How to Calculate Pro Rata Share in Commercial Real Estate

Pro rata share is a concept used to describe a proportionate allocation of something. In the context of commercial real estate, this principle is applied to distribute shared costs or obligations among multiple tenants within a property.

Understanding Pro Rata Share in Commercial Real Estate

Pro rata share in commercial real estate defines how shared building expenses are divided among tenants, distributing costs equitably based on each tenant’s proportionate use or occupancy of the property. Tenants occupying larger areas contribute a larger portion to operating costs, reflecting their greater resource consumption. This concept is particularly relevant in multi-tenant properties where shared expenses, such as common area maintenance (CAM) fees, property taxes, insurance premiums, and utilities, need to be distributed. It is commonly expressed as a percentage or a fraction, representing a tenant’s responsibility for a building’s total expenses.

Information Needed for Calculation

Before performing a pro rata share calculation, specific pieces of information must be gathered.

The total square footage of the entire commercial property, representing the overall leasable or rentable area, is required.

The specific square footage of the tenant’s leased space, the actual area they exclusively occupy, is also necessary. These figures are typically found within the lease agreement, which often specifies how space is measured.

Finally, the total amount of the shared expense that needs to be allocated is required. This could be a total property tax bill, common area maintenance costs, or a utility bill for a shared meter. Lease agreements or property management statements usually provide details on these total expenses.

Steps for Calculation

A tenant’s pro rata share is calculated in two steps. The first step determines the tenant’s proportionate share of the property’s total square footage. This is achieved by dividing the tenant’s leased square footage by the total square footage of the entire building. For instance, if a tenant leases 2,000 square feet in a 20,000 square foot building, their proportionate share is 2,000 ÷ 20,000, or 10%.

The second step involves multiplying this proportionate share by the total shared expense to determine the tenant’s financial responsibility. If total common area maintenance expenses are $50,000 annually, the tenant’s share is 10% multiplied by $50,000, resulting in $5,000. This method ensures that costs are distributed fairly according to each tenant’s occupied space.

Practical Scenarios

Pro rata share calculations are commonly applied across various shared expenses in commercial real estate.

Common Area Maintenance (CAM) charges are a frequent application, covering costs for maintaining and operating shared spaces like landscaping, parking lot maintenance, common area utilities, cleaning services, and security. The tenant’s pro rata share determines their portion of these collective upkeep costs.

Property taxes are another significant area where pro rata share is used. The total property tax assessed on the entire commercial building is often allocated among tenants based on their proportionate share of the space.

Building insurance premiums, covering fire and liability, are frequently distributed using this method. Shared utilities for common areas not separately metered also utilize pro rata share. Operating expenses, encompassing many shared costs, are consistently allocated via pro rata share in lease structures where tenants assume responsibility for additional fees beyond base rent.