How Landlords Use a "Rubber Ruler"
to Charge Tenants for Invisible Square Feet

© CSI Consultants Inc.

As George Orwell might have put it, "All square feet are equal, but some are more equal than others."  The "rentable area" of virtually every office unit includes a large block of square feet that cannot be used, or even found, but for which the tenant is nevertheless charged rent.  The percentage difference between rentable and usable area is known as the Loss Factor.

To make life even more interesting, loss factors vary from building to building, and sometimes from floor to floor.  It might be 15% in a small prewar property, and 40% in a contemporary tower.  The loss factor is never disclosed publicly, and can only be determined by measuring the space and comparing the usable and rentable square footages.

There are no universally accepted standards for establishing loss factors in office buildings.  In 1969, the Real Estate Board of NY created guidelines, but they were ignored and eventually rescinded.  A national organization, the Building Owners & Managers
Association (BOMA) has its own guidelines, but compliance with them is totally voluntary.  In practice, particularly in New York, landlords set their loss factors according to "whatever the market will bear".

As a result, rentable areas bear little relation to usable areas.  Floors routinely "grow" overnight following the purchase of a property, a change in the landlord's agent, or the relocation of a major tenant.  In researching space for a client recently, we found that a floor listed as 8,000 square feet had been listed as 6,400 square feet only five years ago.  It had miraculously grown by 25%!  In Manhattan, such discoveries are almost routine.

Rent is quoted in terms of rentable, not usable, area.  So, if any two buildings offer space at the same $30 per rentable square foot, the rent per usable square foot will probably be different.  If Building A's loss factor is 20%, for example, the rent is $37.50 per USF.  If Building B's loss factor is 30%, the rent is $42.86 per USF.  A building with a higher quoted rent, but a lower loss factor, can actually be less expensive than one with a lower quoted rent, but a higher loss factor.

What's a tenant to do?

Don't be put in the position of comparing apples to oranges.  Before deciding among competing transactions, you must know the Cost per Usable Square Foot of each one.  These calculations should be reflected in the financial analyses prepared by your broker.

In the early stages of the space search, the broker should be able to approximate the usable area of each unit, based on floor plans and on industry and landlord practices.  As the search narrows, the calculation of loss factor will change, as your architect applies his or her own definition of usable area, and re-measures the units accordingly.  (Sorry, there's no standard definition of "usable area" either.)  The financial analyses will then be revised.  You will then know precisely what the cost is for both the visible and the invisible square feet of each unit under consideration.

If you can't get what you pay for, at least know what you're paying for what you do get.

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