When renting residential property in Tennessee, the terms tend to favor tenants. The opposite is true when it comes to commercial real estate. Commercial laws and leasing terms tend to favor the property manager or property owner. One clause to look out for is the pass-through clause.
To make a space more enticing and seem more affordable, a landlord might decide to pay for utilities up to a certain point. However, it is important to pay attention to that stopping point as business tenants then become responsible for the amounts that exceed this.
Why landlords set pass-through amounts
The Alabama Center for Real Estate explains that landlords determine pass-through limits to ensure they keep operating expenses within a manageable limit. Otherwise, variable expenses might eat into profits and make it difficult to calculate, project and make a steady profit. So, while hearing that the landlord pays up to a certain amount sounds good to a future tenant, the measure actually protects the landlord.
How landlords pass through these expenses
There are several methods landlords use but two remain the most common. These include expense stop and base year. When using the base year approach, landlords determine expenses for a year. If costs exceed this at the end of the period, tenants pay the remaining figure. With an expense stop, the landlord sets no base year. Once expenses move above the limit, the tenant becomes responsible. When negotiating lease terms, a good realtor asks for an expense cap.
How payments work in shared spaces
Ideally, business owners occupy spaces with different meter systems, but they might still share some expenses. Forbes recommends ensuring that shared utilities correlate with the percentage of space occupied by the business relative to the total building or total occupied spaces. Ensuring the landlord clarifies this in the lease might save business owners thousands down the line.
While pass-through expenses primarily protect business owners, tenants also benefit. Knowing that someone else covers a portion of the utilities every month makes it easier to plan strategically.