How to measure space for tenants, part 2

Last month we learned a tenant may exclusively occupy and use a certain amount of space in a building; but they also share "common areas" with all the other tenants in that building. A tenant ends up occupying net or usable square footage but paying for this space plus their proportionate share of the common area, known as the rentable or gross or billable square footage. Different terms are used in different areas and by various landlords. The important concept is that tenants often have to pay for more space than they occupy. There are two different methods used to do this calculation, the Add-On Factor and the Loss or Core Factor method. In order to illustrate the differences between the calculations we will use an example of a 50,000 s/f building that has "common areas" in 20% of the building. The tenant will occupy 10,000 s/f in the building. The Add-On Factor is generally found in use in areas where there is high vacancy and low absorption rates. In this case, the tenant will use and occupy 10,000 s/f in this building; the landlord uses an Add-On Factor of 20% representing the common area of the building. How much space is the tenant billed for? To calculate, we consider the usable square footage occupied by the tenant to be 100% of their space and add to that 20%. The percentages are converted to decimals and multiplied by the usable amount of space. 100% + 20% = 120% or 1.20 10,000 s/f X 1.20 = 12,000 s/f The tenant must pay for 12,000 s/f of space. Using the same building example, but using the Loss Factor of Core Factor method of calculating rentable square footage will produce a different result. This system of calculation is found in use in areas of generally low vacancy and relatively high absorption rates. In this method the landlord advises the net or usable square footage and the Loss or Core Factor percentage. The agent is expected to know how to calculate the rentable square footage and advise the tenant how much space they will have to pay for. The rentable square footage is determined by dividing the net square footage by the inverse of the loss or core factor. The calculation is illustrated by the formula in Chart 1 (above). To determine the denominator for this equation we subtract from the whole number one the loss factor percentage as a decimal, this gives us the inverse of the loss factor. For example: The landlord advises the usable square footage is 10,000 s/f and the building has a 20% loss factor. Step 1: Calculate the inverse of the loss factor (denominator for the equation) 20% = .20; 1 - .20 = .8 Step 2: Calculate the rentable square footage using the formula seen in Chart 1 (above). Comparing the results of the two different methods shows that using the Loss Factor or Core Factor method produces a higher amount of Rentable Square Footage and consequently more rental money to the landlord. Edward Smith, CREI, ITI, CIC, GREEN, RECS, is the regional director of Coldwell Banker Commercial NRT, Eastport, N.Y.