What is Operating Expense Pass-Through?
The mechanism by which landlords recover building operating costs from tenants based on the lease structure and expense classification.
Definition
An operating expense pass-through is the mechanism by which landlords recover building operating costs from tenants. In NNN leases, substantially all operating expenses are passed through to tenants based on their pro-rata share. In gross or modified gross leases, only expenses exceeding an expense stop or base year amount are passed through. The accuracy of pass-through calculations — including correct expense classification, proper application of exclusions, and accurate pro-rata share computation — directly determines whether the landlord recovers what the lease entitles them to. Pass-through errors compound annually and can result in significant cumulative financial impact across a multi-tenant portfolio.
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