Base rent is only part of what a commercial tenant pays. Here is what landlords bill back, how your share is calculated and which clauses to negotiate on an industrial lease in Kern County, California.
Operating expense pass-throughs are building costs that a landlord bills back to tenants on top of base rent. They include property taxes, insurance, common area maintenance, management fees and sometimes reserves or amortized capital repairs. What you pay depends on your lease type and on the definitions, exclusions and caps written into the lease, so the expense clause deserves as much attention as the rent.
Key takeaways
- Landlords bill pass-throughs as monthly estimates and true them up once a year against actual costs.
- Your share is usually your square footage divided by the project’s, stated as a fixed percentage in the lease.
- In California, a sale of the building can reset property taxes under Prop 13, and most net leases pass that increase to tenants.
- The best protection is negotiated up front: clear exclusions, a cap on controllable expenses, amortized capital costs and audit rights.
- Since Jan. 1, 2025, California’s SB 1103 adds documentation rules for very small qualified commercial tenants.
What are operating expense pass-throughs?
A pass-through is any cost of owning or running the property that the lease lets the landlord charge back as additional rent. In a triple-net (NNN) lease, nearly all operating costs pass through. In a gross or modified gross lease, the landlord absorbs a base amount and passes through only increases or specific items. Our guide to NNN, modified gross and full service leases explains the differences.
The billing mechanics are usually the same. You pay a monthly estimate with your rent, and after year end the landlord compares those payments with actual costs. The AIR multi-tenant net lease form, common in California industrial parks, requires a reasonably detailed statement within 60 days after the tenant’s written request, no more than once a year. The landlord credits overpayments against future charges, and the tenant pays shortfalls within 10 days. For a closer look at year-end statements, see CAM charges and reconciliations.
Which costs are typically passed through to industrial tenants?
Industrial tenants usually see six categories: property taxes, insurance, common area maintenance, common utilities, a management fee, and reserves or capital items. Industrial pass-throughs are simpler than office because there is less shared space. In a single-tenant building, the tenant often pays many of these costs directly.
Common pass-through categories on an industrial lease
| Category | What it covers | What to watch |
|---|---|---|
| Property taxes | Secured tax bill and special assessments | Prop 13 reassessment after a sale; tax refunds should be credited back |
| Insurance | Building property and liability premiums | Premium spikes, high deductibles, coverage beyond what the lease requires |
| Common area maintenance | Parking lot, truck court, landscaping, sweeping, exterior lighting | Repairs that are really capital replacements |
| Common utilities | Site lighting, irrigation water, unmetered services | Your own use billed twice through a shared meter |
| Management fee | Property manager’s fee for running the project | A percentage charged on taxes and insurance, not just services |
| Reserves and capital items | Funds or charges for future replacements | Full cost in one year rather than amortized |
How is a tenant’s share of operating expenses calculated?
Most leases use a pro rata share: your rentable square feet divided by the rentable square feet of the building or project. A 12,500 SF tenant in a 100,000 SF park pays 12.5%. The AIR multi-tenant forms state the share as a fixed percentage and require the landlord to recalculate it if the premises or project change size. If you are unsure how square footage is measured, read our explainer on rentable vs. usable square feet.
The denominator matters. Your share should rest on the total project, not just the leased space, or you end up paying for vacant units. In office buildings, a gross-up clause adjusts variable costs to what they would be at a stated occupancy. The AIR office gross form (OFG) uses 95%. Fixed costs such as taxes and insurance generally should not be grossed up.
How do property taxes pass through to tenants in California?
Property taxes pass through in full under most net leases, and they are the pass-through most likely to jump. Under Prop 13, the tax rate is limited to 1% of assessed value plus voter-approved local bond rates. According to the State Board of Equalization, assessed value generally rises no more than 2% a year until the property changes ownership or new construction is completed. The board explains the rules in its California Property Tax overview.
A building bought in the 1990s may carry a fraction of the tax bill of an identical building that sold last year. The AIR net forms define real property taxes to include increases caused by a change in ownership. A sale during your term can therefore raise your monthly charges with no change in how the building operates. Our guide to Prop 13 reassessment for NNN tenants covers ways to negotiate protection.
What should be excluded from operating expenses?
Tenants should ask to exclude costs that belong to the owner’s investment rather than the building’s operation. The standard AIR definition is broad, so tenant-side attorneys commonly request exclusions. Checklists from Baker Burton & Lundy and Herrick, Feinstein focus on items such as:
- Mortgage principal, interest, financing and refinancing costs
- Depreciation and the landlord’s income or franchise taxes
- Leasing commissions and legal fees tied to other tenants
- Costs of work done for one specific tenant
- Capital replacements, unless amortized over useful life and charged only for the current year
- Salaries of landlord employees above the property manager level
- Costs reimbursed by insurance, warranties or other tenants
Can tenants cap operating expense pass-throughs?
Yes, for the costs the landlord controls. A typical approach caps annual increases in controllable expenses, such as landscaping, repairs and management, and leaves taxes, insurance and utilities uncapped. Baker Burton & Lundy’s 2016 sample language suggests a cap of about 5% a year and a management fee of no more than 5% of common area expenses, excluding real property taxes.
Insurance is usually uncapped, but it moves with the market. Marsh reported that U.S. property insurance rates fell 13% in the second quarter of 2026, a steeper drop than the 6% decline in its global composite index. Those figures reflect large commercial accounts, and results for a small Bakersfield building can differ.
Capital costs are the other big lever. The AIR multi-tenant net form spreads a capital improvement over 12 years, which limits the tenant’s monthly charge to its share of 1/144th of the cost. If your lease has no amortization rule, a $150,000 parking lot rebuild could land on one year’s statement.
