July 29, 2014

Defining Pass-Through Fees

During your search for the perfect space, you will hear a variety of terms that may seem foreign—it may be overwhelming, but have no fear.Once you become acquainted with the terminology, things will naturally become easier to understand.Today, we are going to focus mainly on pass-through fees.

Pass-Through Fee Quick Definition

A pass-through fee can include a number of different costs that are associated with the leasing process, however, we are more concerned with:

  • Tax stop
  • Common area maintenance
  • Stop clauses.

All three are similar in the way they are structured—meaning, that if the local government has increased the cost of maintaining the building then the landlord may have to increase your rent.

Tax Stop

According to the Financial Dictionary, a Tax Stop is, "A clause in a lease stating that the lessee is responsible for payment of property taxes should they rise above a certain level. The tax stop limits the lessor's liability for property taxes."Here’s an example. If your landlord is asking for $200 a month, you are paying the taxes he has at the moment. If there is a pass-through fee clause in your lease, you will have to pay the increased wages due to the inflation of taxes. If your landlord’s taxes increased by ten percent, you will have to pay more in order to cover the costs. A tax stop is a clause in the lease that keeps your landlord from charging you inflation prices beyond a certain point.It can go both ways though, so meticulous when examining the contents of your prospective lease.A tenant tax stop may put a limit on taxes a tenant must reimburse to a landlord, but a landlord tax stop requires the tenant to reimburse the landlord if property taxes in any year exceed a certain amount.

Common Area Maintenance

Common area maintenance fees pertain to the costs associated with the upkeep of the building and it’s surrounding property. These standard maintenance services include inspections, insurance, grounds keeping, general improvements and any other utilities that are needed to keep the property functioning.This may seem like a generally simplistic part of the leasing process but it can problematic. This is a matter that should be heavily discussed with your agent and the landlord.  You will want to heed with caution to assure that you are not paying for than you should but you also need to be aware of sharing the costs with the other tenants.

Stop Clauses

You will see stop clauses in the lease as well. A stop clause gives an amount of operating fees, above a certain point, that the tenant must pay. It is similar to the common maintenance area fees. When the cost of upkeep on the building increases, the rent increases as well.

These pass-through fees are not a matter to take lightly. You will need to discuss this with your agent. Read the lease thoroughly to ensure that you are aware of what will take place during your time in the new property.

Pass-through fees may not be found in every lease so it is crucial to do your research in this process.

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