The common area of an office building is a confusing one not only for tenants, but even some seasoned brokers.
The underlying concept of the Rentable to Useable Factors (or “R/U Ratio”) is so that Landlords can capture revenue for the common areas of the building, which are made available for the benefit of all tenants within the building.
The formula for the R/U Ratio is simply:
R/U Ratio = Rentable Area / Useable Area
A picture is worth a 1000 words, so let’s look at a diagram. The diagram below breaks out the building’s vertical penetrations, the building’s common area and usable area for the purposes of allocating these common areas to each tenant on a proportional basis.
As straight forward as this appears, there are about a half a dozen terms used to describe this ratio, which is where the confusion really begins. These terms include:
- Load Factor
- Add-on Factor
- Gross-up Factor
- Loss Factor
- Core Factor
- Common Area Factor
- Partial Floor Factor
- Full Floor Factor
Several of these terms are generic, others more specific, and a couple are interchangeable. In summary –
The terms “Load Factor”, “Add-on Factor” and “Gross-up Factors” describe the same calculation. In order to derive the Load Factor using the Rentable and Useable Areas, the formula is:
Load Factor = (Rentable Area / Useable Area) – 1
Or, if you happen to have the Rentable or Useable Area measurement and the Load Factor instead, the formulas would be:
Rentable Area = Useable Area x (1+ Load Factor)
Useable Area = Rentable Area / (1+ Load Factor)
The Loss Factor formula varies slightly from the Load or Add-on Factor. In order to derive the Loss Factor using the Rentable and Useable Areas, the formula is:
Loss Factor = (Rentable Area – Useable Area) / Rentable Area
Or, if you happen to have the Rentable or Useable Area measurement and the Loss Factor instead, the formulas would be:
Rentable Area = Useable Area / (1 – Loss Factor)
Useable Area = Rentable Area x (1 – Loss Factor)
The term “Core Factor” is used to describe either the R/U Ratio or can be interchangeable with the term Loss Factor, further clarification is usually a good idea when you hear this term.
The term “Common Area Factor” is a generic descriptor for the R/U Ratio in most instances.
The terms “Partial Floor Factor” and “Full Floor Factor” reference whether the factor is based upon the tenant occupying an entire floor, or only a portion of a larger floor. Partial Floor Factors will be higher than Full Floor Factors, as the layout required to accomodate multiple tenants on one floor will not be as efficient as the layout for a full floor user.
Let’s take a look at why understanding the difference in this terminology is important.
In the first example, the Rentable Area (RSF) is held constant at 20,000 square feet and the Useable Area (USF) at 18,000 square feet. Holding these two variables constant:
Load Factor = 11.11%
Loss Factor = 10.00%
See the difference? By quoting the Loss Factor, a landlord is able to quote what appears to be a lower Common Area Ratio, while maintaining the same rentable (i.e. income producing) square footage.
In the second example, we hold the Useable Area and R/U Ration constant:
Load Factor: Rentable Area = 19,800 SF
Loss Factor: Rentable Area = 20,000 SF
See the difference? By quoting the Loss Factor, rather than the Load Factor, the Landlord is able to generate another $4,000 in annual rental income because it yields a higher Rentable Area.
At the end of the day, for smaller tenants, understanding the Load vs. Loss factor only amounts to a couple dollars a year; but, for larger tenants, it could be in the $100,000s.
Several other great articles covering the Common Area Factor and its use can be found on CoyDavidson.com.