Tenant's proportionate share: Overview, definition, and example
What is tenant’s proportionate share?
A tenant's proportionate share refers to the percentage of a property or building that a tenant occupies relative to the total space available in the building or property. This share is often used in commercial real estate leases to determine how certain costs, such as property taxes, insurance, maintenance, and common area expenses, are allocated among tenants. The tenant’s proportionate share is typically calculated based on the square footage of the leased space compared to the total square footage of the building or complex.
For example, if a tenant leases 5,000 square feet in a building that has 50,000 total square feet, their proportionate share of the building is 10% (5,000/50,000).
Why is tenant’s proportionate share important?
The tenant's proportionate share is important because it determines the tenant's financial responsibility for shared operating costs and expenses in a commercial lease. These costs are often categorized as "additional rent" and include expenses like maintenance of common areas, utilities, security, property taxes, and insurance premiums. By calculating each tenant’s proportionate share, landlords can ensure that each tenant contributes fairly to the overall operating costs of the property.
For businesses, understanding the tenant’s proportionate share helps in budgeting and planning for additional expenses that may fluctuate over time. It also provides clarity on how much of the building's total expenses the tenant is liable for, aside from the base rent.
Understanding tenant’s proportionate share through an example
Let’s say a commercial office building has 100,000 square feet of rentable space, and a tenant, ABC Corp., leases 10,000 square feet. In this case, ABC Corp.'s proportionate share of the building is 10% (10,000/100,000).
If the building incurs $200,000 in annual property taxes, ABC Corp. would be responsible for 10% of that total, or $20,000. Similarly, if the building’s operating expenses (e.g., maintenance, insurance, utilities) amount to $500,000 for the year, ABC Corp. would pay 10% of that total, or $50,000, in addition to its base rent.
An example of a "tenant’s proportionate share" clause
Here’s how a tenant’s proportionate share clause might appear in a commercial lease agreement:
“The Tenant’s proportionate share of the Operating Expenses shall be calculated based on the ratio of the total square footage leased by the Tenant to the total rentable square footage of the Building. For example, if the Tenant leases 10,000 square feet and the total rentable area of the Building is 100,000 square feet, the Tenant’s proportionate share is 10%. The Tenant agrees to pay its proportionate share of all Operating Expenses, including but not limited to property taxes, insurance premiums, maintenance costs, and utilities.”
Conclusion
A tenant’s proportionate share is a critical factor in determining the tenant’s financial obligations in a commercial lease. By calculating the proportionate share based on the space leased relative to the total property, tenants can be assigned a fair share of common costs, such as maintenance, taxes, and utilities. Understanding this concept is crucial for tenants to anticipate additional costs beyond the base rent and for landlords to allocate expenses equitably among tenants. This ensures transparency and helps both parties manage their financial responsibilities within the lease agreement.
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.