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What Is Loss factor in Commercial Real Estate?

Today we are resuming our series of explanatory articles in which we define and describe popular terms used in the commercial real estate industry. On this occasion we’re shining the spotlight on CRE loss factor, a phrase which is often misunderstood even by professionals in the business, not to mention tenants.

After some thorough research, we’ve put together a comprehensive list of everything you need to know about CRE loss factor, from the way it’s calculated to the things you need to be aware of when shopping the market for a new office space. Read on to find out more:

Rentable square foot vs. usable square foot

Before we dive into the concrete definition of loss factor, we first need to clarify two different and very specific terms: rentable square feet (RSF) and usable square feet (USF). RSF signifies the total amount of space you as a tenant lease from your landlord. This includes virtually useless spaces (such as walls), as well as spaces which you share with other tenants of the building, like elevators, staircases, shafts and even the lobby.

Usable square feet, on the other hand, refers to the space which only you, as the tenant, use. This space is calculated differently depending on whether you lease the entire floor or merely a part of it. Full floor tenants’ usable square feet includes the entire leased floor, covering not only the offices but the lavatories, elevators and mechanical rooms as well. Part-floor tenants, however, only calculate the area within the walls of their leased spaces as their usable square feet.

The definition and calculation of CRE loss factor

The two previously mentioned terms are the two main components used to calculate and define your CRE loss factor, also known as the load or core factor. Simply put, this factor is the difference between the usable square footage and the rentable square footage.

It is calculated by subtracting USF from RSF to get the exact figure. But since CRE loss factor indicated the percentage of your loss and not the number, you’ll need to then divide that value by RSF to get the statistic you’re looking for. Although this calculation might seem good enough to be a universal estimate for loss factor, it is actually calculated differently in some cases. For example, in the U.S., there are two different authorities who decide the definitions of RSF, USF and the CRE loss factor: the Business Owners and Managers Association (BOMA) and the Real Estate Board of New York (REBNY).

BOMA vs. REBNY

The most significant difference between the two is that BOMA measures the space of the commercial real estate starting from the centerline of the window, whilst REBNY starts its measurements from the exterior of the window. Most states in the country establish USF and RSF according to BOMA’s standards, but landlords in New York and its surroundings follow REBNY’s calculations. For a more in-depth and visual explanation of the differences between BOMA’s and REBNY’s standards, take a look at this graphic illustration put together by HLW International.

Changes in CRE loss factor and building growth

When the commercial real estate market is hot and highly in-demand, landlords can modify the loss factor to increase their own gains. In instances where buyers are being asked to pay more for their leases because the competition is intense, landlords tend to raise the building’s loss factor slowly but surely, until the new value becomes the new norm.

Tips & tricks to keep your CRE loss factor low

When on the hunt for a new office space, you might already have an exact number in mind regarding square footage. Don’t forget that loss factor also comes into the equation, so you might need to be on the lookout for a roomier office space than you had initially considered. Though prices are mostly displayed per square foot, ask the landlord to calculate total monthly costs to avoid any unpleasant surprises.

As the average loss factor in New York City is around 27%, the much lower average figure in other states (18%) is a comparatively moderate value. The neighborhood you’re in and the exact features of the building housing the office you want to rent can significantly impact the loss factor. For instance, buildings with enormous lobbies and spacious elevators will have a much higher loss factor than those which boast smaller common areas.

You can always ask to look at the layout of the office space you’re wanting to lease in order to establish the useless spaces on your floor. You can also ask for the RSF to be included in your leasing contract to avoid any confusion. Just make sure you take account of the loss factor when calculating your office space needs and your monthly leasing budget so every detail of your arrangement is crystal clear.

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