How to Calculate Load Factor: Step by Step
If you’re paying to rent an office or other space for your business, you probably want to get the most out of every square foot you rent.
But wait. Are you paying rent on more square feet than you actually occupy? If your office is only 500 square feet, why do you pay rent on 590 square feet? Are you being ripped off by a sleazy landlord?
Not quite. It’s common for landlords to factor in rent for common areas – like shared bathrooms, lobbies, storage rooms, kitchen, and hallways, if you and the other tenants also use those spaces in your operations. And the good news is that the rent for these spaces is almost always split evenly between you and other tenants.
For example, let’s say you rent a 500 square foot office in a 6500 square foot building. You’ll pay rent on the 500 square foot office space and on a portion of the common area spaces that you also use. But if you have a small office, and everyone else is renting a bigger office space, how can you be sure that your portion of the common area rent is fair?
Answer: Load Factor
Load factor is a calculation that breaks down the common area rent so each tenant pays a proportionate amount. First, find the usable square footage of a building. Usable space is all of the single tenant spaces added together – so, in this case, usable square footage is 5500 square feet.
Calculate load factor by dividing the total square footage in the building by the usable square footage. In this example, you would take 6500 square feet – the total square footage of the building – and divide it by 5500 – the usable square footage of the building.
That gives us a load factor of 1.18. That also tells us that 11.8% of the building is shared common area, and not space that is exclusively used by a single tenant.
But how can you use the load factor to understand how much rent you pay? Take your rentable space and simply multiply it by the load factor of 1.18. In this case, it would be 500 times 1.18 for a total of 590. That means you will pay rent on 590 square feet of space, including both your private office space and the shared common areas.
Now, it’s important to note that load factor is just one number you should pay close attention to on your lease. There are other costs, like those that make up triple net expenses, to carefully consider in the lease review process. We’ve covered the triple net expenses in another video if you want to learn more.
Thanks for watching! Like and subscribe to Sterling CRE Advisors for more quick CRE info like this.