What are pass throughs in real estate?

Quick Overview on Pass-throughs

Pass-through expenses in commercial real estate are operating costs that landlords transfer to tenants, including common area maintenance, property taxes, insurance, and utilities. The structure of these expenses varies based on the lease type: in a Triple Net Lease, they are added on top of the base rent, while in a Full-Service Gross Lease, they are included in the base rent. In Modified Gross Leases, most pass-through expenses are part of the base rent with some exceptions, offering a middle ground between the other two types.

The method of calculating and charging these expenses depends on the type of lease:

  1. Triple Net Lease (NNN): Here, pass-through expenses are added on top of the base rent. Tenants pay a pro-rated share of the operating expenses like property taxes, insurance, and maintenance costs.
  2. Full-Service Gross Lease: In this type of lease, pass-through expenses are included in the base rent. This offers tenants the convenience of a single payment without needing to calculate additional expenses.
  3. Modified Gross Lease: Most pass-through expenses are included in the base rent, with some exceptions. This lease type provides a balance between the triple net and full-service gross leases, allowing for more flexibility in negotiations.

The payment structure of pass-through expenses can be a significant consideration in lease negotiations. Landlords and tenants should be aware of these details to establish lease terms that align with their objectives.

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