Have you ever asked: What’s the difference between loss factor and load factor in commercial real estate (CRE)? These terms are essential for calculating the rentable and usable space within a building, which directly impacts leasing costs and space efficiency.
To better grasp these concepts, let’s delve into their definitions and applications.
Loss factor
The loss factor represents the percentage of the total space in a building as dictated by the market that is for building operations and building amenities. These building common areas like lobbies, conference rooms, fitness rooms, and building mechanical rooms are not part of a tenant’s usable area. Essentially, it shows how much of the building’s area is taken up by non-usable spaces for building operations and amenities.
“A loss factor is a market-driven, add-on factor, and it is primarily used in New York and the tristate region, and it falls within the revenue standard,” Miguel Flores Ugarte, Implementation Project Senior Director at Building Engines, said during a recent presentation at Building Engines Connect.
This means that the loss factor is heavily influenced by market practices in specific regions, particularly in highly competitive real estate markets like New York City. A higher loss factor indicates that a larger portion of the building’s area is taken up by common areas, which can affect space efficiency and rental costs.
Load factor
On the other hand, the load factor represents the ratio that accounts for the proportion of common areas the tenant will effectively “share,” used to allocate a portion of these common areas to each tenant’s leased space.
“The load factor is calculated according to the BOMA Office Standard guidelines. The load factor is a combination of building service areas, such as building lobbies and building mechanical rooms. And your floor service areas, those are the areas, such as bathrooms and utility rooms that are servicing one floor,” Flores Ugarte said.
The load factor helps determine the total rentable square footage to be charged to a tenant, reflecting both their private area and a share of the common areas.
BOMA Standards for load factor
“The load factors, under Method A in the BOMA Office Standard, will vary from floor to floor depending on the configuration of the floor. You also have, under Method B, the ability to just produce one load factor for the entire building,” said Flores Ugarte. “And the way this is achieved is basically, you’re grouping all your building service area and floor service area into one group and then allocating proportionately to all tenants in the building.”
This flexibility in the BOMA Standards allows for more tailored approaches depending on the building’s design and tenant needs. Method A offers specificity per floor configuration, while Method B provides a unified load factor for the entire building, simplifying the allocation process.
Conclusion
While the loss factor indicates the percentage of space lost to common areas as dictated by the market, the load factor helps distribute these common areas among tenants. These calculations can vary based on regional market practices and guidelines, such as those provided by BOMA.
Whether you are a landlord setting lease terms or a tenant negotiating your space, comprehending these factors ensures transparency and fairness in the commercial real estate market.
Contact an expert to learn more.
