The Impact of Load Factor on the Rentable Square Footage: What Tenants Should Know
Discover the crucial role of load factor in leasing commercial office space and how it can affect space efficiency
Understanding Load Factor
If you've ever been on an office tour and viewed several spaces that were supposed to be the same square footage, but felt like they varied substantially in size, you're not crazy. Chances are, they WERE different sizes even though their quoted square footages were approximately the same.
This is because of the calculation of what's called the Load Factor, which we'll explain below.
When a tenant leases office space, the rent they pay is usually tied to a square footage. But what many tenants don't know is that they're not only paying for the square footage of the space that they actually occupy, but also their share of all of the common areas of the building that exist beyond the front door of their office.
It's crucial to understand this concept because the Load Factor affects the overall cost and efficiency of the leased space.
Calculating Load Factor: Unraveling the Equation
Landlords seek to collect rent on ALL of the useable square footage of a building and not just the individual offices. Therefore, they calculate the square footage of all of the common space of the building and express it as a percentage of the total building's square footage to arrive at what's called the Load Factor.
Therefore, if areas such as common bathrooms, hallways, lobbies, building reception/security and mechanical rooms make up 18% of the building, then that percentage is added to the tenant's Useable Square Footage (USF) to arrive at the Rentable Square Footage (RSF). This is important to understand because the rent that's paid per square foot is calculated on a multiple of the RSF, and not the USF.
By way of example, if a tenant were to measure their office from wall to wall and it came to 10,000 square feet, that would be the USF. However, if the building's Load Factor was 20%, then the RSF would actually be 12,000 square feet.
10,000 USF x 1.2 (20% Load Factor) = 12,000 RSF
Understanding how to calculate the load factor is essential for tenants as it allows them to accurately assess the true cost of the leased space, especially when comparing multiple properties.
Optimizing Space Efficiency: Leveraging Load Factor to Maximize Value
Understanding the Load Factor for each building under consideration can help tenants optimize the efficiency of their leased space. Since different buildings have different Load Factors, and therefore varying efficiencies, a tenant can decide if it's worth paying an extra 10% on their rent to have a huge waterfall in the lobby of their building when employees and guests arrive. First some firms, this is important; for others, not so much.
Also, if a tenant leases a full floor in a building, their broker can negotiate to have a lower load factor applied to the tenant's USF since they're not receiving the benefit of the common bathrooms and hallways that multi-tenant floors enjoy.
While there's no standard Load Factor applied to buildings, there are generally recognized guidelines that usually vary based on building class. For example, a big Class A building with a large lobby with seating, wide common hallways and a large security desk can have a Load Factor that ranges anywhere from 18-25%. In contrast, a small Class B building with no security guard and a small elevator lobby could have a Load Factor as low as 5%.
Understanding this concept should be an integral part of a tenant's comparative analysis when considering leasing space. When comparing multiple buildings from a financial perspective, always evaluate them using their cost per USEABLE and not RENTABLE square foot to ensure that you're truly getting an "apples to apples" comparison.