Q. What is a loss factor?

Q. When leasing commercial office space for the first time, most tenants discover that the amount of space they can actually utilize (the usable square footage or  “USF”) differs dramatically from the amount of space quoted by the landlord in the lease document (the rentable square footage or “RSF”).  This differential is called the “loss factor”, but more importantly, why does this occur?

 

A: The rational explanation

The explanation for this differential is that the landlord is allocating a portion of the building’s unusable (but shared) square footage to all the tenants in the property.  Such unusable square footage would include lobbies, corridors, elevator shafts, stairwells, mechanical (HVAC) rooms, riser closets and shared restrooms.  Thus, the RSF helps to equitably allocate the impact of the shared spaces across all of the tenants in the property.  When cost escalations (such as real estate tax increases) are indexed to a proportionate share (of total space) calculation, the RSF helps to level the paying (sic) field!

What really is happening?

In practice, however, landlords employ the loss factor to “remeasure” the spaces at the conclusion of each and every lease.  [Have you ever noticed that there is no mention of the RSF in any part of the lease document?}  This also applies to lease renewals, so it is conceivable that a tenant who renews its lease can face both a market rate increase (based on real estate cycles) as well as a landlord remeasurement increase - talk about a double whammy!!  Additionally, not only do the measurements increase, but over time the market definition of an acceptable loss factor steadily increases as well.  [One more reason not to engage a landlord agent to negotiate on one’s behalf!]

How to calculate the loss factor

The loss factor is calculated by dividing the difference between the rentable and usable square footages by the rentable number.  For example, if a space is being called 5,000 sf and the usable square footage is 4,000 sf, the loss factor would be (5,000-4,000=1,000/5,000=) 20%.  Be careful not to divide by the usable square footage or the resulting ratio will be even worse!!

Typical loss factors

For New York City full floor tenants, an acceptable loss factor would fall in the 20-25% range.  For multitenanted properties (more corridors), this range would increase to 30-35%.  In practice, we have seen both higher and lower loss factors, but most will occur in these ranges.  If a loss factor is outside of this range, to us it would scream “something’s unusual with this property/landlord!”

How to minimize the effects

Unfortunately, it is extremely difficult to negotiate a lower RSF number, regardless of who is taking the measurement.  The negotiable portion of the rental equation is always the per square foot rent, which is the multiplier of the RSF.  Here, though, are some tactics for minimizing the impact of the loss factor on rental costs:

  • Always comparison shop - loss factors vary across landlords, so one landlord’s 2,000 sf may equal another’s 2,500 sf;

  • Focus on total costs - landlords are very good at shifting tenants’ focus to the square foot price, which often masks a relatively high loss factor;

  • Ask for the RSF in the lease - landlords hate this, but always push to have the negotiated square foot number represented in the documentation;

  • Request a renewal option - properly worded, a renewal option can protect the tenant against a space remeasurement if the tenant renews beyond the initial lease term;

  • Have an architect prepare a layout - assuming USF’s are equal, different spaces may have varying layout efficiencies due to the shape of the space, location of internal columns, number of windows, size of workstations among other factors.