Maximize Your Commercial Real Estate Dollar in 3 Easy Steps
Signing a commercial lease is one of the biggest steps in a business owner’s journey. The lease agreement is filled with all aspects of rules, regulations and terms to understand during a rental relationship. And, as a business owner, your livelihood is at stake so you want to make sure you’re getting the most value for your dollar.
Fortunately (or unfortunately, however you see it), this starts with determining your rentable square footage. It’s one of the first and most crucial steps in the process. However, especially if you have a mixed-use building or a space with multiple tenants, understanding what you’re renting can be confusing.
Before you sign any lease agreement, here’s a quick and dirty lesson to know what you’re paying for and ultimately getting for your business.
Rentable v. Usable Square Footage – What’s the Difference and Why it Matters:
Simply put, Usable Square Footage (USF) is the actual space a tenant occupies. Keep in mind, this only accounts for the space a tenant is using for their business, and it excludes any common areas (for example, the building’s lobbies or restrooms.) If you’re a tenant that occupies multiple floors in a building, the USF calculation includes lobbies or restrooms that exclusively serve your floor(s).
Rentable Square Footage (RSF) is your usable square footage plus your proportionate share of the building’s shared space. So, this can be anything outside of your occupied space and that benefits you (for example, the lobbies and restrooms, mentioned above). As a tenant in a commercial space, you pay for a portion of the shared space and so your monthly rent is always calculated on RSF.
The “Loss Factor”:
When you take a look at the lease agreement, you’ll likely come across the phrase “loss factor,” “common area factor” or “add-on factor.” And – for tenants – this is arguably the single most important calculation to understand when evaluating commercial property.
The loss factor is essentially the increase in the rentable square footage above your usable square footage. You can easily break it down into three easy steps:
Step 1: Determine how much total floor area a building has.
Step 2: Subtract the shared square footage (from the total building floor area) to give you the USF. If you’re unsure of this number, just ask the building owner as they can easily provide you with the information.
Step 3: Divide the total floor space by the USF to give you the loss factor %.
What does this mean for a tenant?:
Higher loss factor percentages mean that more of a tenant’s monthly rent will be dedicated to common areas and less to the space they occupy. However, this also means that buildings with higher loss factors have many more amenities – in the form of indoor pools, spacious lobbies with conference rooms, on-site laundry facilities, chef-grade kitchens – all of which might be very appealing to some tenants. The most important takeaway here, is determining if the price per square foot matters to your business.
With any commercial real estate lease, you should always know exactly what you’re getting and what you’re paying for. As a potential tenant, pay attention to the fine print – it really matters to your business. Having the help of a trusted and experienced advisor or broker can help tremendously in these types of situations, so as a tenant, you can always be sure you’re getting a fair deal.
If you’re going into a lease or purchase, it’s important to know what you’re getting into. Check out my previous post “8 Tips and Tricks for Commercial Tenants” that can help you have a smoother transaction process.