Pro Rata

Definition of "Pro rata"

Written by

Michelle Schwartz-Clement

Prominent Properties Sothebys International Realty

The Latin term pro rata has a significant meaning in legal, real estate as well as job industries. To define pro rata, anyone can take a quick vocabulary lesson. Any element that is split into shares, distributed in a manner consistent with the investment, or distributed regarding proportions of time is affected by the pro rata term. Now, as the term pro rata might be less comfortable to use in everyday speech, we’ll give you alternatives. Something that real estate agents also use instead of pro rata is pro rate, pro-rata, pro-rated, prorated, prorating, and other variations from this. To prorate is the American vernacular version of the Latin root.

For pro-rata in real estate, we can mention rental costs, utility expenses, HOA fees, commercial property expenses, all split by renters or time. Then we have property ownership, ownership expenses, mortgage interest that are also impacted by the pro-rata method. We’ll explain the most important ways in which proration affects the real estate industry below.

Pro Rata in Residential Real Estate

The highest costs that are shared in residential real estate transactions are taxes. Those are affected by the pro rata tax method and are covered by the municipalities. Other types of expenses are prorated if the ownership changes, if the renter changes, and so on. Let’s take a closer look.

• Utilities - monthly costs (gas, electricity, or water bills) are prorated between renters in a shared rent, between buyer and seller for mid-month sales (foreclosures may increase chances of this happening), or if the seller doesn’t want to pay for what he will no longer use. Utility bills can also be prorated between owner and renter.
• Rent - depending on when the renter moves in, they might pay a prorated first rent. If they move on the 8th of the month, they will pay 3 quarters of the rent, but if they move on the 23rd, they will only pay one quarter. This is a fair way of charging rent by landlords. The same can happen if a renter vacates a rental mid-month. This should be in writing in the lease as a guarantee because landlords aren’t legally obliged to do this. Rent can also be prorated between renters.
• Other costs - while HOA fees are usually prorated, it’s always safe to check with the HOA. As they cover a full year, HOA fees are paid at one time and if the owner changes after that time, the buyer might need to reimburse the seller. A buyer can also take over a homeowner’s insurance with a prorated insurance cost.

The easiest way to calculate the exact prorated cost is by days of a month or a year. As there are 365 days in a year, pro rata means calculating the proportion of those 365 days when an individual owes a cost. So, one must consider the start and end date of the cost and the date when the responsibility changes.

With 365 days in a year and a start and end date of responsibility, one has to determine the days they have to pay and how much they have to pay.

Example: A seller lived in a home for 232 days, so they only used around 64% of the HOA fee. The buyer should reimburse the seller for the remaining 36% or 133 days.

Pro Rata in Commercial Real Estate

For commercial property owners, renting offices or spaces is calculated by square footage. This is the case only for individually rented spaces, however, as there are also common areas like lobbies, hallways, and restrooms. Those spaces can not be rented for individual use, which is where pro rata is used in commercial real estate.

The commercial property owner needs to determine the annual cost of maintenance and use of the common area and divide the total by how much rented square footage is in the building. Then he divides the value in proportion to how much each individual tenant rents in square footage. This can seem and be complicated, but the calculation is relatively simple once the owner has the required values. So, if one office rents precisely 2,000 square feet and the costs for the common areas are calculated at $1 per rented square foot, then that renter is charged with $500 more per year.

Pro Rata of Mortgages

Pro Rata affects mortgages and loans as well. Because the majority of homebuyers use a loan or a mortgage to purchase a house, pro rata in mortgages is detrimental to their payments. Once a homebuyer closes on a house, the date when the sale is finalized is important for the financial institution that gives the mortgage or loan. If the sale is finalized on the 6th of October, that is the start date of the mortgage as well. The lender expects the first payment of the mortgage on the first day of the month that follows the purchase. However, in that first payment, the homebuyer will need to cover the interest for November but also the pro rata interest for October because he owned the property for 26 days of that month.