Load Factor in Commercial Leases: What It Means and Why It Matters
"Load factor" is a term that refers to the method of calculating the total monthly rent costs to a commercial tenant. It combines usable square feet in addition to a percentage of the square feet of common areas that the tenant is expected to benefit from. It's sometimes called an "add-on" factor or a "common area" factor.
What Counts as Common Areas
Common areas can include restrooms, lobbies, elevators, stairwells, and common hallways. They're areas that a commercial tenant's customers, clients, and employees can have access to and would be expected to use.
Usable Square Feet in the Load Factor Calculation
Load factor calculations begin with identifying the difference between usable and rentable square feet. Usable square feet defines the area that you and your business are actually and solely able to occupy. Other tenants do not have access to this space. It's your store, your office, your location.
If you lease store space that's 25' x 20', you have 500 square feet of usable space. This is your area and your business can presumably make use of all of it. If you leave a corner of this space vacant, that's your choice, but you could use that space if you wanted to so it contributes to your usable square feet.
You and others associated with your business can use the common areas as well—the restrooms, the lobby, elevators, hallways, and stairwells—but they're not part of your usable square feet because they're not exclusively yours.
An exception can exist if your usable square feet is divided up into separate rooms or on separate floors. In this case, any access ways that connect them would contribute to your usable square feet. They're not common areas because other tenants and/or the property owner don't use them.
Rentable Square Feet in the Load Factor Calculation
Now that you've identified your usable square feet, you can figure your rentable square feet by adding on a percentage of the common areas that you and/or your customers also use. The percentage is typically set by the landlord or property owner and is based to some extent on your usable square footage compared to the total square footage of the building.
You might have some room to negotiate here. There's no uniform, across-the-board percentage, although it doesn't usually run any higher than 15 percent. It can depend on whether you're renting space in an area with many other commercial tenants, such as a mall. If your customers and clients also have the use of a large parking lot, this can bump up the percentage.
Calculating the Load Factor
Begin with the total square footage of the floor area of the entire building. Now subtract the square footage of the common areas. You're left with usable square footage, at least if you're leasing the entire building rather than space in a mall or strip mall. Divide the total space by the usable square footage to arrive at the load factor.
If your calculations arrive at a figure of 20 percent and the landlord is offering 15 percent, you probably have a good deal. If you arrive at a figure of 10 percent and the landlord is asking 15 percent, you might want to negotiate or enlist the help of a real estate professional to do so.
You'll also want to note whether the load factor is adjustable in your lease, subject to recalculation upon renewal. Running a successful business is all about planning. If the business doesn't boom and you face a possible significant load factor increase next year, this could be catastrophic. Commercial leases are ideally long term. You don't want to have to relocate your enterprise.