The Real Deal New York

How is loss factor calculated?…and more questions answered

October 16, 2007

Q. How is loss factor calculated for commercial space?

A. According to NYspace, the last thing a landlord’s agent wants to point out to you is the loss factor. If this is overlooked, it can be the most costly mistake you make.

Loss factor, theoretically, is the percentage of the space “lost” to the common areas of the building or the proportional share of common areas attributed to a specific space. Loss factor can and does vary between different buildings, and even from floor to floor within a single building.

The factors included as “common” are things such as the lobby, elevator shafts, stairways, super’s office, boiler room, storerooms, bathrooms, hallways, and other areas.

What isn’t factored in is that some owners have added an extra area for calculations imagination, according to NYspace.

Tenants should be aware that it exists. They should measure the spaces that seem to work best for them and over which they can negotiate so they will be able to determine the price per “useable” (as opposed to “rentable”) square foot. This way it creates a comparison of the value per useable square foot of one space to another, an apples to apples evaluation.

Q. I work in residential real estate and was curious about my counterparts on the commercial side. How are commissions structured for commercial real estate leasing deals?

A. According to NYspace, a commercial tenant-rep firm in the city, in the 1930′s, when Manhattan vacancy rates were very high, owners and landlords found that it was in their best interest to let every broker market their space.

They began to use an “override commission” system, where the owners paid both the listing and tenant’s brokers. Although this was a little more costly than a “co-brokerage” arrangement, where all brokers split one commission, the owners found that their space rented faster and they made more money in the long run. All brokers had access to all listings.

This system is still in use today, regardless of market conditions.

As far as income, overall, commercial brokers earn a lot on fewer transactions than residential agents.

Alan Schwartz, president of Glen Equities, says that commissions for commercial transactions are generally lower percentages than residential sales, but still offer significant earning potential, because the transactions are for larger amounts of money.

In leasing transactions, commissions are calculated on a sliding scale according to the rent as paid over the term of the lease.

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