Tenant’s pro rata share: Overview, definition, and example
What is tenant’s pro rata share?
A tenant’s pro rata share refers to the proportion of the total costs, expenses, or responsibilities in a lease agreement that the tenant is obligated to pay, based on the amount of space they occupy in the building or property. It is typically used in commercial leases to allocate common area maintenance (CAM) fees, property taxes, insurance, and other shared operating costs. The pro rata share is calculated by dividing the square footage of the tenant's leased space by the total square footage of the building or property.
For example, if a tenant rents 5,000 square feet in a 50,000-square-foot office building, their pro rata share of expenses like maintenance and utilities would be 10%, since 5,000 divided by 50,000 equals 0.10, or 10%.
Why is tenant’s pro rata share important?
Tenant’s pro rata share is important because it helps fairly distribute the costs of operating and maintaining a shared property among all tenants. Instead of each tenant paying equal amounts for services like cleaning, landscaping, or insurance, the costs are allocated based on the amount of space they occupy. This ensures that tenants pay a fair and proportionate share of the building's overall expenses, which can fluctuate depending on the size and use of their leased space.
For landlords, the pro rata share calculation is crucial for maintaining accurate accounting and ensuring that operating expenses are fully recovered from tenants. For tenants, understanding their pro rata share helps them anticipate their financial obligations related to the leased space and avoid surprises in terms of additional costs.
Understanding tenant’s pro rata share through an example
Imagine a tenant, ABC Corp., who leases 2,000 square feet of office space in a building that is 20,000 square feet in total. The building's total operating expenses for the year, including property taxes, maintenance, and insurance, amount to $100,000. To determine ABC Corp.'s pro rata share of these expenses, we calculate:
- ABC Corp.'s leased space is 2,000 sq ft, and the total building size is 20,000 sq ft.
- ABC Corp.'s pro rata share = 2,000 ÷ 20,000 = 0.10 or 10%.
Therefore, ABC Corp. would be responsible for 10% of the total operating expenses, which is $10,000 ($100,000 × 0.10).
An example of a tenant’s pro rata share clause
Here’s how a clause about tenant’s pro rata share might appear in a commercial lease agreement:
“The Tenant’s pro rata share of the building’s operating expenses, including common area maintenance (CAM) charges, property taxes, and insurance premiums, shall be calculated based on the ratio of the Tenant’s leased square footage to the total square footage of the building. The Tenant’s pro rata share shall be [Tenant’s square footage] ÷ [Total building square footage] and shall be used to determine the Tenant’s portion of operating expenses.”
Conclusion
A tenant’s pro rata share is a fair and practical way to allocate shared costs in a lease agreement, ensuring that tenants only pay for the portion of expenses proportional to the space they occupy. It is an essential concept in commercial real estate leases and helps both landlords and tenants manage financial responsibilities related to operating and maintaining a property. Understanding how pro rata shares work ensures transparency and helps tenants anticipate and manage additional costs outside of base rent.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.