By Peter Shakalis
The concept of a loss factor goes something like this: since a tenant uses or is serviced by areas such as the building’s lobby, hallways, freight loading areas, telecom¬munication rooms and HVAC floor(s), but does not occupy (and pay rent on) these areas, the landlord includes in a tenant’s rentable square foot measurement a ‘loss factor’ to compensate for its cost for these dedicated areas. These landlord loss factors can vary substantially between buildings as well as between divided and full floors.
For instance if one physically measured what a landlord called 10,000 ‘rentable’ square feet with a 25% loss factor, you would find only 7,500 net or usable square feet. The tenant pays rent on this missing 2,500 square feet to compensate the landlord for the tenant's use of the above mentioned areas.
While there is a good reason for loss factors, it’s important to determine just how much ‘lost’ space there is in the landlords quoted rentable square foot measurement when considering new office space. Some less scrupulous landlords will increase the loss factor they apply to space in their building arbitrarily, utilizing it as a profit center and taking advantage of unsuspecting tenants. It’s important to note that tenants pay base rent on this loss factor measurement as well as annual operating escalation increases. If electricity is supplied on a rent inclusion basis say at $3.25 per square foot, that’s also included.
Loss factors aside, the net or usable space in an office unit can also be deceptive. It can include bathrooms, interior col¬umns, supplemental heating/cooling units and other elements that reduce the space a tenant can utilize. Columns, corners, curves and other architectural elements will also make a difference. Tenants therefore should use “carpetable” or "assignable" square footage to determine how desks, com¬puters and employees will actually fit into various blocks of space. A company look¬ing at 10,000 rentable square feet in two competing buildings might find the one with a higher loss factor (i.e. with less usable space) is actually better because the company's people and equipment fit into the space better.
While loss factors are important, assignable or usable space based on the configuration of the floor is key - price alone is not necessarily an indicator of value. With companies trying to cut costs in this challenging economy, the role of their architect and broker in finding the ‘right’ space has become ever more important.
Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com
When leasing commercial office space, the size of the space is typically referred to in terms of ‘rentable square feet’ instead of square feet. The reason is that the rentable square foot measurement includes what is referred to as a ‘loss factor’. 
