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Add On Factor: Why Office Tenants Pay for Space They Don't Use

Rentable and Usable Office Space

When leasing office space in a multi tenant office building it is important to understand the difference between rentable and usable square feet.  Some office tenants are not familiar with these terms.  Tenants unfamiliar with the concept of an add-on factor may be confused about how much space they truly need. Essentially as an office tenant you are paying rent based on the “rentable” size of your space. The rentable square footage is not the actual size of your office space.  Let me tell you a story about just how unbalanced that difference can become…

Energy Corridor Case Study

Recently I worked with a client in the Energy Corridor in Houston looking for new office space. He expressed strong interest in a property which had recently converted from a single tenant corporate use to a multi-tenant layout. This means the property was designed originally for one company – think of an office campus setup. Since the conversion was not yet complete the floor plates and common areas were under construction and not fully determined. During construction the new ownership would be making decisions about which common area corridors, restrooms, lobbies and other common area elements would remain. As a result the leasing agent was unable to provide the true add on factor at the time we toured the property.

What Is An Add-On Factor?

As a quick refresher, the add on factor (sometimes referred to as core factor) is the amount of a commercial building taken up by common areas such as hallways, restrooms, elevators, the lobby, etc. The add on factor will typically fall between 15-20%. This means the usable square footage of a company’s office space will be inflated by 15-20% to account for the common area space in the office building. In this way each tenant pays for their share of the common areas they may use throughout the building.

Back To Our Story

After touring the property with my client we began discussions with the leasing broker. Upon receiving an initial proposal we discovered an add on factor in excess of 60%! Understandably this was not an acceptable calculation for my client. Imagine leasing an office space consisting of 3,000 actual square feet, but paying rental expense on 4,800sf – out of the question. After much discussion and negotiation we were able to reduce the add on factor to 37%, but ultimately this was not enough to make a deal.

It is not uncommon to find re-purposed office buildings with a high percentage of common areas. With the headwinds facing retail developments and malls we may see this trend continue to grow. Typically landlords will opt to use a “market factor” which is artificially lowered to compete with other properties in the area. In this situation the landlord was attempting to secure lease agreements with an add on factor 3 times the market rate. I advised my client throughout this interaction and we decided to pursue alternative options in the area.

Relocation to Multi Tenant Office Space

One important thing to mention is that most types of commercial real estate do not use an add on factor. This type of calculation is typically exclusive to multi-tenant office buildings. This means if you are a tenant in an industrial, flex office, retail or single-tenant office building you are not paying for an add-on factor. Tenants in these types of properties have a rentable and usable square footage which are identical. This can lead to some confusion for tenants looking at relocation to a multi-tenant building. These tenants may expect that the 5,000sf they currently occupy will be the same 5,000sf they need upon relocation. But again, this is 5,000sf usable, and with the add-on factor included they will require at least 5,750sf – and possibly more.

At Oxford Partners we will frequently begin the process of working with a new client by preparing a minimum space analysis. This allows the client to visualize all the necessary space elements for their office, and understand how much space will be required. Part of this assessment is an estimation for add-on factor. You can access our free Space Planning Tool here. Contact us directly for more information about the minimum space analysis if you’re interested in learning more.

Conclusion

Companies leasing space in a multi-tenant office building must always be aware of the add on factor used in their building. At some point a tenant will want to relocate, and it is key to know the exact usable space required for their operations. It is also important to ensure the rentable square footage for your lease agreement is calculated correctly. There should be a clearly identified common area markup listed in the lease. When considering a relocation verify these numbers ahead of time to ensure a market factor is being used. This will help avoid paying for space you don’t use and likely will never see.