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Not All Commercial Buildings Are Created Equal: Examining 'Core Factor' and How It Affects Commercial Tenants

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Jamal Brown

Not all commercial buildings are created equal. One of the most overlooked aspects of a building's value to the tenant is the ratio of space the tenant leases within their four walls (the usable square footage) versus the amount of space attributed to all common areas of the building. These areas include the lobby, hallways, restrooms, common conference rooms, common kitchen areas, common break areas, work-out facilities, showers/lockers, phone and electrical rooms, and any other common use area. This ratio refers to the building's core factor (also referred to as load factor, loss factor, or add-on factor). Landlords add a proportionate share of this common space to each tenant's usable square footage in order to reach the rentable square footage — the amount a tenant pays rent on. Variations in core factor can quickly offset differences in rental rates. Core factors can vary by as much as 10% to 15% and many times are artificial, as in, implemented by the landlord with no confirmation. This becomes a marketing ploy, to offer a lower rent when, in reality, the end result is substantially more than other competing buildings with greater efficiency. We find that in many cases, tenants who have existed under leases for years still don't understand this issue today.

Buildings calculate all space that is constructed as gross square footage. The standard of commercial property measurement ("BOMA") then requires that all vertical penetrations (stairwells and elevator shafts) be deducted from the gross square footage and the remaining square footage is the rentable square footage. When a company negotiates a lease on commercial space, they are occupying the usable square footage which is the square footage within their four walls but paying for the rentable square footage, including their share of the common areas referenced above.

Understanding core factors translates directly to the bottom line. Since building costs are typically near the top of the expense list, the savings can be dramatic in comparison to other expenses. Pay attention to the core factor. The example below puts numbers to the story:

XYZ Company needs 30,000 square feet of usable space to operate their business and is evaluating two opportunities. Building A has a core factor of 19% (1.19) and Building B has a core factor of 11% (1.11). Both buildings are offering $2.00 per rentable square foot. In this scenario, XYZ Company has a choice of leasing 35,700 rentable square feet in Building A, at a monthly rent of $71,400, or leasing a more efficient 33,300 rentable square feet in Building B, at a monthly rent of $66,600 per month. Calculating the difference in XYZ Company's rental costs, they will save $288,000 over a five year lease term if they locate in Building B for the same amount of usable square footage.

This is one of many pitfalls that can be costly if not known by companies leasing commercial space. Don't get caught paying more than you should. Hire a tenant representation broker to help you. It doesn't cost you a dime but the savings can be extraordinary.

About Jamal

Joining Cresa in 2008, Jamal brings a wide range of real estate knowledge to the San Diego team. His dedication to supporting local business owners and achieving their company goals in facility negotiations make him uniquely qualified to represent San Diego's employers. As a trusted advisor to tenants in the legal, technology, healthcare, and life science industries, Jamal ensures that his clients are positioned to make well-informed decisions based on empirical market data.

About Cresa

As the world's largest corporate real estate advisory firm exclusively representing tenants, Cresa specializes in the delivery of fully integrated real estate services, including: Transaction Management, Project Management, Strategic Services, Corporate Solutions, Site Selection, Lease Administration, Capital Markets, Mission Critical Solutions, Relocation Management, and Facilities Management. For more information, visit www.cresa.com.

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