Snapchat and Loss Factors
When it comes to technology, I am dangerously close to becoming roadkill on the information superhighway.
Yet, despite ridicule from my three sons for my middle aged techno incompetence, I am very proud that I recently took a huge step by downloading Snapchat.
Snapchat is an app (c’mon, admit it, you love it when I say “app”) which allows users to take pictures (and even video), write captions and draw on the pictures, and send them to other users.
The pictures only last for a few seconds, creating a handy medium for “sexting” and Congressmen with poor judgment, but also becoming a big hit with the target younger audience. My sons are particularly adept at capturing awkward moments (often mine) or forwarding photographs with amusing captions.
The amazing thing about Snapchat (other than that the creators recently turned down an offer of 3 Billion Dollars for the company!) is that it is based on a service that so quickly disappears.
This may seem alien in my world of commercial leasing, where our clients treasure forever our lease documents for their magical prose.
However, in commercial leasing we have our own version of a disappearing act; the loss of some of the tenant’s actual space based on the conversion of “usable” square feet into “rentable” square feet.
How did this come about? Well, at some point, an enterprising landlord introduced the concept of the “loss factor” (the percentage reduction from rentable to usable space) so that each tenant would pay for its proportionate share of common areas.
Although the rationale makes some sense, loss factors are really driven by the market, so that loss factors are generally accepted based on area custom even though office buildings have vastly different floor plans, load bearing column sizes, mechanical spaces, lobbies, etc.
Various organizations, such as the Real Estate Board of New York and the Building Owners & Managers Association, provide guidelines for establishing loss factors, but these are not uniform or universally followed.
Even the term “usable” space is misleading. REBNY guidelines define the term to include measurements to the outer façade of the building, deducting only floor penetrations (e.g. elevators), but not other mechanical or electrical rooms, janitorial closets, columns, etc. Loss factors for multiple tenant floors are, as you might expect, higher than for full floor tenants (to cover common area hallways, bathrooms, etc.).
So while a tenant is really concerned with “carpetable” space where bodies and furniture can actually fit, it pays for rentable area (often imaginary space halfway across the street).
And in today’s market, buildings can see their floor space “grow” for no particular reason other than to maximize landlord profit, such as when the building has been sold or a new landlord agent has been retained.
Maintain a handle on your disappearing carpetable space with these four suggestions:
- Conduct thorough due diligence. You must understand your landlord’s loss factor to make an informed leasing decision.
○ Have your architect and/or broker determine whether the loss factor in your building is consistent with the market, an essential “apples to apples” analysis.
○ Confirm whether your landlord’s exclusions and inclusions make sense. Do any of the mechanical or common area spaces benefit you or do they only benefit other particular tenants? You do not want to pay for something that provides no benefit to your lease.
- Address the loss factor up front. Work with your architect, broker and other professionals early on in the process to address this issue. Once the term sheet is completed, it will be hard to go back to your landlord to re-negotiate the rent other than with respect to an egregious error.
- Watch out for the percentage share “bait and switch”. Find your inner Nancy Drew and do some web research. We have found that a landlord’s website can provide valuable information about the loss factor. We had one large lease where the rentable square feet shown on the landlord’s website differed from the larger figures provided by the landlord to calculate the tenant’s percentage interests and the landlord was using the larger numerator figure (the tenant’s space) with the smaller denominator figure (the rentable square feet for the building) to improperly inflate the percentage interest.
- Focus on the economics. You should ultimately focus on how many people and how much personal property your premises can accommodate (which you can determine by having your architect do a test fit plan for each space you are considering) and how the rent for that space compares with other spaces in the market.
The loss factor cannot be viewed in a vacuum. For example, there can be certain advantages to you based on the larger rentable square foot number, such as a greater tenant improvement allowance, which is usually paid based on a dollar figure per rentable square foot, even though contractors generally charge based on the actual cost of construction. You will need to determine the aggregate costs and benefits and how they stack up to what is available for comparable space in the market.
Make sure to follow these suggestions and obtain the necessary information to make an informed economic decision about your potential space. If you have any trouble with the numbers, I am always ready to pull out my abacus and assist you.