CAM, property taxes, insurance, and operating expenses are all passed through to tenants, but not always correctly. This guide decodes what landlords can charge and what to challenge.
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See How It WorksSee a sample report firstExpense pass-throughs let landlords bill tenants for operating costs beyond base rent. In NNN leases, pass-throughs typically include property taxes, insurance, and CAM charges, adding $8 to $18 per square foot annually for retail tenants. The most common overcharges occur in management fees (4-6% of controllable expenses is standard), capital expenditures misclassified as maintenance, and gross-up applied to fixed costs like insurance premiums.
Run your numbers through the lease expense comparison tool to see how different lease structures affect your total occupancy cost.
The total dollar amount can be significant. For a 5,000 square foot retail tenant in a well-occupied suburban strip center, annual CAM, tax, and insurance charges often run $8 to $18 per square foot, adding $40,000 to $90,000 per year in pass-through costs. Knowing what is allowed to be in that number, and what is not, is the difference between paying your fair share and overpaying.
40% of commercial CAM reconciliations contain material billing errors (Tango Analytics, 2023)
The most common source of those errors is not math. It is the inclusion of expenses the landlord should not be passing through at all.
In a commercial lease, the landlord sets a base rent for the space. In a gross lease, that base rent is all-in: the landlord covers property taxes, insurance, and building operating costs from that number. In NNN and modified gross leases, the base rent covers the landlord's financing cost and return, and operating expenses are billed separately as additional rent.
The pass-through mechanism works like this: the landlord collects all actual operating costs for the building or property into a cost pool. Your share of that pool is calculated based on your pro-rata share, which is typically your leased square footage divided by the total leasable area of the property. That share is billed to you, either as monthly estimates with an annual reconciliation, or as actual costs billed quarterly.
The year-end document you receive that shows how the estimates compared to the actual costs is called a CAM reconciliation statement. If estimates exceeded actuals, you get a credit. If actuals exceeded estimates, you owe additional rent. The problem is that the reconciliation often includes costs that should not be in the pool in the first place.
Understanding which lease type you signed is the first step in knowing what you should be paying.
Gross lease: The landlord pays all operating expenses from the base rent. No pass-throughs. These are common in smaller office suites and some suburban office buildings. If your rent is $4,500 per month with no additional charges for CAM, taxes, or insurance, you likely have a gross lease.
Modified gross lease (base year or expense stop): You pay base rent plus your share of operating expenses that exceed a defined threshold. With a base year, the threshold is the actual expenses in a specific year (the base year), and you pay the increase above that level each year. With an expense stop, the threshold is a fixed dollar amount per square foot. Modified gross leases are common in multi-tenant office buildings. The pass-through is real but limited. For the full picture on modified gross expense splits and where billing errors concentrate, see the Modified Gross Lease Guide.
NNN (triple net) lease: You pay base rent plus your pro-rata share of all three major operating cost categories: property taxes, property insurance, and common area maintenance (CAM). There is typically no cap on the absolute dollar amount you pay, though some NNN leases include caps on annual CAM increases. NNN leases are the standard structure for retail, restaurant, and industrial tenants. The pass-through here is nearly everything.
In a properly drafted NNN or modified gross lease, the following categories are standard pass-through items.
Property taxes: Your pro-rata share of real property taxes assessed against the land and buildings you occupy. This is typically the largest single pass-through category. It should include only actual tax liability, not penalties or interest from the landlord's late payment.
Property insurance: The cost of commercial property insurance, general liability, and in some cases umbrella liability for the building. Your share should reflect the building's actual insurance cost, not a number inflated to cover properties the landlord owns elsewhere.
Common area maintenance (CAM): The largest and most contested category. Standard CAM includes:
Management fees: Most leases allow a property management fee as a CAM line item. The fee is calculated as a percentage of controllable operating expenses or total revenues. Market rates run 4% to 6% of controllable expenses. Some leases define the fee as a percentage of base rent. Whatever the lease says is what the landlord can charge.
This is where most overcharges originate. Landlords sometimes include costs in the CAM pool that the lease explicitly excludes, or that the law and standard practice treat as the landlord's responsibility. Here is what should not be in your bill.
