SPACE What is a ‘load factor’ and what it means in your lease
By Christina S. Porter
Hopefully most of you will not have to negotiate more than a few leases in your business career. A commercial real estate broker conducts lease negotiations regularly and grasps the many components that should come into play during the process. Understanding the different types of leases is a very important part of an effective negotiation, and renegotiation of the terms and conditions in a lease. One of the more prominent lease structures is the “full service gross” lease.
A full service gross lease is primarily used in larger, “A” class office buildings, which include most of the larger office buildings in Westwood, Brentwood and West Los Angeles. But that doesn’t mean that smaller buildings do not offer full service gross leases, just less frequent.
When you agree to a lease with a full service gross specification it should include the following general terms: ■ The landlord pays all building expenses, including electricity and janitorial. ■ You pay for parking and your “prorata,” the share of any increase in operating expenses over the “base year,” which is usually the first year of your lease term. ■ You are usually on your own as far as “after hours” heating ventilating and air conditioning. Most “A” class office buildings charge as much as $100 per hour and certainly not less than $35 for after hours air conditioning. The hours that most buildings offer HVAC vary, but you can expect 8 a.m. to 6 p.m. Monday through Friday, and 9 a.m. to 1 p.m. on Saturdays. If you consistently need “off hours” HVAC, it is possible to have a “package unit” installed in your suite. ■ Be sure to ask if the parking rates include the city.
Another important factor used primarily in a full service gross lease is the “load factor.” What is your rentable square feet and how much do you actually occupy? Do you know what the amount of “usable” square footage is in your office suite?
In all office buildings there is a “common area” the size of which, during the life of a building, may change from remodel to remodel. The common area consists of the hallways, lobby areas, bathrooms and any area of the office that is not for your exclusive use. The “usable” square footage is how many square feet you actually occupy.
The “rentable” square footage is calculated by the percentage of the office project’s square footage that is common area, added to the actual amount of square footage that you occupy in your suite.
Example: If you occupy 10,000 square feet and the “load factor” is 15 percent, then your “rentable” square footage amount (and the basis from which your base rent is calculated) is 11,500 square feet.
Even though you do not have exclusive use of the common areas you are still paying for it via the load factor.
Most owners add a load factor close to 15 percent to be competitive, notwithstanding the fact that their building’s actual common area percentage may be much higher and occasionally lower. It is rare to find an owner that does not add a percentage to the amount of square feet that you actually occupy to compensate for the load factor.
When comparing lease opportunities, the “load factor” is certainly an important component. (Christina S. Porter is a senior associate at NAI Capital Commercial Real Estate, specializing in leasing, and selling office and industrial buildings.)
Originally published in the Santa Monica Daily Press print edition on September 17, 2003. Read the original PDF.