When you’re looking at commercial properties and start reviewing rental rates, it’s important to know what you’re looking at – which is sometimes easier said than done. What is Core Factor, Triple Net Lease, Cap Rate, or 1031 Exchange? Trying to understand common commercial real estate terms can sometimes feel like deciphering a foreign language. But we’re here to help.
In this article today, we’re going to cover one of those real estate terms – Core Factor.
What is Core Factor?
Time and time again, we hear the same question. What is Core Factor? How does it work? And how will it affect my lease? Well, to help you better understand the intricacies of Core Factor, here’s United Development Realty Founder and CEO Charles Peacock as part of our What’s That Wednesday short video series, which tackles frequently asked questions about the commercial real estate market.
Charles Peacock: What is Core Factor? Why would I be paying for more square footage than I’m actually occupying? In commercial leasing, there’s two numbers we’re going to want to know when we’re looking at building sizes. The usable square footage, which is the square footage within the walls of the lease space. And the rentable square footage, which is the usable square footage plus a portion of the common space that benefits all building tenants. That might include lobbies, elevators, and public restrooms. The core factor describes a ratio between these two numbers and is typically about 10 to 20 percent in most buildings. This is just one of the many variables your commercial real estate broker is going to help you determine on all the spaces you’re considering when you’re looking for that perfect home for your business or medical practice. Thanks and we’re here to help!
Understanding Core Factor & Why It Matters
The Core Factor can be calculated by dividing the rentable square footage by the usable square footage.
- The Usable Square Footage is the square footage within the walls of the lease space where a tenant will conduct business.
- The Common Space is those parts of the building that benefit all occupants. These areas can include elevators, lobbies, restrooms, closets, electrical and mechanical rooms, storage, loading docks, etc.
- The Rentable Square Footage combines the usable square footage and a portion of the common space.
To better understand what all of this means, let’s look at a hypothetical scenario. A new company called ABC Construction is interested in leasing 10,000 square feet of usable space to operate its business. They are evaluating two options, which both offer a lease rate of $3.00 per rentable square foot.
- Commercial Space 1: This space offers 10,000 square feet of usable space and a Core Factor of 22%. This means ABC Construction would pay $36,600 per month for 12,200 rentable square feet.
- Commercial Space 2: This space offers 10,000 square feet of usable space and a Core Factor of 15%. This means ABC Construction would pay $34,500 per month for 11,500 rentable square feet.
As you can probably tell from the above scenario, Core Factor matters a lot. Despite offering the same amount of usable space, ABC Construction would save $25,200 over the course of one year going with Commercial Space 2.
An experienced broker can help you evaluate a commercial space and determine the best fit for your business’s unique needs.
United Development Realty is Here to Help!
Whether you’re still struggling with that big question – what is Core Factor – or you just need a little extra guidance, partnering with the right broker can make all the difference. United Development Realty is a licensed and experienced commercial real estate broker in Maryland specializing in tenant representation and, more specifically, lease analysis and negotiation. We start by listening to you – your current situation, your wants, and your needs. Then, once we fully understand your business, we can help you review your options and, ultimately, help you make the best decision for your business.
Our client-first approach ensures that your unique needs are met. Please call our office today (locations in Bethesda 240-221-1976 and Fells Point 410-522-1632) to get in touch with a licensed broker.