What Is an Add-On Factor?
The add-on factor is the percentage of a building's gross usable space that is added to each tenant's rented space to determine their total rent.
- The add-on factor is the percentage of a building's gross usable space that is added to each tenant's rented space to determine their total rent.
- The add-on factor plays an important role in setting lease rates, especially in commercial real estate.
- Tenants need to understand what the landlord classifies as usable (add-on factor) versus non-usable (loss factor) square footage.
Understanding Add-On Factor
The add-on factor is the amount of usable square feet in a commercial property divided by the number of rentable square feet. The result of this calculation will be one if the two numbers are identical, but it is always lower than one because some square footage in a building will not be rentable. This non-rentable square footage includes space, designated as common area, that is shared with other tenants. In a building purposely designed with large amounts of space dedicated to shared areas, calculating the add-on factor helps commercial landlords and tenants negotiate a fair lease agreement.
The add-on factor plays an important role in setting lease rates. In commercial real estate, the lease cost is calculated based on rentable area with an add-on factor tacked on for the use of common spaces. For example, a 20,000 square foot building may have 2,000 square feet of common space, including foyers and so on, which the tenants can jointly use. To properly price this common space into the lease, the landlord will calculate the add-on factor to use on a tenant lease.
In this case, add-on factor is common use space of 2,000 square feet divided by the gross rentable space of 18,000 (20,000 minus the 2,000 square feet in common space)
Add-on Factor=2,000 SqFt÷18,000 SqFt=11.11%
So if a tenant is leasing 1,000 square feet, the landlord will tack on 11.11% as the add-on factor and charge the tenant for 1,111.11 square feet to cover that tenant's portion of shared space use and its upkeep.
Add-On Factor and Loss Factor
The add-on factor is often conflated with the loss factor. The loss factor is the non-usable square footage divided by the rentable square footage. The square footage involved in the loss factor includes structural components like interior walls, support poles, and maintenance rooms that cannot be used by tenants. Sometimes, loss factor is classified as the add-on factor, which is why tenants have to understand what the landlord classifies as usable versus non-usable square footage. If non-usable square footage is being calculated into the add-on factor, then this means that for the same amount of usable space, a building with a lower add-on factor will cost the tenant less than a building with a higher add-on factor. However, if a building has been designed with a focus on shared areas, then a higher add-on factor isn't a negative, provided that is something the tenant values.
Potential tenants often use the add-on factor to help them compare leases and determine which lease offers the best value. While the add-on factor is important and useful in this sense, it is just as important to clarify what is being used to calculate the number to make certain that you are comparing apples to apples.