What is a “Load Factor” in Commercial Real Estate?
In commercial real estate, the term “load factor” (also known as “common area factor,” “add-on factor,” or “loss factor”) refers to the proportion of shared or common spaces within a commercial property that is allocated to a tenant in addition to their leased usable square footage. It is used to determine the total rentable square footage for a tenant.
The load factor includes areas such as hallways, lobbies, elevators, restrooms, common corridors, and other shared spaces within the building that are not part of the tenant’s exclusive leased space. To calculate the load factor, you add the tenant’s usable square footage (the space they can exclusively occupy) to their proportionate share of the common areas. The formula for calculating load factor is typically (we’ll get to a good example towards the end):
Formula for Load Factor
Load Factor = (Total Rentable Square Feet – Tenant’s Usable Square Feet) / Tenant’s Usable Square Feet
The load factor is usually expressed as a percentage, and it can significantly impact the overall cost of renting commercial space. When comparing different commercial properties, tenants may consider both the usable square footage and the load factor to understand the total space they will be paying for and to make more accurate cost comparisons.
For example:
Let’s say a business is interested in leasing office space within a commercial building. The commercial property is a multi-story office building with a total rentable square footage of 100,000 square feet. The business is considering leasing a suite that has a usable square footage of 2,000 square feet. To determine the load factor for this space, we need to consider the common areas within the building.
Suppose that the common areas in the building, such as hallways, restrooms, lobbies, and shared spaces, amount to 20,000 square feet.
Here’s how to calculate the load factor:
(Again) Load Factor = (Total Rentable Square Feet – Tenant’s Usable Square Feet) / Tenant’s Usable Square Feet
Load Factor = (100,000 sq ft – 2,000 sq ft) / 2,000 sq ft
Load Factor = 98,000 sq ft / 2,000 sq ft
Load Factor = 49
In this example, the load factor is 49. This means that for every 1 square foot of usable space the business is leasing, they are responsible for paying rent on an additional 49 square feet of common areas within the building. This load factor is typically expressed as a percentage, so in this case, it would be 4,900% (49 multiplied by 100).
The total square footage the business would be billed for (including common areas) is 2,000 sq ft (usable space) + 49,000 sq ft (proportionate share of common areas) for a total of 51,000 square feet.
It’s important for tenants to be aware of how load factors are calculated by landlords or property management companies, as the method may vary from one location to another. Understanding the load factor can help tenants make informed decisions when leasing commercial real estate.
