A Fresh Take on CRE

Loss Factor Demystified OR The Truth About Loss Factor OR What is a Loss Factor?

If you're looking for office space in NYC, you may have heard about "Loss Factor." You may even think you know what it is - but do you?

Well, to put it simply Loss Factor = (Rentable Area minus Usable Area) divided by Rentable Area. At least this seems like relatively simple math, but what if different buildings use different metrics for determining rentable area and usable area? Besides, why should I even have to pay for space I can't use?

I'll start off, by answering the second question. You have to pay for space you can't use, because Landlords find it more convenient to charge you for space you can't use than to charge you higher rent for the space you can use (like they do in Europe). They figure, that they have to build and maintain these spaces (lobbies, stairwells, corridors, etc.), so why not pass on the cost.

Now, the answer to the first question is a bit more complicated - what does happen if different buildings use different metrics? . . . and they do! I'll explain how it works through the story of Joe Landlord and Steve Landlord.

Joe Landlord has a "1 million square foot" office building. Of that space, 750,000 sf is usable. That means that Joe Landlord's building has a 25% loss factor. Steve Landlord owns the building next door. His building is just like Joe Landlord's and his space rents for about the same number as Joe Landlord's. There's one key difference, and that's that Steve Landlord only has a loss factor of 20% in his building vs. Joe's 25%. What does that mean? It means that Joe Landlord brings in more money than Steve Landlord!

One day, Steve Landlord finds out that Joe Landlord has found this clever way to make more money. Not to be shown up by Joe, Steve decides he's going to "grow" the size of his building. He'll still rent the same floors, but instead of calling those floors 15,000 sf, he's now going to call them 17,500 sf. Voila! Steve now has a 27% loss factor.

For those of you who haven't heard about this practice, you're probably shocked and appalled. You think, this must be illegal, you can't just say that a floor is larger than it is! Well, actually, in NYC you can. If it makes you feel any better - everybody does it (no, that doesn't make it right), but if you are a landlord, and you don't do it, you'll either sacrifice a lot of money, or have to charge exorbitant rents to compensate.

Now, I know I haven't told the full story, so stay tuned for tomorrow's installment, where I'll tell you about the other half of the equation above . . . usable area! (and why it's not really usable)