Explaining the Loss Factor

I have been working in commercial real estate for almost 20 years and the one conversation I have more than all others involves the concept of  “Loss Factor.” It comes up because either the tenant has never heard of it, or they understand the concept but are annoyed by how high it is for their preferred building. This has been an issue in real estate for decades. I’ve touched on it before and and people continue to try and solve it, as the Wall Street Journal reports today.

Stated simply, the loss factor is a calculation that allows the owner of a multi-tenant building to demonstrate that they can theoretically lease 100% of the structure. It allows the landlord to account for areas where they would otherwise be unable to collect rent, such as the lobby, elevator shafts, bathrooms, hallways, etc.

There is a formula to attach the proportionate share of these common areas to each lease, effectively increasing the square footage stated in the lease from the “Usable Area” to “Rentable Area.”

The difference between the Usable Area and the Rentable Area is the loss factor, and it’s stated as a percentage. The calculation is:

 (Usable Area – Rentable Area) / Rentable Area = Loss Factor

A real life example would be:

(10,000 sf – 12,000sf) / 12,000sf = 17%

This is fine, in itself, if every building used the same standard for measuring loss factor, but they don’t. The Building Owners And Managers Association (BOMA) has a standard, but it is not applied consistently. The Real Estate Board of New York (REBNY) also has a standard for NYC buildings, but it is not universally accepted either.

This is a high-stakes discussion and it’s understandable that these differences can create frustration for tenants(and for landlords alike. When two spaces that each hold 50 people measures differently from one building to another, that difference can account for tens of thousands of dollars in income for a landlord or expense for a tenant.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s