A capital expenditure is a cost that extends the useful life of an asset or adds a new asset. Roof replacement, parking lot repaving, complete HVAC system replacement, elevator upgrades, facade renovation: these are capital improvements, not maintenance. Under IRS rules (Revenue Procedure 2015-82), capital improvements must be capitalized and depreciated over their useful lives. They cannot be fully expensed in the year incurred.
The practical impact: replacing a $200,000 roof is the landlord's capital cost, not your operating expense. The lease may allow the landlord to amortize certain capital expenditures over their useful life and include the annual amortization in CAM. That provision must be explicit in the lease. If your lease contains an amortization clause for CapEx, verify that the item qualifies (typically limited to items that reduce operating costs or are required by law), that the useful life used for amortization is reasonable, and that the amortization amount matches the item's actual cost.
If your lease does not contain an amortization clause, CapEx is categorically excluded from CAM.
Costs the landlord incurs to lease space to other tenants are not operating expenses of the building. Broker commissions paid to lease a neighboring suite, the cost of constructing a build-out for another tenant, and lease incentives paid to attract new tenants are all excluded from CAM in every properly drafted lease. These are the landlord's cost of doing business as a real estate owner.
Property management fees (within the defined percentage) are allowable. What is not allowable is the salary of the landlord's regional vice president, the cost of the corporate headquarters office, accounting staff expenses above the property-level, or the cost of corporate legal counsel unrelated to the property. The management fee is the agreed-upon cost of property management. Layering additional overhead on top of it is a double charge.
Depreciation is an accounting entry that reflects the declining value of an asset the landlord already owns. It is not an out-of-pocket operating cost. The landlord cannot pass depreciation on existing HVAC systems, roof structures, or building components through to tenants as CAM.
Interest payments, principal payments, and financing costs on the landlord's mortgage are the landlord's financing obligations. They have no relationship to the cost of operating the building. Mortgage costs are universally excluded from CAM.
If a building has a structural defect, environmental contamination, or deferred maintenance that predates your tenancy, the cost to remediate it is the landlord's problem. You should not pay for the landlord's failure to maintain the property before you arrived.
If the landlord provides cleaning, security, or other services to one tenant that exceed what other tenants receive, the cost of those above-standard services should not be allocated to the common area pool. Costs that benefit a single tenant are not common area costs.
Legal fees the landlord incurs in disputes with other tenants, lenders, or third parties are not a building operating expense. The landlord's attorney fees for negotiating a loan refinancing or suing a departing tenant are excluded from CAM.
Landlords sometimes reclassify capital expenditures as maintenance or repairs in the CAM pool. A $180,000 parking lot repaving billed as "lot maintenance" is a capital project, not routine upkeep. If a single line item is unusually large, ask for the invoice.
The IRS provides a useful framework here. Under the "FARM" test (Function, Adaptation, Restoration, Major improvement), a cost that restores a component to working order is an expense. A cost that rebuilds a major component, replaces a structural component, or adapts the property for a new use is capital.
Landlords know this distinction and sometimes cross it. Watch for:
When in doubt, request the underlying invoice. A routine service call is typically $500 to $3,000. A capital replacement is tens of thousands of dollars or more.
Management fees generate two distinct overcharge patterns.
Rate overcharge: Your lease says the management fee is 4% of controllable operating expenses. The landlord bills 6%. This is a straightforward rate error. CAMAudit's detection engine flags it by extracting the fee cap from the lease and comparing it to the billed amount.
Fee-on-fee: This is more subtle. The landlord calculates the management fee as a percentage of total CAM, which itself already includes the management fee. In other words, the landlord is charging a management fee on top of the management fee. The lease language that permits this is rare. Most fee provisions define the base as controllable expenses or total revenues, neither of which includes the management fee itself.
A fee-on-fee overcharge on a $400,000 CAM pool with a 5% management fee looks like this: the fee should be $400,000 × 5% = $20,000. Instead, the landlord calculates it as ($400,000 + $20,000) × 5% = $21,000. The $1,000 difference compounds every year. Over a 7-year lease, that is $7,000+ in excess management fees from a single calculation error.
Gross-up is a provision that allows the landlord to adjust variable operating expenses to a normalized occupancy level, typically 95% or higher. The rationale: if the building is 70% occupied, the landlord is absorbing costs for vacant space. Variable costs (cleaning, HVAC, utilities) are lower than they would be at full occupancy. The gross-up lets the landlord bill tenants as if the building were fully occupied.
