Jones Lang LaSalle
Landlords stretch square footage
Growing use of `loss factors' pumps up rents; statistically absurd
By Fran Hawthorne
Published on May 15, 2006
Only in New York.
Two years ago, a Japanese cosmetics company began talks to renew its lease for 14,500 square feet of office space on Manhattan's Third Avenue. Over the following eight months, the amount of space under negotiation grew first to 15,000 square feet and finally to 16,300 square feet.
"The tenant never moved, and the floor never changed," says John Maher, the executive vice president at CB Richard Ellis representing the tenant, which he declined to identify.
What's the difference?
What did change was the loss factor, New York landlords' term for an arcane formula referring to the difference between the square footage that a tenant is paying for and the space that the firm actually gets to use.
These calculations were originally developed with the idea that tenants should shoulder their share of the cost of maintaining common areas, such as lobbies, bathrooms and stairwells. Over time, the once-modest pro rata allocations have become anything but, in many cases doubling from their historical norms. The reason: Landlords have turned the loss factor into an add-on they can use to get more money from tenants by charging for more space.
"A loss factor is just an artificial means of manipulating the rent," says Jim Frederick, an executive managing director at Colliers ABR Inc. "If you're a New York-based tenant, you know that a square foot isn't 12 inches by 12 inches."
Brokers say that the loss factor in prime locations has soared to as much as 25%, from 15% as recently as 20 years ago and 10% when the concept was introduced decades ago.
Mathematical menace
The situation is even worse than it appears. Because of the way the calculations work, a tenant facing a loss factor of 25% is paying for about 30% more space than it actually occupies. That's an extra 30,000 square feet on a 100,000-square-foot space; in a building with rents of $50 per square foot, the loss factor adds $1.5 million to the rent.
Beyond the rise in the loss factor, the formula has changed. A room's square footage used to be measured from one wall of a room to the other. In recent years, landlords have switched to measuring spaces from the outside edge of the walls. That move can add as much as 9 inches to a room's width, and hundreds of square feet to a large space commitment.
"The loss factor originally had some relationship to the design efficiency of a building," Mr. Maher says. "At some point, [this escalation] really does have to stop."
Given the lack of rules on the use of loss factors, that's not likely to happen anytime soon. Steven Spinola, president of the Real Estate Board of New York--which created the system--says his organization's only requirement is that building owners "give the square footage that is available, and then state clearly to the tenant what the loss factor is."
Furthermore, landlords can "remeasure," or increase the loss factor, at any time. And they do.
"The loss factor is based on what each landlord thinks the market will bear," says Kenneth Siegel, a managing director at Jones Lang LaSalle.
Mr. Spinola insists that landlords--several of whom declined requests to talk about loss factors--have reason to implement increases.
"There are a lot more things today that tenants are demanding: backup generators, telecom systems, more elevator service," he says. "All those take up space in the building."
Playing the game
Some tenants understand the intricacies behind the use of loss factors so well that they actually use hikes as bargaining chips to gain concessions, such as rent-free periods. "Sophisticated tenants understand it's part of the game," says Mr. Siegel.
The concept may be difficult to explain to less-sophisticated tenants and out-of-towners, however. It also can be a tough sell for multicity law firms. Partners at the same level are supposed to have offices of the same size. If firms use square footage figures provided by New York landlords, their offices here will be physically smaller than those elsewhere, because the loss factor must be subtracted. For firms using their own figures, rents can be astronomical once the loss factor is tacked on.
No wonder brokers increasingly say things have gotten out of hand. "Even at 18%, you could still make the argument that the loss factor was reasonable," says Mr. Siegel. "But now, at 25%, the total square footage charged is more than the actual gross square footage of the building."
Comments? cnyb@crain.com
Landlords stretch square footage
Growing use of `loss factors' pumps up rents; statistically absurd
By Fran Hawthorne
Published on May 15, 2006
Only in New York.
Two years ago, a Japanese cosmetics company began talks to renew its lease for 14,500 square feet of office space on Manhattan's Third Avenue. Over the following eight months, the amount of space under negotiation grew first to 15,000 square feet and finally to 16,300 square feet.
"The tenant never moved, and the floor never changed," says John Maher, the executive vice president at CB Richard Ellis representing the tenant, which he declined to identify.
What's the difference?
What did change was the loss factor, New York landlords' term for an arcane formula referring to the difference between the square footage that a tenant is paying for and the space that the firm actually gets to use.
These calculations were originally developed with the idea that tenants should shoulder their share of the cost of maintaining common areas, such as lobbies, bathrooms and stairwells. Over time, the once-modest pro rata allocations have become anything but, in many cases doubling from their historical norms. The reason: Landlords have turned the loss factor into an add-on they can use to get more money from tenants by charging for more space.
"A loss factor is just an artificial means of manipulating the rent," says Jim Frederick, an executive managing director at Colliers ABR Inc. "If you're a New York-based tenant, you know that a square foot isn't 12 inches by 12 inches."
Brokers say that the loss factor in prime locations has soared to as much as 25%, from 15% as recently as 20 years ago and 10% when the concept was introduced decades ago.
Mathematical menace
The situation is even worse than it appears. Because of the way the calculations work, a tenant facing a loss factor of 25% is paying for about 30% more space than it actually occupies. That's an extra 30,000 square feet on a 100,000-square-foot space; in a building with rents of $50 per square foot, the loss factor adds $1.5 million to the rent.
Beyond the rise in the loss factor, the formula has changed. A room's square footage used to be measured from one wall of a room to the other. In recent years, landlords have switched to measuring spaces from the outside edge of the walls. That move can add as much as 9 inches to a room's width, and hundreds of square feet to a large space commitment.
"The loss factor originally had some relationship to the design efficiency of a building," Mr. Maher says. "At some point, [this escalation] really does have to stop."
Given the lack of rules on the use of loss factors, that's not likely to happen anytime soon. Steven Spinola, president of the Real Estate Board of New York--which created the system--says his organization's only requirement is that building owners "give the square footage that is available, and then state clearly to the tenant what the loss factor is."
Furthermore, landlords can "remeasure," or increase the loss factor, at any time. And they do.
"The loss factor is based on what each landlord thinks the market will bear," says Kenneth Siegel, a managing director at Jones Lang LaSalle.
Mr. Spinola insists that landlords--several of whom declined requests to talk about loss factors--have reason to implement increases.
"There are a lot more things today that tenants are demanding: backup generators, telecom systems, more elevator service," he says. "All those take up space in the building."
Playing the game
Some tenants understand the intricacies behind the use of loss factors so well that they actually use hikes as bargaining chips to gain concessions, such as rent-free periods. "Sophisticated tenants understand it's part of the game," says Mr. Siegel.
The concept may be difficult to explain to less-sophisticated tenants and out-of-towners, however. It also can be a tough sell for multicity law firms. Partners at the same level are supposed to have offices of the same size. If firms use square footage figures provided by New York landlords, their offices here will be physically smaller than those elsewhere, because the loss factor must be subtracted. For firms using their own figures, rents can be astronomical once the loss factor is tacked on.
No wonder brokers increasingly say things have gotten out of hand. "Even at 18%, you could still make the argument that the loss factor was reasonable," says Mr. Siegel. "But now, at 25%, the total square footage charged is more than the actual gross square footage of the building."
Comments? cnyb@crain.com
posted by Jones Lang LaSalle NJ News Blog at 10:35 AM
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