What is a Load Factor in Commercial Real Estate?
A load factor, also known as a loss factor, is a metric that compares the amount of space a tenant pays for in a commercial lease versus the amount of space they actually use. The load factor or a commercial lease is calculated with the formula below:
Rentable Square Feet/Usable Square Feet = Load Factor
Load factor is important because tenants in commercial leases, especially leases for office buildings or large retail developments like malls, typically pay for their percentage of a building's common areas. These can include mezzanines, stairwells, bathrooms, elevator shafts, maintenance areas, walkways, and a variety of other areas, depending on the specific leasing arrangement. For example, if a tenant pays for 12,000 square ft. of space, but only 10,000 of that is usable, the load factor would be:
12,000/10,000 = 1.2
In some situations, this is also calculated as the percentage beyond one that the space has. Alternatively, one might say that the space has a load factor of 20%.
How Load Factor Effects Commercial Property Investors
Typically, load factor is more of a concern for tenants and less of a concern for landlords. However, it can still be an important metric. For example, if a property (whether existing or planned) has a very high load factor, it may be difficult to attract and retain commercial tenants, who, understandably, don't want to pay for space that they can't directly use.