When it is legitimate: the gross-up must apply only to variable expenses (costs that actually increase with occupancy, like janitorial and utility). Fixed expenses (property taxes, insurance, management fee) do not vary with occupancy and should never be grossed up. The gross-up percentage must match your lease. If the lease says gross-up to 95% and the landlord applies 100%, that is an error.
When it is abusive: applying gross-up to expenses that are already at a full-occupancy rate, using a gross-up factor above what the lease permits, or applying gross-up to fixed expenses. CAMAudit checks each expense category against the gross-up provision and flags categories that are inappropriately normalized.
Most reconciliation statements arrive as a summary: a list of categories with dollar totals. That summary does not tell you what is inside each category. Identifying improper pass-throughs requires going one level deeper.
Start with the largest line items. A $180,000 "repairs and maintenance" entry in a mid-size strip center warrants verification. Request the general ledger detail and supporting invoices for that category. Look for any single vendor invoice above $30,000, any multi-year contract billed in a single year, and any item described as "replacement" rather than "repair."
Compare year-over-year. A 30% increase in a single category (insurance, management fees, maintenance) without a corresponding change in building size or occupancy is a flag. Get the backup.
Check the management fee formula. Take the total CAM (excluding the management fee) and multiply by the fee rate in your lease. If the billed fee is higher, you have a rate or base overcharge.
Verify your pro-rata share. Take your square footage and divide by the total leasable area stated in the reconciliation. If that percentage is lower than the one used to calculate your share, you are being allocated more than your fair portion.
"I built CAMAudit because tenants receive a summary page and are expected to just accept it. The actual errors are one level down, in the invoices and calculations behind the numbers. Getting to that level on your own requires hours of work most tenants never invest." — Angel Campa, Founder of CAMAudit
For a complete checklist of lease provisions to review before your next reconciliation, see the commercial lease review checklist. For signs that your landlord may be systematically overcharging, see landlord overcharging CAM: warning signs.
What is an expense pass-through in a commercial lease?
An expense pass-through is a lease provision that requires tenants to pay a share of the building's operating costs in addition to base rent. In NNN leases, the pass-through includes property taxes, property insurance, and common area maintenance. In modified gross leases, the pass-through covers the increase in operating expenses above a base year or expense stop threshold.
Can a landlord pass capital expenditures through as CAM charges?
Generally no. Capital expenditures like roof replacement, parking lot repaving, and HVAC system replacement are the landlord's capital costs and cannot be included in CAM as a current-year expense. Some leases allow the landlord to amortize certain capital items over their useful life and include the annual amortization in CAM, but this requires explicit lease language authorizing it. Without that language, CapEx is categorically excluded.
What is a management fee overcharge in a CAM reconciliation?
A management fee overcharge happens when the landlord bills a management fee at a rate higher than the lease allows, or when the fee is calculated on a base that includes the management fee itself (called fee-on-fee). Most leases cap management fees at 4% to 6% of controllable expenses. CAMAudit detects both rate overcharges and fee-on-fee errors by comparing the billed amount to the lease provision.
What expenses are always excluded from CAM charges?
Standard CAM exclusions include: mortgage interest and principal payments, depreciation and amortization of existing building components, leasing commissions and tenant improvements, executive salaries and above-building overhead, costs to remedy pre-existing conditions, and litigation costs unrelated to common area operations. Most commercial leases explicitly list these exclusions, but landlords sometimes include them anyway.
What is gross-up in a commercial lease and when is it legitimate?
Gross-up is a provision that allows landlords to normalize variable operating expenses to a hypothetical 95% or higher occupancy level. It is legitimate when applied to genuinely variable costs like janitorial and utilities, using the occupancy percentage specified in the lease. It becomes an overcharge when applied to fixed expenses like insurance and property taxes, or when the normalization factor exceeds what the lease permits.
How do I check if my CAM reconciliation includes improper pass-throughs?
Start by requesting the general ledger detail behind each summary line item, especially any category with a large year-over-year increase. Look for single invoices above $30,000 in maintenance categories (a likely indicator of a capital project billed as maintenance), verify the management fee rate against your lease, and confirm your pro-rata share denominator is consistent with prior years. CAMAudit automates this process by checking your reconciliation against 14 detection rules derived from your specific lease provisions.
