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What is Commercial Real Estate Loss Factor?
If you need to rent 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. 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.
What is Loss Factor?
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).
- Rentable Square Feet: This is the measurement of the entire space the tenant leases from the landlord, even including useless spaces (such as areas filled by walls) and spaces shared with other tenants.
- Usable Square Feet: The area of the commercial space a tenant—and only that tenant—can use.
Simply put, loss factor is “the percentage difference between rentable area and usable area.” You can calculate loss factor by dividing the difference between the Rentable Square Foot and the Usable Square Foot by the Rentable Square Foot.
Let’s go back to our example from the first paragraph and do the math in three easy steps:
First, find the two essential numbers: Rentable Square Feet and Usable Square Feet.
- RSF: 7,000 square feet
- USF: 5,000 square feet
Then, subtract the Usable Square Footage from the Rentable Square Footage.
- 7,000 (RSF) – 5,000 (USF) = 2,000
Finally, divide the difference by the Rentable Square Footage.
- 2,000 ÷ 7,000 (RSF) = 28%
Voila. The loss factor for your commercial space is 28%.
Who Decides How Loss Factor is Calculated?
Loss factor, sometimes also called load factor or core factor, can already seem complicated. Now consider that it is not calculated the same way in every case. 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 this discussion are the Business Owners and Managers Association (BOMA) and the Real Estate Board of New York (REBNY).
- BOMA. Founded in 1907, BOMA’s “mission is to advance a vibrant commercial real estate industry through advocacy, influence, and knowledge,” according to the website. The majority of United States landlords use BOMA standards to calculate commercial property square footage and thus loss factor percentages.
- REBNY. When REBNY was established in 1896, it became the state’s first real estate trade association. According to the organization’s website, its goals include “expanding New York’s economy, encouraging the development and renovation of commercial and residential property, enhancing the city’s appeal to investors and residents and facilitating property management.” Most relevant to our discussion is that NYC landlords calculate commercial real estate square footage and thus loss factor using REBNY standards.
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 say space measurements are taken from the exterior of the building. Also, REBNY considers more spaces as USF than BOMA does. See the following HLW International graphics for details:
How to Reduce the Effects of Loss Factor
Loss factor is ubiquitous in commercial real estate. “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.” 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.”
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 will affect your search for commercial space.
- Recognize that average loss factor can change based on location property style: If you’re looking at the loss factor for any given building and wondering how it measures up to similar spaces, remember that lots of factors are at play. First, average loss factor varies based on location. For example, New York City tenants will see loss factors averaging 27%, while their New Jersey suburban neighbors might enjoy loss factors averaging only 18%. Second, property style makes a difference. Obviously, buildings with big, open lobbies and lots of stairwells, bathrooms, and shared spaces are going to have higher loss factors.
- Comparison shop: Two commercial buildings in the same area that appear to be about the same size might have two entirely different RSF’s and loss factors. It’s important to look at multiple spaces and ask a lot of questions to make sure you get what you pay for.
- Realize you’ll need more square footage than you think: Perhaps you’ve used our Office Space Calculator and determined that your company needs 5,000 square feet of office space. Keep in mind you may need to look at spaces that are advertised to have 6,000 square feet or more because those measurements also include space that’s shared or useless.
- Focus on total cost: Most of the time, commercial real estate prices are presented as “per square foot” costs. Ask for or calculate the total monthly rental cost and weigh your options that way instead to avoid surprise extra charges associated with previously unrecognized useless space.
- Ask for the RSF to be specified in the lease: Now that you’ve seen building size isn’t exactly universal and objective, you should ensure the agreed-upon square footage is explicitly stated in your contract.
- Inquire about a renewal option: Space remeasurement—that is, a landlord’s measuring a space again for better accuracy or using different or updated standards—may increase the recognized RSF of any given space, which might mean a price increase for any current tenants. That’s right; your office building may actually increase in space without actually getting bigger. Putting together an airtight renewal option can protect a tenant from an unnecessary price increase upon potential lease renewal.
- Look at a layout prepared by an architect: Funny-shaped buildings can waste a lot of space, and the untrained eye might not recognize these “dead” spaces without some help. Ask to see a building layout prepared by an architect, and then you’ll be able to see for yourself how much of the building is comprised of usable space.
- Get a tenant broker: Navigating loss factor-related issues in commercial real estate can be daunting, but we are here to help. One of our experienced brokers will be happy to answer all your questions and help ensure you get the most out of the money you spend to rent office space.