Tenant Leasing Illustrated
February 2014
Issue #25



Forward to
a Friend



Sign up for
this Newsletter



See our
Newsletter
Archive




Madison Park
Hello,

Without being too philosophical, some of the best things in life disappear too quickly.

I am not just thinking of my youth or the hair on top of my head. In commercial leasing "usable" square feet can be reduced to "rentable" square feet (and even usable square feet may not be the "carpetable" square feet you were expecting).

In this issue, we discuss your ever shrinking space and provide four issues to focus on to understand what you are really getting in terms of space.

Sincerely,
Alan
Alan Katz
Mintz & Gold LLP 

 

Snapchat and Loss Factors

 

When it comes to technology, I am dangerously close to becoming roadkill on the information superhighway.

Yet, despite ridicule from my three sons for my middle aged techno incompetence, I am very proud that I recently took a huge step by downloading Snapchat.

Snapchat is an app (c'mon, admit it, you love it when I say "app") which allows users to take pictures (and even video), write captions and draw on the pictures, and send them to other users.

The pictures only last for a few seconds, creating a handy medium for "sexting" and Congressmen with poor judgment, but also becoming a big hit with the target younger audience. My sons are particularly adept at capturing awkward moments (often mine) or forwarding photographs with amusing captions.

The amazing thing about Snapchat (other than that the creators recently turned down an offer of 3 Billion Dollars for the company!) is that it is based on a service that so quickly disappears.

This may seem alien in my world of commercial leasing, where our clients treasure forever our lease documents for their magical prose.

However, in commercial leasing we have our own version of a disappearing act; the loss of some of the tenant's actual space based on the conversion of "usable" square feet into "rentable" square feet.

How did this come about? Well, at some point, an enterprising landlord introduced the concept of the "loss factor" (the percentage reduction from rentable to usable space) so that each tenant would pay for its proportionate share of common areas.

Although the rationale makes some sense, loss factors are really driven by the market, so that loss factors are generally accepted based on area custom even though office buildings have vastly different floor plans, load bearing column sizes, mechanical spaces, lobbies, etc.

Various organizations, such as the Real Estate Board of New York and the Building Owners & Managers Association, provide guidelines for establishing loss factors, but these are not uniform or universally followed.

Even the term "usable" space is misleading. REBNY guidelines define the term to include measurements to the outer fa├žade of the building, deducting only floor penetrations (e.g. elevators), but not other mechanical or electrical rooms, janitorial closets, columns, etc. Loss factors for multiple tenant floors are, as you might expect, higher than for full floor tenants (to cover common area hallways, bathrooms, etc.).

So while a tenant is really concerned with "carpetable" space where bodies and furniture can actually fit, it pays for rentable area (often imaginary space halfway across the street).

And in today's market, buildings can see their floor space "grow" for no particular reason other than to maximize landlord profit, such as when the building has been sold or a new landlord agent has been retained.

Maintain a handle on your disappearing carpetable space with these four suggestions:
  • Conduct thorough due diligence. You must understand your landlord's loss factor to make an informed leasing decision.
    • Have your architect and/or broker determine whether the loss factor in your building is consistent with the market, an essential "apples to apples" analysis.
    • Confirm whether your landlord's exclusions and inclusions make sense. Do any of the mechanical or common area spaces benefit you or do they only benefit other particular tenants? You do not want to pay for something that provides no benefit to your lease.
  • Address the loss factor up front. Work with your architect, broker and other professionals early on in the process to address this issue. Once the term sheet is completed, it will be hard to go back to your landlord to re-negotiate the rent other than with respect to an egregious error.
  • Watch out for the percentage share "bait and switch". Find your inner Nancy Drew and do some web research. We have found that a landlord's website can provide valuable information about the loss factor. We had one large lease where the rentable square feet shown on the landlord's website differed from the larger figures provided by the landlord to calculate the tenant's percentage interests and the landlord was using the larger numerator figure (the tenant's space) with the smaller denominator figure (the rentable square feet for the building) to improperly inflate the percentage interest.
  • Focus on the economics. You should ultimately focus on how many people and how much personal property your premises can accommodate (which you can determine by having your architect do a test fit plan for each space you are considering) and how the rent for that space compares with other spaces in the market.

    The loss factor cannot be viewed in a vacuum. For example, there can be certain advantages to you based on the larger rentable square foot number, such as a greater tenant improvement allowance, which is usually paid based on a dollar figure per rentable square foot, even though contractors generally charge based on the actual cost of construction. You will need to determine the aggregate costs and benefits and how they stack up to what is available for comparable space in the market.
Make sure to follow these suggestions and obtain the necessary information to make an informed economic decision about your potential space. If you have any trouble with the numbers, I am always ready to pull out my abacus and assist you.

About Us

 

Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm.  Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold.

For more information regarding Mintz & Gold's real estate practice, click here.

For a list of representative transactions of Mintz & Gold's real estate group, click here.

For Mintz & Gold's website, click here.

Contact:
Alan Katz
katz@mintzandgold.com
Telephone: (212) 696-4848
Fax: (212) 696-1231



You are receiving this newsletter because you signed up to receive it
or are a client, a friend or have worked with us on a prior transaction.
To ensure that you continue to receive emails from us, please add
katz@mintzandgold.com to your address book today.

To subscribe to this newsletter,
send an email with your request to: katznewsletter@mintzandgold.com

Mintz & Gold respects your privacy.
We do not sell, rent, or share your information with anybody,
and will only use your contact data to provide this newsletter.

Disclaimer

This newsletter has been prepared for general information purposes only, and is provided with the understanding and subject to the user's agreement that it does not constitute the rendering of legal advice or other professional advice by Mintz & Gold LLP, and does not create any attorney-client or other special relationship. The content of this newsletter may be considered advertising under the ethical rules of certain jurisdictions and prior results do not guarantee a similar outcome. You should not rely upon this newsletter without seeking legal advice from an attorney licensed in the relevant jurisdiction(s). THE CONTENT OF THIS NEWSLETTER IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. Additionally, the information contained in this newsletter does not constitute tax advice. Any discussion of tax matters contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter.

Copyright © 2014 Alan Katz. All rights reserved.

You may reproduce this article by including this copyright and, if reproducing it electronically,
including a link to www.mintzandgold.com.

Newsletter developed by Blue Penguin Development.



No attorneys were harmed in the production of this newsletter.