Don’t Fear the Loss Factor

One term making brokers and tenants in New York City squirm these days is “loss factor”, which is basically the amount of communal space in a building the tenant pays for but is not included in the office space (i.e., the building’s lobby, janitor closets, elevator shafts, etc).  The recent story about a small office tenant suing his landlord for nearly $300,000 due to damages incurred by the owner’s apparent miscalculation of rentable square footage illustrates why loss factor is an important term to understand before signing the lease.

Why Working with a Broker Reduces Loss Factor and Saves You Money

Loss factors are primarily unique to New York City, whereas in other parts of the country the communal space is paid for by Common Area Maintenance (CAM) fees. Within the NYC office real estate market, loss factors vary from building to building, which is why it helps to speak with a broker who can tell you which spaces have the lowest loss factors and why. For instance, renting a full floor in a boutique building will result in a reduced loss factor. These are just some of the factors involved in knowing where to rent office space for the best value.

Calculating Loss Factor

After finding the right match in location, size, and unit type for your business ask your broker to help you determine what the rentable area is. This space is also known as the Carpetable or Assignable Area that you will use for your daily office operations. This is especially important for smaller tenants who usually do not occupy a full floor. The more divisible a floor is, the higher the loss factor for the tenant, and the more arbitrary it becomes to determine the exact number.

Loss Factor =

The equation above can be used to determine the loss factor of your space. For example, if the Usable Area (defined by REBNY here) is 10,000 square feet, and the Rentable Area is 7,000 square feet, then the Loss Factor is 25%. According to some reports, this number used to be the standard in New York City, and as long as Loss Factors were reasonably close to this number brokers and tenants accepted the terms as one of the many confounded but necessary leasing agreements determined by landlords.

But in light of the recent lawsuit mentioned earlier, and given the fact that new buildings are constructed with different floor plates and building envelopes (not to mention, the cutting-edge technology allowing you to measure the building at the granular level), it seems likely that revisions to the standard loss factor percentage—and the methods in which it is measured—are on the horizon. In the meantime, it is important to consider the following before inking your signature on the lease:

1. What are the Carpetable, Rentable, and Usable Areas in the space?

Ask your broker what these are and have them go over each with you.

2. How does the building’s Loss Factor compare with the market’s Loss Factor?

Hire an architect to compare CAD drawings of similar buildings.

3. What tenant improvement allowances will the landlord offer based on Rentable Area, and how will these compare with the contractors’ construction bids?

Before You Sign the Lease

To help answer these questions, as well as getting a more in depth explanation about Loss Factor and how to get the most space for your buck, contact Alan Rosinsky at (212) 447-5403, Principal Broker of Metro Manhattan Office Space, Inc.