Proportionate Share in Commercial Leases: Are You Paying More Than Your Fair Share?

If you occupy 50% of a building, paying 50% of certain building expenses sounds reasonable.

But what if the tenant next door consumes significantly more electricity, water or gas than you do?

Proportionate share is commonly used in commercial leases to allocate expenses among tenants. While the calculation itself may be straightforward, it doesn’t always result in costs that accurately reflect how much each tenant is actually using.

For tenants, this is a good example of why reviewing occupancy costs shouldn’t stop at confirming that the landlord’s math is correct. You also need to understand what you’re being charged for and whether the allocation method makes sense.

What Does Proportionate Share Mean in a Commercial Lease?

Proportionate share typically determines the percentage of certain property expenses that a tenant is responsible for paying.

Depending on the lease, it may be calculated using the tenant’s rentable area compared with the total rentable area of the building or property.

If you occupy 50% of the applicable space, for example, your proportionate share may be 50%. For many shared building costs, this can be a practical way to divide expenses.

Problems can arise when the expense being allocated doesn’t actually correspond with the amount of space each tenant occupies.

Utilities are a good example.

When Proportionate Share Doesn’t Reflect Actual Usage

One of our clients recently encountered exactly this situation.

At one of its locations, the client shared a building with a bitcoin mining operation. Utility expenses were being allocated based on each tenant’s proportionate share of the building.

The problem was that the two businesses had dramatically different utility requirements.

Our client’s share of the building might have supported the percentage used in the calculation, but its actual utility consumption did not.

The client’s utilities and facilities team identified the discrepancy internally and brought the resulting credit to our Lease Administration team for review.

Our role was to validate the credit, confirm that the calculations and methodology were consistent with the lease, and investigate whether there were any additional amounts that could be recovered. The result: our client will receive a credit of more than $100,000 from the landlord for utilities it had overpaid.

The allocation formula wasn’t necessarily complicated. The issue was whether that formula was appropriate for the expense being allocated.

Why Lease Administration Goes Beyond Checking the Math

When reviewing additional rent and operating costs, it’s easy to focus on whether the numbers add up.

That’s important, but effective lease administration goes further.

You also need to ask:

• Does the lease permit this expense to be charged to you?
• Has your proportionate share been calculated correctly?
• Is the allocation methodology appropriate for the type of expense?
• Are there unusual circumstances at the property that could be affecting your costs?
• Does actual usage tell a different story?

An invoice can be mathematically correct and still deserve a closer look.

This becomes particularly important across larger real estate portfolios. Issues can be identified by facilities, accounting, real estate or other internal teams, but they still need to be assessed against the lease. Lease Administration provides that additional layer of review, helping determine whether a charge is appropriate, whether a proposed credit is accurate and whether the same issue may have resulted in other recoverable amounts.

When Does Submetering Make Sense?

For our client, identifying the overpayment also led to a longer-term solution.

Going forward, the client intends to use submetering for electricity, water and gas when sharing a property with other businesses, where possible. This allows utility costs to be based on actual consumption rather than floor area.

The client will also seek to establish its own utility accounts where circumstances allow.

That provides greater transparency and reduces the possibility that one tenant will effectively subsidize another tenant’s unusually high consumption.

More importantly, the lesson from one location can now inform how the client approaches other leases across its portfolio.

What Tenants Should Take Away

Proportionate share isn’t inherently problematic. For many expenses, it provides a sensible and efficient way to allocate costs among tenants.

But it shouldn’t automatically be assumed to be the right methodology for every expense.

When reviewing your operating costs, look beyond whether the percentage matches your share of the building. Consider what is being allocated, how the cost is generated and whether your proportionate share reasonably reflects your responsibility for that expense.

That type of review can help identify and validate overpayments, confirm that credits have been calculated correctly and determine whether additional amounts may be recoverable. Just as importantly, the lessons from one location can help establish better lease terms and cost controls across the rest of your portfolio.

Landmark Advisory Services works exclusively on behalf of commercial real estate tenants. Our Lease Administration team reviews occupancy costs against lease obligations and property-level circumstances to help tenants identify discrepancies, recover overpayments and establish stronger processes across their portfolios.

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