The Loss Factor In NYC Commercial Real Estate

POSTED ON 09-13-2016 FOR PRIVATE SPACE BY NEAL LERNER

When dealing with space size in New York City, we've inherited a system where what you see is not what you get. The sad truth is that NYC commercial office space is always smaller than they say it is - usually by between 25%-35%, and sometimes even more. This is called the loss factor, and the logic behind it is that the landlord has substantial space in the building that the tenant benefits from but which the landlord doesn't receive rent from. Ostensibly it is an effort for the landlord to regain the value of vertical penetrations (shafts, elevators), janitorial closets, elevator hallways, lobby, mechanical space etc. The problem however is that all buildings are not measured with the same ruler - and it can be hard to compare apples to apples when evaluating different spaces side by side. We like to distinguish buildings by their "cost per useable sq. ft." for these comparisons.

In shared office space the sublandlord's loss factor is imputed in the monthly rent - and probably more than once. The sublandlord is subject to the landlord's loss factor calculation. The subtenant actually gets a double loss factor because the sublandlord has to account for circulation and common areas within the space. This is a little less obvious because in shared office space the subtenant usually pays a monthly rent rather than a rent per sq. ft. In fact, for most shared office space the cost per sq. ft. is an unusually high number if you actually calculate it, but you now have to take into account that you are renting finished, furnished space (in a law firm) that is fully provisioned with phones and IT, and managed by someone else, and as subtenant you get to use all of the amenities. If you add in the cost that would have been incurred if the subtenant was managing its own space.

When you add up everything, including the receptionist and the apportionment of common areas (conference rooms, reception and waiting areas, kitchen, copy room, file space, hallways etc. you will get quite a different figure if you add in that office's proportionate share of these amenities and services. So if there were 12 offices of equal size in a legal suite, and the subtenant rented 2 of them, you can start with the cost per sq. ft. of the office adjusted (increased) for the building loss factor, and add to it 1/6th of the cost for:

  • Receptionist salary & benefits
  • Phone system lease cost
  • Copy machine rental cost & supplies
  • Office manager salary & benefits
  • IT maintenance contract (or proportionate share of full time, dedicated IT staff, if any
  • Kitchen supplies
  • Electricity
  • Annual leasehold escalation
  • Annual share of increases in real estate tax
  • Extra cleaning cost

So when looking at the cost and value of shared office space it is really important to take into account the "host's" actual cost of running and maintaining the space when you are trying to calculate a fair value for the space either on a monthly basis or a per sq. ft. basis. There are a lot of factors involved in the calculation beyond the cost per sq. ft.

Conclusion: If you are comparing private spaces on a direct lease from the landlord or a sublease from the sublandlord, you must compute the loss factor for each space and use it to interpret the cost per useable sq. ft. in each prospective space in your comparison set.

If you are comparing shared office spaces, we suggest you start with the monthly rent and divide that by the actual sq. ft. measurement of the space. Compare that number space by space - while adding in the monthly costs for any "extras" so you are comparing shared space on an equal basis. "Extras" would include any charges for the items highlighted above.

There is a minefield of opportunities for Tenant's in NYC to stumble in a way that will hurt the bottom line considerably. As Tenant Brokers, we advocate an analytical approach to evaluating spaces side by side and the Tenant has to realize that there are a plethora of factors that need to be included in the analysis if it is to be made on an equal basis for each submission.

If your firm is looking for space and you'd like a free office space survey, please contact Neal Lerner at: 212 986-9100 for immediate assistance with your search for new offices.

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