By Aron Schreier
Recently I was working with an international client, a tenant whose lease was up for renewal. We received a proposal from the Landlord to renew their lease and the local and international executives were perplexed, because the square footage that they were paying for was different from the square footage in the initial lease, but the space hadn’t changed. How could that be? And so I had to have another conversation about loss factors.
Tenants are not only charged for the square footage that they occupy (called the “usable square footage”). They are also responsible for things that might not belong to any tenant – things like corridors, elevators, stairwells, etc. The loss factor is calculated by dividing the difference of the usable square footage and rentable square footage by the rentable square footage. So if a tenant needs 10,631 usable square feet and the loss factor is 27% (typical for full floors now in Manhattan, and much higher for multi-tenant floors), the tenant needs to be prepared to budget for 14,563 rentable square feet.
Theoretically, the purpose of the loss factor is so that landlords don’t bear sole responsibility for the cost of spaces that are used by tenants but not included in rent. New York City is particularly challenging, however, because our loss factors are extremely high compared to the national average. This is due to the fact that New York City relies on different standards for the loss factor calculation (for instance, the rest of the nation, using standards set by the Building Owners and Managers Association or BOMA, allows owners to measure out to the exterior wall, whereas in New York, relying on Real Estate Board of New York or REBNY guidelines, owners may measure out to the exterior façade of the building, past the window line).
Obviously the loss factor makes a big difference in leasing contracts, and so it’s something that tenants need to be aware of when looking for space. I represent a significant number of international companies, and for many of my clients at both a local and international level, this can be a hard concept to wrap their heads around.
While a tenant may not have a say in what the loss factor will be, there are other areas of the lease that can be negotiated aside from a lower rental rate that can help mitigate this additional cost. A tenant could seek increased concessions in the form of Tenant Improvement Allowance and Free Rent, for instance, or resetting Base Years for Escalations in the event of a lease renewal. It also our strong recommendation to clients looking for space to engage a qualified architect, the true experts in quantifying space size requirements, as part of the project team.
Loss factors are something that every tenant has to be prepared for, and understanding how they work is essential to putting together a budget. But with the right guidance and with a solid understanding of the market, any tenant can get into the space they need at a price they can afford.
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Aron Schreier is a Managing Director for Cushman & Wakefield, specializing in tenant representation services to multinational companies. He brings more than 16 years experience working in New York commercial real estate brokerage.