What is a loss factor and how do you calculate it?
How to calculate loss factor in New York City
What is a NYC loss factor?
The NYC loss factor is unlike any other city in the world. Few real estate concepts cause as much confusion with tenants, and even some real estate professionals, as the difference between usable square footage (USF) and rentable square footage (RSF) . A quick primer on USF, RSF, and Loss Factors, is in order for anyone searching for office space in order to streamline their search and obtain the most value from their lease.
Before breaking down the USF and RSF it is important to understand what a loss factor is. Loss factor is defined as the “percentage of the building’s area shared by tenants… that are dedicated to the common areas of a building and used to calculate the difference between the usable and rentable areas.” The loss factor takes into consideration the building’s lobby, elevators, stairwells, shafts, and mechanical areas. In New York City, loss factors are less determined by actual physical features of a building and floor but rather set by the market. For example many tenants renewing leases today are shocked to find out that their space has grown- what was once 3,400 RSF is now 3,852 RSF!
How does a building grow?
When the office leasing market becomes more competitive, building owners look to for ways to extract more revenue from their buildings. Tenant’s tend to compare space on a $/RSF basis so while the $/RSF could only be hiked up so much while seeming competitive, Landlords can play with the Loss Factor as a way of increasing rental income. So when the market heats landlords will increase the loss factor one by one until the new loss factor becomes the market standard. Once this catches on there is no turning back.
Usable square footage (USF)- A tenant’s usable area which some refer to as “carpetable area” is the amount of square footage that the tenant can use for its business purposes as calculated using a standard of measurement defined by Building Owners and Manager Association (BOMA).
USF is calculated differently for full floor tenants than for partial floor tenants. For a full floor tenant the usable square footage includes the perimeter of the floor from the glass including all area dedicated to the floor such as bathrooms, mechanical rooms, elevator lobby ect. For partial floor tenants the usable square footage in the area within the demising walls of the tenant’s own space. Area’s such as common area restrooms, mechanical rooms on the floor, and common corridors are not included in the usable area. Once the USF is calculated a loss factor is applied to get to the rentable area.
Rentable square footage (RSF)- This is the amount of space that the tenant pays for. The rentable area is calculated by applying a building’s loss factor to the USF.
How is the rentable square footage calculated?
The formula used for calculating the rentable square footage (RSF) from the usable square footage (USF) using a defined loss factor (LF) is:
After meeting with an architect and reviewing their space program TechChamps learned that they need 8,000 USF. They are looking at a building offering a full floor with a 27% loss factor and a building with a divided floor with a 34% loss factor.
To gross this up to a RSF using a 27% loss factor it would look like this:
8,000/1-.27= 10,959 RSF
To gross this up to a RSF using a 34% loss factor it would look like this:
8,000/1-.34= 12,121 RSF
By changing around the variables you could determine a Loss Factor using the following equation:
Full Floor vs Shared Floor
After seeing office spaces in different buildings and on different floors a tenant will begin to notice that they will fit into one space that is 3,500 RSF on a full floor but not into 3,500 RSF on a divided floor. This is because the loss factor on a divided floor takes the common corridors on the floor into account thereby increasing the shared area for the tenants on the floor. Due to the fact that floors could be divided in many different ways, some more efficient than others, a tenant could also find themselves fitting into 3,500 RSF on one divided floor and will not fit into 3,500 RSF on another divided floor in the same building.
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