Nothing has confused and frustrated my commercial leasing clients more than the term loss factor. For my colleagues, property owners and the majority of real estate professionals, loss factor is a widely accepted, and recognized phenomenon. One New York City property owner once told me during negotiations, it is like having kids, every year they [buildings] grow a little bigger.
The Breakdown
Rentable Square Feet (RSF) is simply how much space a tenant is leasing from the landlord. What defines this number is not only the actual space the tenant is occupying, it includes tenant’s share of building common areas, which are but not limited to, lobbies, stairwells, and core spaces. Tenants who occupy a partial floor typically are impacted by a significantly higher loss factor than a full floor tenant. Why? Because the landlord includes in the rentable square footage the common areas for not just the main lobby, it includes common area on the floor which the tenant is leasing space.
Useable Square Feet (USF) translates to the amount of space the tenant occupies in the building. Since I am in NYC I will use REBNY’s accepted list of what the USF is comprised of. It [USF] includes the occupied space, restrooms, mechanical/electrical, columns, elevator lobbies, janitor closets and telephone closets. In a utopian society the actual loss factor would be calculated based on the difference between the RSF and USF, more on the realties of today’s CRE market to follow.
There is a third metric that is necessary to understand, which is seldom discussed, until it comes to the planning and designing stage of the leased space. This metric is called Carpetable Square Feet (CSF) or Plannable Square Feet (PSF) which is the term used by most architects I have worked with. PSF is the true area which is used for the designing and planning of people placement. The PSF measures how much space is available for workstations, offices, conference rooms, and support spaces. It can include amenity area, storage closets, mailrooms, file and copy areas. PSF excludes bathrooms located in the building core, egress stairs, elevators, vertical shafts, MEP rooms, elevator lobbies, and electrical/telephone closets.
What does it mean?
The notion, that landlords should not solely take on the cost of maintaining the common spaces which their tenants access and use, is sound. Unfortunately, the practice of measuring loss factor has become more of a market condition than a true calculation of common area add-on factor. In some instances, the rentable square feet has magically outgrown the actual gross square feet of the property. Loss factor is another line item that must be addressed during the initial assessment of a space search. As a commercial real estate broker, I keep myself and my firm up to date with the varying loss factors in order to effectively assist my clients in comparing properties for their new commercial office lease. The loss factor becomes an integral part of the negotiations. Tenants generally do not have a say on the loss factor, however, your negotiating leverage is knowing and understanding the building’s loss factor and how it compares to the market. Based on this knowledge you can negotiate lower base rents and greater concessions which includes free rent and tenant improvement allowance.
I strongly suggest to hire a qualified architect, as part of the project team, who can simplify and quantify the loss factor in order to confirm the correct space size for your requirements and accurately compare costs between prospective properties.
For further information and guidance please email me at abose@keystone-commercial.com or call at 212.682.9856.
Thank you.
