What are pass-through costs in commercial real estate leases?

I've seen many commercial tenants caught off guard by their total monthly payments because they focused only on the base rent. The reality is that pass-through costs make up a significant portion of your total occupancy expenses. Let me break down everything you need to know about these additional charges.

Pass-Through Costs: Operating expenses that a landlord charges to tenants in addition to base rent, typically including property taxes, insurance, utilities, and maintenance costs. These costs are "passed through" from the property owner to the tenant as part of their total payment obligation.

Common Types of Pass-Through Costs

Let's examine the main categories of expenses you'll see on your statement:

• Property Taxes: Your share of the building's annual property tax assessment

• Insurance Premiums: A portion of the property's liability and casualty insurance costs

• Utilities: Charges for electricity, water, gas, and other services

• Common Area Maintenance (CAM): Expenses for maintaining shared spaces like lobbies, elevators, and parking lots

• Building Services: Security, janitorial services, and trash removal

• Administrative Fees: Management costs and overhead expenses

How Pass-Through Costs Are Calculated

The math behind these charges isn't as complicated as it might seem. Property managers use several methods to determine your share:

Base Year Method: You pay increases above a set "base year" amount Expense Stop: The landlord covers costs up to a certain point Pro-rata Share: Your portion based on the percentage of space you occupy

For example, if you lease 2,000 square feet in a 20,000-square-foot building, your pro-rata share would be 10% of the total expenses.

Different Lease Structures and Pass-Through Costs

Each lease type handles these costs differently:

Triple Net (NNN): You pay all operating expenses separately from rent Modified Gross: Some expenses are included in rent, others passed through Full-Service: Most expenses included in rent Percentage Rent: Costs might vary based on your business revenue

Negotiating Pass-Through Costs

I always tell tenants to focus on these key areas during negotiations:

• Right to audit expense statements

• Clear list of excluded costs

• Annual caps on increases

• Detailed expense categories

Common Issues and Solutions

Watch out for these frequent challenges:

• Unexpected charges appearing on statements

• Disputes over calculation methods

• Annual reconciliation surprises

• Unclear cost allocations between tenants

Best Practices for Tenants

Protect yourself by following these guidelines:

• Review historical operating expenses before signing

• Read every word of your lease's expense provisions

• Keep detailed records of all charges

• Build a good relationship with property management

Future Trends in Pass-Through Costs

The commercial real estate industry keeps changing. New factors affecting pass-through costs include:

• Energy-efficient building upgrades

• Smart building technology implementation

• Enhanced cleaning and safety protocols

• Shifting market conditions

Conclusion

Pass-through costs significantly impact your total occupancy expenses. Don't sign a lease without fully understanding these obligations. Bellhaven Real Estate's experts can guide you through lease negotiations and help you avoid costly surprises.