The information you obtain at this site is not, nor is it intended to be, legal advice.  
You should consult an attorney for advice regarding your individual situation.  
Contacting an attorney does not create an attorney-client relationship.  Do not send,
e-mail, or provide confidential information or information you do not wish to be
publicly disseminated until such time as an attorney-client relationship has been
established and requested to do so by an attorney.

Copyright 2009 Law Office of Craig W. Little, P.A.  All rights reserved. You may
reproduce portions of this site or materials available at this site for personal and
non-commercial use.  All copies of portions of this site or materials available at this
site must include this copyright statement.
Web Articles
      Calculating Tenant's Proportionate Share of
Operating Expenses Under a Net Commercial Lease

Calculating Tenant's Proportionate Share of Operating
Expenses

Once the square footage attributable to a tenant has been
determined, their proportionate share of the operating expenses
for the project can be calculated.  

The simplest scheme to calculate the proportionate share of
operating expenses that a tenant must pay is to utilize the
proportionate share the square footage attributable to the
tenant represents to the total square footage within the project
as the basis for such calculation.  The square footage that is
attributable to the tenant is divided by the total square footage
of the project.  This proportion is multiplied by the total
operating expenses to be paid by all tenants to determine this
tenant’s proportionate share of such costs.  Such operating
expenses are typically paid by the tenants in advance, therefore
the total operating expenses are usually the landlord’s estimate
for the future operating costs.  This is the scheme most often
utilized.  

But landlords may not want to use this simple scheme for
calculating the proportionate share of costs to be allocated to a
tenant because it can allocate a portion of the project’s
operational expenses to the landlord because it is the landlord
who absorbs the costs allocated to leased space within the
project that is not occupied by a tenant.  If the landlord of the
project and the tenants wish to use this simplified scheme for
calculating the proportionate share of costs to be allocated to
the tenant then the landlord may offset such expenses
attributable to unoccupied spaces by inflating the estimated
operational expenses of  the project upon which the
proportionate share calculation is based.

Landlords may prefer to have a tenant’s proportionate share
equal the square footage of the project attributable to the
tenant as a percentage of the occupied square footage within
the project.  With such a scheme for calculating the tenant’s
proportionate share, the costs are only allocated to leased
space that is occupied by tenants therefore the landlord is not
forced to absorb any operational expenses.  Tenants may not
want to use this scheme for calculating the proportionate share
of operating costs because it could place an excessive amount
of costs on the tenant if large areas of the project are not
occupied by tenants.  Such a scheme can also be procedurally
difficult for the landlord if the amount of space leased within the
project changes often because tenants are frequently moving
into the project or leaving the project.  These procedural
difficulties arise due to the fact that each time the amount of
square footage leased within the project changes, each tenant’s
proportionate share of the operational expenses changes and
has to be recalculated and a notification thereof would have to
be provided to each tenant.  These procedural difficulties for
the landlord can be lessened by having an operating
procedure, and the corresponding lease provisions, that dictate
that the tenant’s proportionate share will only be recalculated on
set dates such as the beginning of each calendar year.

As a means of compromising on the scheme to be utilized to
calculate a tenant‘s proportionate share of operating expenses,
the landlord and the tenant may agree to maximum increases in
the tenant’s contribution to those expenses.  Such a scheme will
allow unforeseen expenses to be, to some degree, passed onto
the tenants but the landlord also will join in the payment of
greatly increased costs.

Such a scheme that caps the increase in a tenant’s contribution
to operational expenses can be mutually beneficial to both the
landlord and the tenant.  Such a scheme gives both the landlord
and tenant a degree of certainty for budgeting and planning
purposes.  The tenant is assured that their monthly payment will
not exceed a certain amount and the landlord is assured that
they will not have to contribute to operational expenses unless
those costs exceed a certain amount and only to the extent that
they do in fact exceed that amount.  Also both the landlord and
the tenant would share in the payment of excessive operational
costs therefore the risk is shared by both the landlord and the
tenants and both the landlord and the tenant have economic
incentive to ensure the project is operated efficiently and cost
effectively.  

Because the scheme by which a tenant’s proportionate share of
operational expenses are calculated can greatly impact both the
landlord and the tenant, there is often negotiations required to
arrive at a scheme that is mutually acceptable.  However the
landlord will usually want leases within a project to be generally
the same in operational terms to simplify the accounting
associated with tracking each individual tenants contribution to
the operational expenses of the project and to ensure that all of
the operational expenses are paid by the tenants and not left to
be absorbed by the landlord.  

The calculation of a tenant’s proportionate share of operational
costs may be further complicated if the project includes an
anchor tenant.  Anchor tenants, by definition, lease large
portions of real estate projects.  Because of this, such tenants
enjoy a certain degree of leverage when negotiating lease
terms with a landlord.  Such tenants sometimes parlay that
leverage into a concession by the landlord that sets the tenant’s
contribution for operational costs for the project rather then
allowing such costs to the tenant to fluctuate with the actual
amount of such expenses.  Such a leasing arrangement
provides certainty for the anchor tenant as to what their leasing
expenses will be.  But such an arrangement affects the other
tenants within the project and their proportionate share of the
remaining operational expenses for the project.  To calculate a
non-anchor tenant’s proportionate share of operational costs in
a project that has an anchor tenant with a set contribution, first
the contribution of the anchor tenant should be subtracted from
the total of the operational costs.  Then the non-anchor tenant’s
proportionate share of these remaining costs is equal to the
square footage of the project attributable to the non-anchor
tenant as a percentage of the total square footage of the
project or the occupied square footage of the project,
depending on what the basis is for a tenant’s proportionate
share is in a particular lease,  less the area attributable to the
anchor tenant.  With such a scheme the anchor tenant may be
responsible for less than its proportionate share of the
operating expenses of the project and in such a case the other
tenants share proportionately in those operational expenses not
paid by the anchor tenant.  But the benefit to the other tenants
of having the anchor tenant operating within the project and
increasing traffic within the project should hopefully offset
inflated contributions to the operational expenses to be paid by
the non-anchor tenant.

                                       Return to Calculating Tenant's Proportionate Share
Law Office of
Craig W. Little, P.A.