What Is the Load Factor in Real Estate and How Does it Work?

Posted by Amr Tenney on Jan 8, 2022


What Is the Load Factor?

The load factor is a value that represents space in a building that is not directly rentable. This space is generally known as the common area. Load factor allows each tenant to know the proportion of common area they are paying for. 

Is the load factor important for other reasons as well? When comparing buildings, one with a higher load factor can often mean the tenant will pay more. It can also mean the landlord is not utilizing space within the building to its fullest for tenants. 

Two buildings of equivalent size, charging the same amount for the same office space, may appear to have equal value. But if Building A has a higher load factor, tenants in Building A are being charged more than those in Building B.

How Do You Calculate Load Factor?

Calculating the load factor is simple. The formula is:

(total sq ft / total usable sq ft)

This formula shows that it is a ratio of usable square feet to total square feet (sq ft). The final number is always greater than one. Usable square feet doesn’t include common areas. Instead, this is the office space rented by tenants.

Let’s see the calculation in action:

5000 sq ft office of space in 6000 sq ft building

6000 / 5000 = 1.20

20% of the building is common area. Common areas include lobbies, bathrooms, and the kitchen. Tenants don’t pay for the areas that are not considered common. These include elevators and stairs.

Tenant rents include some common areas. Each tenant pays pro rata on common areas. The load factor can help in determining if you are paying your fair share of the common area.

For example, you rent a 500 sq ft office in the above 6000 sq ft building. But why are you paying for 600 sq ft? While that may not sound right initially, the extra 100 sq ft is common area. Applying the load factor to your office space reveals that the number is correct:

500 x 1.20 = 600

When everyone has the same office space, it is easy to determine if they are paying a fair share of the common area. For example, four offices in the above 5,000 sq ft space mean 1250 for each office. Their share of the common area is 250 sq ft each. Therefore, tenants are billed for 2,000 sq ft each.

If the offices are broken into different sizes, the common area calculation can be more difficult. Load factor simplifies that problem. In the following example, you can see how load factor quickly determines proportionate common areas for differently sized offices:

500 sq ft x 1.20 = 600 sq ft (100 sq ft goes to common)

2,083 sq ft x 1.20 = 2,500 sq ft (417 sq ft goes to common)

2,500 sq ft x 1.20 = 3,000 sq ft (500 sq ft goes to common)

Load factor is just one consideration in determining if your lease is a good value. Other considerations are the particular lease arrangement, such as single net or NNN, and what exactly is covered (by the landlord).

Some landlords may provide a sq ft number for your office well above the actual sq ft. Be sure to check your space via load factor to ensure accuracy. You may discover that you're overpaying for common area compared to other tenants.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. This is a hypothetical example that is demonstrating some mathematical principles. It does not illustrate any investment products and does not show past or future performance of any specific investment. Investing involves risk, including the loss of principal.

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