The term “Pro Rata” means proportional or in proportion. In the context of commercial real estate, the term “Pro Rata Share” is a method of calculating a tenant’s share of a building’s expenses based upon a calculation defined in a tenant’s lease. Pro Rata Share of expenses is generally expressed as a percentage. As explained in our comprehensive primer on leases, “The ABCs of Commercial Real Estate Leases”, the terms “Pro Rata”, “Pro Rata Share” and “PRS” are used interchangeably in commercial real estate and mean the same thing.
Calculating Pro Rata Share of Expenses
The process for calculating a tenant’s Pro Rata Share of expenses is fairly simple and straightforward:
1. First, determine the total square feet of space the tenant is leasing (the “Premises Square Footage”). This can be found in the tenant’s lease.
2. Second, determine the Defined Area for the building, which is the amount of space in the building being used to calculate the Pro Rata Share. This will be the denominator in the calculation. Some leases will state the specific square footage for the Defined Area. However, if the specific square footage is not stated in the lease, one of two measures is generally used: Gross Leasable Area (GLA), which is the total amount of space in the building that is currently available to be leased, whether occupied or not; or Gross Lease Occupied Area (GLOA), which represents the total occupied area of a building.
Pro-Rata Share of expense calculations using GLA are more advantageous to the tenant because they take all the leasable space in the building into account, whether the space is leased or occupied or not, which reduces the tenant’s share of expenses. GLOA favors the landlord, because only leased and occupied space is included in the Defined Area, so the tenant covers a higher proportion of the property’s expenses. Check the tenant’s lease to confirm which measure the landlord is using to define total space.
3. Third, divide the Premises Square Footage by the Defined Area, using the measure defined in the lease. That gives you the percentage of total space occupied by the tenant.
Last, multiply the percentage of total space occupied by the tenant by 100. That will give you the tenant’s Pro Rata Share of both space and expenses.
Here it is summarized in a formula:
A tenant’s Pro Rata Share of expenses might change over the lease term if the tenant increases or decreases the amount of space it’s leasing, or if the GLA or GLOA of the building increases or decreases, thus increasing or decreasing the total square footage of the Defined Area. If this is the case, it will be indicated in the lease.
Over or Understating Pro Rata Share
As with any financial process in commercial real estate, when calculating Pro Rata Share, accuracy is critical. Over or underestimating the tenant’s Pro Rata Share impacts not just one expense, but potentially many. Consequently, the tenant could end up significantly over or underpaying its expense reimbursements and the error might go unnoticed and not be caught until the tenant or landlord conducts a thorough audit. Overpaying hurts the tenant’s cash flow, obviously, plus the reconciliation and reimbursement processes can be lengthy and time-consuming. If a tenant severely underpays, on the other hand, when the landlord eventually catches the mistake, the tenant may be required to make up the shortfall, which would give an unexpected and very unwelcome jolt to the tenant’s balance sheet and cash flow. Before calculating Pro Rata Share, it’s smart to check the lease very carefully for any language that impacts Pro Rata calculations and to calculate the Pro Rata Share accurately upfront, so no damage is done.
Some Additional Notes on Pro Rata Share in Commercial Real Estate
- Occasionally, the Defined Area may be based on only a portion of the building, or even the collective square footage of several buildings. For example, retail and office tenants may have different Defined Areas and thus different denominators for Pro Rata Share calculations. Always check the lease to confirm how Defined Area is calculated.
- A tenant’s Pro Rata share of expenses may vary by type of expense– Operating Expenses vs. Real Estate Taxes, for example.
Additional Information and Resources on Pro Rata Share and Commercial Real Estate Leases
Want to learn more about the intricacies of commercial real estate leases? We’ve updated several of the most popular posts from our original series on commercial real estate lease fundamentals with new information and insights. Those updated posts cover:
Just click on any of the links above to read the articles.
Also, there are several resources in our Library that you might find helpful: our glossary of commercial real estate terms, with definitions to over 140 terms; and the “ABCs of Commercial Real Estate Leases”, our comprehensive primer on leases that covers lease basics, from A to Z.
For those looking for a guided learning experience, we offer a training course called “Understanding Commercial Real Estate Leases” as well as a class on lease abstraction. You can learn more about all our commercial real estate training courses on the training page of our website.
By Terry Banike, Marketing Manager, Realogic