Do California laws limit what landlords can pass through?
For most industrial tenants, the lease controls. A narrower rule protects very small businesses. SB 1103, which added Civil Code Section 1950.9, covers qualified commercial tenants: microenterprises, restaurants with fewer than 10 employees and nonprofits with fewer than 20 employees. The tenant must give the landlord written notice and a self-attestation of its employee count.
For those tenants, the California Lawyers Association summarizes three requirements. Landlords must allocate building operating costs proportionately. The costs must have been incurred within the previous 18 months or be reasonably expected within the next 12. And the landlord must supply supporting documentation within 30 days of a written request. The rules generally apply to leases signed or renewed on or after Jan. 1, 2025. Ask a California real estate attorney whether your business qualifies, and see our SB 1103 explainer.
Worked example: a 12,500 SF tenant in a 100,000 SF Bakersfield industrial park
Assume a multi-tenant industrial park in Bakersfield, California, with 100,000 SF across several buildings. The tenant leases 12,500 SF, so its pro rata share is 12.5%. The budget below is illustrative and is not Kern County market data.
Annual operating budget and tenant share (illustrative)
| Expense | Project total | Tenant share (12.5%) | Project cost per SF per month |
|---|---|---|---|
| Property taxes | $130,000 | $16,250 | $0.108 |
| Insurance | $45,000 | $5,625 | $0.038 |
| Common area maintenance | $46,000 | $5,750 | $0.038 |
| Management fee | $12,000 | $1,500 | $0.010 |
| Reserves | $10,000 | $1,250 | $0.008 |
| Total | $243,000 | $30,375 | $0.203 |
Total pass-throughs come to $243,000, or about $0.20 per SF per month across the park. The tenant’s share is $30,375 a year, or about $2,531 a month on top of base rent. Under a modified gross lease with a $220,000 base year, the tenant would pay only its share of the $23,000 increase, or $2,875 for the year. Our article on base year vs. expense stop explains that structure.
Frequently asked questions
What is the difference between operating expenses and CAM charges?
CAM, or common area maintenance, is one slice of operating expenses. It covers upkeep of shared areas such as parking lots, landscaping and lighting. Operating expenses is the wider term and usually adds property taxes, insurance and management fees. Some leases, including the AIR multi-tenant forms, fold everything into one defined term, so the definition matters more than the label.
Are property management fees a legitimate pass-through?
Usually, if the lease allows them. The fight is over how the fee is calculated. A percentage applied to every expense, taxes and insurance included, raises your bill without adding any management work. Tenants often negotiate a cap based on common area expenses only and ask that no separate administrative fee be stacked on top.
Can a landlord pass through the cost of a new roof or parking lot?
It depends on the lease. Many leases allow capital costs only when they are spread over the item’s useful life, so you pay a slice each month or year. The AIR multi-tenant net form uses 12 years. With no amortization rule, a large project can show up in a single year’s reconciliation.
Why did my NNN charges jump after the building sold?
A change in ownership lets the county reassess the property to current market value under Prop 13. When the sale price is well above the old assessed value, the tax bill rises, and most net leases hand that increase to tenants.
What is a gross-up provision?
A gross-up clause restates variable expenses, such as janitorial and utilities, as if the building were at a set occupancy, often 95% or 100%. That keeps a half-empty building from understating costs per foot. It matters most in office leases with a base year, and it should not apply to fixed costs such as taxes.
Do I have the right to audit my pass-through charges?
It depends on the lease. Many leases give tenants an audit right with a fixed review window. A 2016 Baker Burton & Lundy memo noted that the AIR multi-tenant net form then lacked one, so tenants often negotiate their own. A good clause lets you hire a qualified reviewer and makes the landlord pay if the audit finds a material overcharge. Small qualified tenants also have documentation rights under SB 1103.
If you are weighing industrial space in Bakersfield or elsewhere in Kern County, we can help you read the operating expense clause, estimate your true monthly cost and negotiate the exclusions and caps that matter. Call Kern CRE at 855-KERN-CRE (855-537-6273) or contact us. To see how a letter of intent sets these terms early, read our guide to the commercial lease LOI. Get Kern County CRE news monthly: subscribe to the Kern CRE report.
Sources
- AIR CRE, Standard Industrial/Commercial Multi-Tenant Lease – Net (MTN-26.10), AIR CRE, November 2017.
- AIR CRE, Standard Multi-Tenant Office Lease – Gross (OFG-21.10), AIR CRE, November 2017.
- California Property Tax: An Overview (Publication 29), California State Board of Equalization, March 2025.
- Suggested Tenant Revisions to the AIR Standard Industrial/Commercial Multi-Tenant Lease – Net, Baker Burton & Lundy, March 2016.
- A Tenant’s Guide to Operating Expense Escalations, Herrick, Feinstein (via Law360), February 2013.
- Gross-Up Provisions in Commercial Leases, Holland & Hart, undated.
- New Protections for Qualified Commercial Tenants under CA SB 1103, California Lawyers Association, January 2025.
- California SB 1103 (Chapter 1015, Statutes of 2024), bill text, LegiScan, September 2024.
- Global commercial insurance rates fall 6% in Q2 2026 (Global Insurance Market Index), Marsh, July 23, 2026.
About this article
Kern CRE prepared this article with help from AI research and writing tools. An editor reviewed the draft, checked its facts against the sources linked above and edited it for accuracy and clarity. It is general information, not legal, tax, investment or financial advice; talk with a qualified professional about your situation.