Business, Profits and Strategy

Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President
(908) 245-5999 x11
andrew.zezas@realstrat.com

Common Area Factors Cost Your Company More Than You Think!

Ooops! How successful was your company in reducing the impact of the Common Area Factor in your last office lease? Common Area Factors are an important component of almost every commercial office lease, and can be costly for commercial occupants, too. Commercial office building landlords typically charge occupants an additional amount to reimburse them for costs associated with operating building common areas. That amount may be added to the rental rate, or as is most often the case, it appears as additional square feet. This additional cost component has various names, depending on local markets, such as Common Area Maintenance, Core Factor, Utility Factor, Add-on or Loss Factor, Load Factor, Common Area Factor, and others. The Common Area Factor is typically established by the landlord and is agreed to at the outset of a lease transaction.

What's Included in Common Area Factors?

Common Area Factors include any areas that are common to multiple building occupants: building lobbies, restrooms, storage and utility closets, loading and staging areas, and others. Some broader definitions of Common Area Factors include areas for health clubs, cafeterias, meeting and conference areas, outside plazas, and others.

Common Area Factors vary from market to market and from building to building. In the northeast, Common Area Factors can range from as low as five percent (5%) in single story suburban office buildings to as high as twenty-five percent (25%) in suburban high-rise office buildings, to considerably higher rates of thirty-five percent (35%) or more in high-rise city office buildings.

Certain trade associations, like BOMA, have established suggested guidelines that in many markets have become accepted as de facto standards. But, landlords are not bound to use this, or any other standard. Many landlords employ their own means of defining and measuring space. Common Area Factors are not typically governed by law.

Where Did The Common Area Factor Come From?

Common Area Factors were introduced in New York City in the 1960's as a means for landlords to increase office building revenue without appearing to raise published rental rates. By adding a Common Area Factor, landlords were able to generate additional income while appearing to maintain published rental rates. This approach made their buildings seem to be more competitive and therefore, more financially appealing to tenants.

The use of Common Area Factors in office leasing has become an accepted landlord practice throughout most of the United States, and has been accepted by the business community as a component of commercial office leases. Common Area Factors have migrated into other commercial real estate leasing, including distribution and industrial space, as well as, retail real estate and others.

So, What's The Problem?

Recently, we've heard a lot of hub-bub about how landlords use common areas to steal from tenants and to artificially raise rents. While I am not writing in defense of landlords, the simple truth is that the use of Common Area Factors in office leasing is not new. And, so long as a would-be tenant is paying attention, the use of Common Area Factors is rarely hidden. (Hint: If your potential landlord attempts to hide the building’s Common Area Factors, find another building and another landlord, as you'll be certain to have bigger problems with that landlord later!). However, depending on how you negotiate your company’s leases, Common Area Factors can become costly components to leasing office space. As such, they are transaction components that must be understood, in terms of their financial impact on the transaction and on both landlord and tenant.

Today, Common Area Factors are rarely reflective of the actual amount of space in a building that is common to multiple occupants. In fact, competition, rising costs, and other market forces have driven Common Area Factors higher and higher. Common Area Factors have become additional revenue sources and profit centers for landlords ...plain and simple.

Our Building Should Go On a Diet!

Since the introduction of Common Area Factors, a large number of office buildings appear to have grown over the last few decades. Yes, that's what I said ...they've grown! The interesting thing here is that these buildings have grown on paper, and that very often, no new construction has occurred there. How could this happen? Well, as Common Area Factors have grown, landlords have represented that the size of their buildings or, at least, the amount of square feet on which those buildings generate rent, has grown. In many cases, the number of square feet on which the building generates rent ends up being considerably larger than the amount of square feet that actually exist within the building, itself! This has occurred for many years, and is a practice about which most real estate professionals are well aware.

What's the Real Impact of Common Area Factors on Commercial Occupants?

Common Area Factors are not new, at least not since the 1960's. So, if your company has leased office space in the last few decades, it is probable that your lease, or your rent, contains a Common Area Factor. The impact is simple: Common Area Factors are additional costs that basically result in a true occupancy cost that is higher than published rental rates (see below).

Published Rental Rate: $25.00
Common Area Factor: 18%
_________________________

Effective Rental Rate $29.50

So, the polish is off the apple. Most commercial occupants are really paying higher rental rates than they think they are. And, Common Area Factors typically have an exponential impact on occupants. As landlords pass through increases in operating expenses and real estate taxes based on an occupant’s square feet, actual occupancy costs can be significantly impacted. Some have suggested that this practice may be deceptive or an unfair means for landlords to increase occupancy costs. It certainly can be complex and costly, and the real impact could easily sneak up on an occupant. But, if the Common Area Factor is clearly spelled out in an executed lease that both parties negotiated, and where both parties had equal opportunity to engage professional advice, then it may not be deceptive or unfair…just challenging.

How Can We Protect Our Company?

The use of Common Area Factors in commercial real estate leasing will not likely go away any time soon. So, what steps can you take to protect your company? Like any part of a complex transaction, make sure that you are sufficiently versed in this subject and confident in your ability to navigate through this issue when negotiating with sophisticated landlords. If you're not prepared to attack this important occupancy cost component on your own, then engage an advisor or service professional to bring you up to speed or to represent your company in negotiations.

One more thing: In many cases, Common Area Factors, like rental rates and most other components of commercial real estate transactions are negotiable. So, arm yourself with an understanding of competitive market Common Area Factors and other transaction components, and NEGOTIATE! And, when it comes time to consider renewing your lease, make sure your building hasn’t grown and be certain to address the Common Area Factors.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will be available shortly at www.thecfosguide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given talks, presentations, and has lead educational programs for business, professional, government, and trade associations, including the Building Owners and Managers Association, American Management Association, the U.S. Postal Service, RealComm, Society of Industrial and Office Realtors (SIOR), and others. Andrew is National Chairman of the SIOR Tenant Representation Specialty Practice Board, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.realstrat.com.

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