What is office space loss factor?

Commercial Space Loss Factor

Have you noticed when you’re shopping for an Office Space in NYC you rarely get an exact square footage quoted, or sometimes you get a bigger number but when you actually view the office it’s way much smaller than you visualized? Why do landlords do this?

This practice is called, “Loss Factor”.

What does this mean? How does it work? And what should you be aware of as a tenant shopping for a space?

What it means?

To start you must understand how a building square footage is divided…imagine, a building that is 10,000sqft with 10 offices, each office being 700sqft. That’s a total of 7,000sqft that the landlord is able to rent out and gain a return on. But what about the other the 3,000sqft, where is it, where is it being used, and how will the landlord make a return on his investment with this “loss” space?

This “loss” space is taken up by elevators, stairwell, lobbies, corridors, janitorial rooms, bathrooms, space occupied by perimeter convectors, electrical closets, etc, etc, essentially space that all tenants benefit from.

However, the landlord is only able to rent out 7,000sqft while paying a loan for a total 10,000sqft, this doesn’t sound like such a smart investment with these numbers, right. Well, this is where the creativity begins…

There is an equation used by the landlords to figure out how much square footage will be added to each office so that it will cover the cost of the remaining 3,000sqft s(he) is paying a loan on.  And for the sake of easy, in my example all offices were created equal, but in reality, that’s never the case, all offices come in all shapes and sizes so each space gets a different percentage.

How it works?

The equation used is:

The total amount of square feet for the common area is divided among all tenants on a prorated basis. Each tenant pays a portion of the landlord’s expenses for these common areas. When the square footage is added to each space, the end result is called “rentable square feet”.

The “usable square feet” is the actual square footage occupied by a tenant. The “usable square feet” is also called the “carpetable square feet”, or “assignable square feet”, because it is simply the portion that can actually be carpeted by the tenant.

Definitions of Square Footage
TERM	DEFINITION
Usable Square Feet (aka, “carpetable” or “assignable”)	SF of space actually occupied by the tenant.
Rentable Square Feet	Usable SF + a % of SF of the Common Areas.
Gross Square Feet	Total SF of the entire building.

How does this help you when shopping for an office space?

In order to find a space that best fits your needs, be clear with your commercial real estate professional, giving as much information as possible to maximize the time you spend searching for a new office space. Information such as the amount of people in your office, how many private offices you need, conference room, how much storage space is needed, etc…will not only help your representative understand your needs but help define the approximate usable square footage.

Also when you’re comparing different office buildings with the same rental rate, be sure to compare the usable square feet, as oppose to the rentable square feet so that to compare “apples to apples”, as many buildings have different common area square footage taken into account. So two spaces with the same rental rate could have significantly different economics depending on how much square footage is factored in for the common areas. Therefore, instead of using the “rentable square feet” to compare, use the “usable square feet” measurement for a more accurate comparison.

Working with a broker who has a clear understanding of the intricacies of leasing office space and understands the technicalities to analyze various options for you will ensure you are making an informed decision.

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Commercial Leasing Terms

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