When you get involved with purchasing or leasing commercial real estate, you will begin hearing about a “load factor.” It’s a term that is integral to commercial real estate investing, and one that you must know if you want to be a successful investor. So what exactly is it?
The load factor, simply put, is the difference-usually expressed in a percentage-between the usable and the rentable square footage in a building. That is, how much of the space accounts for common areas such as restrooms, mechanical rooms, hallways, stairwells, and the like, versus how much is actually rentable to tenants.
Here is how to calculate this important cost for a commercial real estate property:
1. You will need the total rentable square footage of the building.
2. You will need the total usable square footage of the property.
3. Now, subtract the usable square footage (this is always the smaller number) from the rentable square footage.
4. Take that total and divide it by the usable square footage.
5. The resulting number is the load factor.
Here is an example: These are the numbers on a building in Gainesville, Florida, that we recently looked at. The total rentable square footage was 35,938. The total usable square footage was 29,461. So the equation looks like this: 35,938-29,461 = 6,477. Then take 6,477 ÷ 29,461 (usable sq. ft.) =.219 or nearly 22%.
What does this mean? It means that the property owner is adding almost 22 cents to every dollar he charges his tenants per usable square foot. The higher this number, the more the tenant will be paying for space he or she can’t use.
Buildings with a high load factor may indicate inefficient design, and if, as a tenant, you are negotiating to sign a lease for a commercial space, you will definitely want to know the load factor.
If you are an investor considering the purchase of a commercial property, check comparable properties in the area to help you determine what the average cost is. If your potential property is above the average load factor, you may have difficulty attracting the interest of tenants because they will be paying for per square feet than they would in other properties near yours.
I hope this quick tutorial has been useful in helping you understand the importance of knowing the load factor for a commercial property.