One of the first steps in evaluating a commercial property is determining the total rentable square feet. While this might seem like a straightforward calculation, it unfortunately doesn’t always end up being so simple. This is particularly true for multi-tenant buildings. In this article we’ll go over how to calculate rentable square feet (RSF), usable square feet (USF), and the load factor, then we’ll tie it all together with a clear example.
Usable Square Feet
In a nutshell, usable square footage is the actual space you occupy from wall to wall. Usable square footage does not include common areas of a building such as lobbies, restrooms, stairwells, storage rooms, and shared hallways. For tenants leasing an entire floor or several floors, the usable square footage would include the hallways and restrooms exclusively serving their floor(s).
Rentable Square Feet
Rentable square footage is your usable square footage PLUS a portion of the building’s shared space. As mentioned above, shared space can be anything that is outside of your occupied space and is of benefit to you (lobbies, restrooms, hallways, etc). As a tenant in a commercial space, you pay for a portion of the shared space and thus your monthly rent is always calculated on RSF.
The increase in the the rentable square footage above your usable square footage is referred to variously as the “load factor,” “common area factor,” or “add-on factor.” This is generally in the 10-15% range and can be higher in some buildings. When evaluating commercial real estate space options, you’ll want to be aware of this factor so you know exactly what you’re getting and what you’re paying for.
How to Calculate Load Factor
Calculating the load factor is pretty straightforward. First, find out how much total floor area a building has. Then, subtract the shared square footage to determine the usable square footage. The owner or owner’s agent should be able to give you these numbers. Then divide the total floor space by the USF to get the load factor.
Example: A 100,000 square foot building has 15,000 square feet of shared space. The usable square footage is 85,000 square feet. The load factor would be 1.176 (100,000 / 85,000). That would also be the same as saying the building has a load factor of 17.6%.
Rentable Square Feet vs Usable Square Feet Example
Let’s look at a quick scenario when comparing load factors and rentable square footage to see why it’s useful.
The situation
A tenant is looking at two different office spaces, both with 5,000 square feet of usable space and the exact same rental rates, but differing load factors.
Option A
The first suite has 5,000 usable square feet and has a 20% building load factor for an additional 1,000 sf (5000 x 20%) of rentable space. Thus, the rentable square feet is 6,000 square feet.
Option B
The second office has 5,000 usable square feet and a 15% load factor. The rentable square footage is 5,750 sf (5,000 x .15 = 750). Option B has less rentable square footage and thus would cost less per month for the same amount of usable space!
With the same rental rate, the tenant would pay more per month on his lease for Option A at 6,000 rentable square feet. However, one factor to consider is with higher load factors, are you getting better shared amenities that justify the cost? In some cases, a fancier lobby and shared kitchen area could be enough of a draw to justify the higher cost for the same amount of usable square footage.
As shown above, rentable square feet is not always so simple. To make matters worse, sometimes landlords will even fudge the load factor and USF numbers to the point where it becomes part of the negotiation process itself. As with all commercial real estate leases, always read the fine print so you understand exactly what you’re paying for and exactly what you’re getting in return.
Another great article Robert. However, as we teach in our leasing course for occupiers the devil is in the details and this article is a great foundation. The trick is understanding what is really included in the load factor and not just accepting a landlord’s gross-up percentage of 10-15% on face value. For example, landlord A may have a main floor retail podium. It is important for the occupier to understand if the load or gross-up factor included the retail common areas. We think that should be negotiated out if the retail common areas are in the load calculation.
In another example, is the landlord including areas in the load calculation where the landlord also receives income on the same space, such as an auditorium or meeting rooms? In the least the income should offset some of the operating costs.
Is there a central atrium? One landlord included the airspace in the atrium in the gross-up load factor even though there are no costs (other than HVAC) associated with the airspace so the landlord’s rentable area literally included “thin air”.
These are all great points Peter. Thanks for pointing out some solid examples of why the details matter so much.
So as I understand it rentable square feet includes the costs of the entire common area. Would this be part of CAM or “operating expense”? Seems that if you paying for the extra square footage in rentable then you shouldn’t also absorb the cost in Cam or Operational Expense, correct?
The RSF, and the pro rata share of common areas it includes, affects both the base rent a tenant pays as well as their CAM/OPEX charges if they are on a triple-net lease. Since lobbies, corridors, shared restrooms, etc., are for the benefit and use of tenants, their inclusion in both the base rent calculation and the expenses billed to tenants for maintenance is commonly considered a reasonable and standard practice. In other words, tenants rent a proportionate share of the common areas in addition to their exclusive premises, and pay also for the upkeep of these areas by the landlord or management company. The rent is for the right of use and the CAM is the cost of maintaining the spaces in good condition and working order.
Question: in a two story office building, is the space balcony in the lobby in the 2nd floor, which doesn’t have flooring and a chandelier goes through it from 2nd to 1st floor considered as common area or not?
Not counted in common area. I manage a 3-story office building. 3rd floor is a carbon copy of the 2nd floor, however, the 2nd floor has the atrium cut-out, leaving approximately 1,300sf less usable SF than the 2nd floor.
I am leasing the entire office building to one tenant.
The exterior of the building measures 8106 soft.
Would the interior dimensions be considered 8106 sqft less the sqft of the wall itself?
Which would be considered for calculating the total rent (sqft x rent) considering one tenant for the complete building.
What should be cost vs rent ratio to prepare the space for a new tenant in a commercial building? i.e. Build up cost for a tenant paying $1500/month ( 5 year lease).