Definition
Pass-Throughs is a term used in various financial and real estate contexts, with primary definitions including:
Operating Expenses in Leasing: In the context of property leasing, pass-throughs refer to the operating expenses that a landlord can charge to the tenant in addition to the base rent. These expenses typically include property taxes, maintenance costs, utilities, and insurance, as defined in the lease agreement.
Pass-Through Certificates: In the context of mortgage-backed securities, pass-throughs pertain to pass-through certificates. These certificates represent ownership interests in a pool of mortgages, where the principal and interest payments from the pooled mortgages are “passed through” to the certificate holders.
Examples
Operating Expenses:
- A tenant renting retail space may pay $5,000 per month in base rent. In addition to this, the lease agreement may specify pass-throughs such as property taxes and maintenance fees, amounting to an additional $500 monthly.
Pass-Through Certificates:
- A mortgage-backed security (MBS) investor holds a pass-through certificate that entitles them to a portion of the monthly mortgage payments made by borrowers who took loans pooled in this MBS. If the total pool generates $100,000 monthly, and the investor owns 1% of the pool, they receive $1,000 from the pass-through.
Frequently Asked Questions
Q: What types of expenses can be included as pass-throughs in a lease? A: Common pass-through expenses include property taxes, insurance premiums, maintenance costs, utility costs, and common area maintenance fees.
Q: How do pass-through certificates work in mortgage-backed securities? A: Investors in pass-through certificates receive periodic payments that include both principal and interest from the underlying pool of mortgage loans. The payments “pass through” the issuing entity to the investors, hence the name.
Q: Are pass-through expenses negotiable in a lease agreement? A: Yes, the specific expenses that can be included as pass-throughs are generally outlined in the lease agreement, and tenants can often negotiate these terms before signing the lease.
Related Terms with Definitions
Base Rent: The initial amount of rent that a tenant agrees to pay before additional expenses such as pass-throughs.
Common Area Maintenance (CAM): Costs related to maintaining shared areas within a property, which can be included as pass-through expenses.
Gross Lease: A lease agreement where the landlord covers all property expenses, unlike a net lease where pass-throughs are applicable.
Mortgage-Backed Securities (MBS): Financial instruments backed by a pool of mortgage loans, commonly associated with pass-through certificates.
Online References
- Investopedia: Pass-Through Entities
- The Balance: What Are Pass-Through Expenses in Commercial Property?
- U.S. Securities and Exchange Commission: Mortgage-Backed Securities
Suggested Books for Further Studies
“Real Estate Finance & Investments” by William Brueggeman and Jeffrey Fisher: A comprehensive guide on the concepts and analytics of real estate finance, including detailed discussions on pass-through leases and certificates.
“Commercial Leasing: A Transactional Primer” by Daniel B. Bogart and Celeste M. Hammond: Offers deep insights into the practicalities of commercial leasing and the financial implications of pass-through expenses.
“The Handbook of Mortgage-Backed Securities” by Frank J. Fabozzi: A definitive resource on mortgage-backed securities, including the intricacies of pass-through certificates.
Fundamentals of Pass-Throughs: Real Estate and Finance Basics Quiz
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