Gross Leases: Paying for Common Areas
In many buildings, you’ll share parts of the structure or grounds with other tenants. For example, you and other tenants may share hallways, lobbies, elevator shafts, bathrooms, and parking lots. Added up, these spaces can amount to a hefty chunk of the property. The landlord usually won’t let you use these shared facilities for free.
Landlords charge individual tenants for a portion of the nonprivate space by using either a loss factor or a load factor. (Many times the loss factor is also incorrectly referred to as the load factor.) Depending on which method the landlord uses, you may either:
- pay for the amount of advertised space, but actually get less square footage (by virtue of the loss factor), or
- get the full square footage advertised, but pay for more square feet (pursuant to the load factor).
Don’t be put off by the jargon or the math—the concept is what’s key. If you come away from this article understanding that the terms “loss factor” and “load factor” mean that the cost of the rental will go up, you’ve got the essential point.
Using a Loss Factor to Reduce Your Square Feet
One way the landlord gets paid for the common area space you’re entitled to use but don’t pay for directly is to simply reduce your amount of exclusive space—but charge you for the number of square feet quoted in the ad. Obviously, this works best when the space to be rented is easily subdivided, as in new construction or office space with movable walls.
Here’s how it works. Look back to the example in Gross Leases – Measuring Space and assume that both Buildings A and B have 10,000 square feet available to individual tenants plus 2,000 square feet of lobbies, hallways, shared bathrooms, and elevator spaces. The non-private space (2,000 square feet) is one-sixth, or 16.67%, of the total building size of 12,000 square feet. That’s known as the loss factor, expressed as 16.67%.
Next, the landlord subtracts 16.67% from 100% (yielding a balance of 83.33%) and multiplies this times the square feet advertised (.833 x 1,000). The result is the square footage that will be exclusively available to Tom, our tenant. To finish our example, Tom will end up with only 833.3 square feet of his own (1,000 x 83.33%) but he’ll pay for 1,000 square feet.
Using a Load Factor to Charge You for More Square Feet
You’ve just learned about one way that a landlord may make sure that tenants pay for their share of the common spaces—by reducing the space you get to use exclusively (but charging you for the entire advertised space by including common area space in the rent). Using a load factor is another way. Rather than reducing your amount of usable space, landlords tack on an additional charge for the tenant’s proportional share of the non-private or common areas.
Here’s how the load factor works. Suppose landlords A and B both have 2,000 square feet that they cannot rent out to individual tenants, but they wish to pass on the “rent” for this space to their tenants. They divide this 2,000 square feet by the 10,000 square feet available for private use and find that they must increase each tenant’s rent by an additional 20% to cover their proportional share the common area.
The Importance of Discovering the Loss or Load Factor
As you can see, using a loss or load factor has a significant impact on how much space you end up with, or the real cost per square foot of your rented space. Under either method—reducing your exclusive space, or charging you for a portion of the common areas—you end up getting less or paying more. You must find out early on whether the landlord will apply a loss or load factor. The method a landlord picks may depend on several factors:
If the space is wide open and easily divided into rentable pieces of varying sizes, such as a new office building with no interior walls in place yet, it will be easy for the landlord to advertise one size but, applying the loss factor, actually turn over a smaller space.
If the space in the building is permanently divided into rentable “chunks,” as is true in an older, multitenant retail space, it’s likely that the landlord will use the load method, because the square footage for each space can’t be reduced without major reconstruction.
If you must have the full square footage as advertised or represented by the broker, make sure that the landlord doesn’t apply the loss factor, which decreases your usable space. For example, if you need a full 1,000 square feet, you don’t want to learn that the loss factor will used to charge you for that size but actually deliver less. You’ll prefer to have the landlord use the load factor, which will result in your getting the full 1,000 square feet but charging you for more. Raise the issue early on.
Be aware that you may not always be informed of the loss or load factor in your first dealings with the landlord (you may not see it in the ad, for example). But the broker (if there is one involved) will probably know if either factor is operating behind the scenes and should be able to help you compute the true cost of the space.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman