Chapter 3 · Operating expenses

What are operating-expense pass-throughs?

Guide · August 2026 · Not legal or accounting advice

An operating-expense pass-through is a cost the lease lets the landlord recover from tenants on top of base rent. The label changes — CAM, additional rent, OpEx, NNN. The question does not: which dollars are recoverable, and what is your share.

Base rent versus pass-throughs

Base rent is the periodic amount in the rent exhibit — dollars per year, or dollars per square foot per year, sometimes with scheduled bumps. It is not a function of last year’s landscaping invoice. You owe it whether the parking lot was sealed or not.

A pass-through is additional rent that is a function of cost. The lease defines a pool (operating expenses, CAM, tax, insurance, or some combination), defines your share, and requires you to pay that share. During the year the landlord usually bills an estimate. After year-end they settle. That settlement is the same event described in what a CAM true-up is, even when the packet never uses the word CAM.

The economic difference is risk. Base rent puts cost inflation on the landlord unless the lease has bumps or a reset. A pass-through puts defined operating risk on the tenant. Hybrid forms — a base year, an expense stop, a cap — split that risk. None of those forms has a “typical % of rent” that this site will invent. Your share is the fraction and the definition in the lease.

Gross, modified gross, base-year, expense stop, NNN

These are concepts, not statutes. Two leases that both say “modified gross” on the cover can compute additional rent differently. Read the definitions. The labels below are only so you can recognize the structure you are in.

• Gross (or full service). Base rent is meant to include the landlord’s operating costs, or most of them. There may still be a pass-through for tax increases, after-hours HVAC, or a tenant’s own utilities. Do not assume “gross” means the year-end envelope is empty. Look for an additional-rent article.
• Modified gross. Some operating costs are in base rent; some are passed through. Which ones is the whole question. A common office pattern is that the landlord absorbs a base amount and the tenant pays increases. A common retail pattern is that CAM is passed through and some interior services are not.
• Base year. The landlord states a year (often the first calendar year of the term, or a stated year in the exhibit). The tenant pays its share of operating expenses above that year’s amount. The base-year number is itself a reconciliation: if the base year was lightly occupied, or missing a full insurance term, later years can look like a spike that is really a catch-up. Gross-up of the base year, if the lease requires it, is how some forms try to make the comparison fair.
• Expense stop. Similar idea, stated as a dollar amount or a dollars-per-square-foot figure rather than a year. The tenant pays its share of OpEx above the stop. Confirm whether the stop is building-level or tenant-level, and whether it moves.
• NNN (triple-net). The tenant pays a share of operating expenses, real-estate taxes, and insurance — the three “nets” — on top of a lower base rent. CAM is often used as shorthand for the whole reconciliation. See NNN true-up. Some leases are NN (tax and insurance only). Some cap CAM but not tax. The cover label is not a formula.

What often sits in OpEx

Leases define “Operating Expenses,” “CAM,” or “Additional Rent” differently. Common buckets, and the usual questions inside each:

• CAM / common-area operating expenses. Utilities for shared space, janitorial, landscaping, snow, security, ordinary repairs, parking-lot sweeping, dumpster contracts. This is the core of a CAM true-up. Capital versus repair is the recurring line fight; see exclusions.
• Real-estate taxes. Property tax on the land and building, sometimes plus special assessments or BID levies. Often billed as its own line even when the monthly estimate is lumped. This is property tax, not the landlord’s income or franchise tax. Appeals and refunds should credit the pool in the year received or as the lease directs.
• Insurance. Property, liability, and sometimes terrorism, flood, or rent-loss premiums the landlord places. Tenant-placed policies (your contents, your GL) are usually separate and should not appear here. Deductibles, self-insured retentions, and proceeds are taken up in the NNN chapter.
• Utilities. Common-area electricity, water, and trash are often CAM. House meters that also serve vacant space raise a vacancy question. After-hours HVAC billed to a single tenant should not also sit in the shared pool.
• Management. A stated administrative or management fee, on-site payroll, or both. The reconciliation chapter covers stacking and the fee base. Off-site executive overhead is commonly excluded when a fee is already allowed.

If the definition does not include a cost, it is not a pass-through just because it appears on a ledger. If the exclusions exhibit names a cost, it should not be in the pool even if the definition is broad. Read both.

Estimates during the year versus year-end settlement

Landlords rarely wait for December invoices. They bill a monthly estimate — a budget, last year’s actuals plus a guess, or a stipulated dollar amount. That estimate is additional rent. Paying it on time does not mean you agreed the year-end pool is correct. It means you paid the installment the lease required.

If the estimate looks high relative to last year’s statement, ask for the budget and the assumptions (occupancy, insurance renewal, a planned capital project that may not be recoverable). If it looks low, do not assume a gift. A large true-up invoice in Q1 is how a low estimate gets corrected. Some leases allow a mid-year revision; treat a revision as a new installment schedule, not as a settlement.

After the books close, the landlord should produce actual recoverable expenses, apply the lease’s allocation (pro-rata, maybe a gross-up, maybe a fee, maybe a cap or a base-year subtraction), subtract estimates paid, and send a statement. That is the same event described on the CAM reconciliation page, even when the packet is titled “operating expenses” or “additional rent.”

your share of the recoverable pool − estimates paid = true-up (owe or credit)

On a base-year or expense-stop lease the “pool” in that line is the excess over the base or the stop, not the whole building spend. Reconstruct the base-year number with the same definitions used this year. A base year that was not grossed up, if the lease required it to be, will understate the stop and overstate every later true-up.

Gross-up and occupancy from the OpEx angle

Gross-up shows up in two OpEx settings, and they are easy to confuse.

Current-year gross-up. Variable expenses this year are restated to a target occupancy (95% in many leases; a lease term, not a market law) so a low-occupancy year does not understate the tenant’s share of janitorial and similar lines. Fixed expenses — tax, insurance, a roof that costs what it costs — are not supposed to be grossed up. The reconciliation chapter works 82% → 95% on a variable piece of the homepage sample.

Base-year gross-up. The same idea, applied to the comparison year so a lightly occupied base year does not become a permanently low stop. If this year’s OpEx is grossed up and the base year was not, you are comparing a restated number to a raw number. Ask for both occupancy figures and both calculations.

Occupancy support is not a courtesy. It is the only way to test the factor. A rent roll, a month-by-month certificate, or the workpaper behind the 82% — whatever the landlord used — should be on the backup list. If they cannot show occupancy, they cannot show the gross-up.

Related-party vendors and double recovery

Operating expenses are supposed to be the building’s cost of operations, not a second profit center on top of base rent — unless the lease expressly allows a fee or a markup. Two patterns create a second recovery.

Related-party vendors. The landlord, the management company, and a landscaping, security, or construction affiliate share an owner. The invoice in the pool may include a markup over the affiliate’s cost. Some leases limit related-party charges to a competitive or stated amount. Some require disclosure. Ask for the vendor list with ownership noted, and for the bid or the cost-plus support on the largest related-party lines.

Double recovery. The same dollars collected twice. Insurance proceeds for a repair that also sits in CAM. A warranty payment. A judgment. An amount charged directly to a tenant (after-hours HVAC, a tenant’s negligence, an exclusive-use repair) that was not credited out of the shared pool. A management fee plus the same on-site salaries the fee was meant to replace, if the lease treats the fee as a substitute. An estimate that was never subtracted. None of these is automatically improper in every form. All of them are reasons to ask for the credit side of the ledger, not only the debit side.

The exclusions checklist is where you mark these. The request is the same: general ledger, related-party invoices, and a list of recoveries already removed.

How this feeds the calculator

The homepage calculator does not know whether your lease is NNN, modified gross, or base-year. It knows a pool, a denominator, estimates, and the usual adjustments (occupancy, gross-up target, admin fee, optional prior year and cap). You have to feed it the pool the lease describes.

• If the packet is a full pass-through of this year’s recoverable OpEx, the “actual CAM” box is that pool (or the advanced controllable / non-controllable split).
• If the packet is a base-year or expense-stop settlement, enter the excess as the pool — this year minus the base or the stop — or you will share a number the lease never asked you to share. The calculator will not subtract a base year for you.
• Taxes and insurance that the lease treats as non-controllable belong in the advanced non-controllable box so they are not grossed up, not fee’d, and not capped.
• Estimates paid are the installments you actually remitted for that year, including mid-year revisions, matched to your records.

Type the landlord’s numbers and see the headline true-up on the page. The optional $79 landlord packet is a two-page worksheet — line-item math plus a blank exclusion checklist — not an audit and not a subscription. It does not decide whether a cost is recoverable. You mark that against the lease.