercial space, you need to know how to calculate loss factor.
How can you figure out how much loss factor you’re signing up for when you are scouting commercial real estate? To answer that question, we must first define Rentable Square Footage (RSF) and Usable Square Footage (USF).
Commercial brokers and landlords will use two different numbers to describe the size of a space: Rentable Square Foot (RSF) and Usable Square Foot (USF).
Mathematically, loss factor equals “the percentage difference between rentable area and usable area.” In other words, you can calculate loss factor by dividing the difference between the Rentable Square Footage (RSF) and the Usable Square Footage (USF) by the RSF.
Let’s go back to our example from the first paragraph and use the loss factor calculation formula do the math in three easy steps:
First, find the two essential numbers: Rentable Square Feet and Usable Square Feet.
Second, subtract the Usable Square Footage from the Rentable Square Footage.
Third, divide the difference by the Rentable Square Footage.
Voila. The loss factor for your commercial space is 28%. That means, you’re paying for 100% of the office space, but you are only able to actually use 72% of it. You can also think of it as a ratio—unusable space : total space—in this case, 28 : 100 (or 7 : 25).
Calculating loss factor may seem relatively straightforward. However, consider that it is not calculated the same way in every case. It can vary depending on who measures it; sometimes a landlord will re-measure the square footage of a property to see if they can squeeze in more square feet—increasing the perceived value of their product. Also, depending on where you are in the United States, a different authority defines what constitutes RSF, USF, and loss factor. The two organizations most pertinent to the loss factor discussion are the Business Owners and Managers Association (BOMA) and the Real Estate Board of New York (REBNY).
So what’s the difference in the way BOMA and REBNY calculate USF, RSF, and loss factor? The first main difference is that BOMA dictates that space measurements are taken from the centerline of the window, while REBNY standards state that space measurements are taken from the exterior of the building. Also, REBNY considers more spaces as USF than BOMA does. Examine the following two HLW International graphics for details:
Now that you are aware of loss factor and have a general idea of how it’s calculated, it’s time to talk about how it is related to your search for commercial space. “I think it has become the norm for a quote [from the landlord] for retail square footage to have some loss factor,” said Robin Abrams, a retail broker for the commercial firm Lansco. “There is no absolute standard anymore.” If you’re going to negotiate loss factor, do it early. You don’t want to waste your time evaluating a property that is too expensive for your budget or doesn’t offer enough space for your business.
Negotiating against the landlord regarding what the loss factor is for any given building may be difficult. However, with the proper education and the right people on your side (like a tenant broker), it is possible to combat this difficult conundrum.
Loss factor is ubiquitous in commercial real estate. It’s an important issue for not only landlords and real estate brokers but also tenants. “Increasingly, top management teams realize that occupancy costs can no longer be ignored or passed on to lower-level managers,” Mahlon Apgar, IV writes for Harvard Business Review. “Organizations as diverse as Shearson, AT&T, Dun & Bradstreet, and USF&G have set up formal occupancy cost reduction programs.”
Here are ten ways to reduce the effects of loss factor:
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