The Real Deal New York

Big loss factor riles small tenant in Midtown

Lawsuit draws attention to confusing element of Manhattan leasing

March 16, 2012 04:30PM
By Adam Pincus

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From left: Esther Zar, managing director at Murray Hill properties, 250 West 57th Street, and Anthony Malkin of Malkin Holdings

A small office tenant in a Midtown building is expressing the confusion and anger that many of his peers feel with the concept known in the industry as the loss factor, which he perceives is eating up nearly half of the space for which he is paying rent.

Glenn Nordlinger, CEO of the business management firm the Nordlinger Group, has been renting 2,508 square feet at 250 West 57th Street since 2008. But after measuring it, he discovered that he had only 1,378 square feet of usable space.

Because he felt the landlord had been “deceptive,” by calling it more than 2,500 square feet, he filed suit in New York State Supreme Court Wednesday, seeking to terminate his lease with Fisk Building Associates and asking for damages of at least $286,358, the court papers show.

The loss factor represents the percentage of the square feet recorded on the lease, known as the rentable space, which is not usable space. Landlords use the loss factor to help them cover the costs of common areas of the building such as the lobby, mechanical rooms and elevator shafts, which are not part of a tenant’s usable space. (For example a loss factor of 25 percent provides a tenant who has a lease for 10,000 square feet actually only 7,500 square feet of usable space.)

Several brokers interviewed said loss factors for a space on a divided floor in a 91-year-old building such as 250 West 57th Street, would typically range from 33 percent to 40 percent. Although Nordlinger’s suit says his unit’s loss factor is higher than that, it’s not by much, brokers said. Loss factors on a full floor are generally lower, closer to 25 to 30 percent, brokers said.

“The lease applies an outrageous loss factor, approaching 50 percent, nearly double the industry standard,” the court filing says. “The lease terms are unconscionable and unenforceable.”

Nordlinger’s attorney declined to comment, citing a policy not to discuss active litigation. A spokesperson for Anthony Malkin’s Malkin Holdings, which owns the building, declined to comment.

Nordlinger is not alone in his exasperation with the city’s loss factor, and it’s a situation that tends to grow with time. Often when a building is sold or the leasing company is changed, the rentable area in the building is increased.

“It is an ongoing conversation with tenants about loss factor, and they are so frustrated by it. They feel different landlords have different loss factors, and when it is really high they think the landlord is pulling a fast one,” Esther Zar, managing director at Murray Hill properties, said. She was speaking about the market in general, and was not familiar with or commenting on the Nordlinger case.

Last year, for example, Manhattan’s office space grew by 11 million square feet, figures from commercial firm Cassidy Turley show, with most of that coming from increases in the rentable space in existing office buildings that announced higher rentable figures for their buildings, but not from new construction.

Some examples are 100 Wall Street, purchased by Midtown-based investment firm Savanna last year, which saw the property’s rentable area grow from 463,664 square feet to 480,000 square feet; and SL Green Realty’s 521 Fifth Avenue, where the rentable area rose from 460,000 square feet to 490,000 square feet, data from CoStar Group shows.

The most high-profile growth in recent rentable area was at 1 World Trade Center. In late 2010, after the Durst Organization made an equity investment in the Port Authority of New York and New Jersey tower, the rentable area the co-owners used jumped from 2.6 million square feet to 3 million square feet.

A Durst spokesperson said of the change, “We are now using the industry standard to calculate the size of the building. One World Trade Center is now measured like every other commercial office building in New York City.”

Most tenants just grin and bear it, once the structure is explained to them, one broker said.

“Some tenants roll their eyes and say, ‘Jesus, [I guess] this is just doing business in New York,’” said one insider, who represents building owners and so asked not to be identified.

 

  • OTW

    It is about time that there should be a standard measurement regulated by either DOB or REBNY. REBNY knew about this deceiving practice by many owners but they looked the other way because they are part of the problem. Helmsley-Spear used call the Empire State Building 2.2 million sf and now Malkins calls it 2.9 million sf. It is a thievery.

  • DeezNutz

    Yes, this is thievery, but it’s been going on for a long time and unfortunately, there is nothing any of us can do it about it. Loss Factors have become simply part of the market. Pending any sort of new legal standards, I really don’t know what one can do. While I commend this broker sticking up for her client, to try and win this with a 2,000 +/- sf tenant is, I hate to say it, but sadly, a waste of time and energy for her.

  • dealster

    What are yout talking about? The tenant is the one that’s starting the lawsuit – the broker had nothing to do with it. They just asked the broker for her opinion on loss factors in Manhattan.

  • Chuck

    The only thing it will change is how the money is allocated. Instead of leasing at lower rates ($/sf) they’ll just raise the rates to to cover the costs associated with ‘loss’ factors.

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