How to review tax and insurance pass-through charges for clients
Real estate tax and insurance pass-throughs are some of the cleanest items on a landlord bill to review, and some of the most commonly wrong. They are clean because the underlying source document exists outside the landlord (the county tax bill, the insurance carrier's premium invoice) and the calculation is mechanical: total bill, multiplied by the tenant's pro-rata share, equals the expected pass-through amount. They are commonly wrong because the landlord's accounting team often does the math from internal allocations rather than from the source documents, and the source documents are not always reviewed against the bill that goes out to the tenant. For more context, see CAM red flags accounting firms should know.
For an accounting firm reviewing landlord bills on behalf of commercial-tenant clients, tax and insurance pass-throughs are also one of the highest-value items to spend a few minutes on. The math is verifiable, the source documents are obtainable, and the dollar exposure can be material. I built CAMAudit to detect this category of errors specifically because the inputs are well-defined and the answer is computable.
Pro-rata pass-through: A charge billed by the landlord to the tenant equal to the tenant's contractual share of a building-level expense, computed by multiplying the total expense by the tenant's pro-rata share percentage. Pro-rata pass-throughs are most commonly applied to real estate property taxes, property insurance premiums, and CAM operating expenses. The pass-through is supposed to recover the landlord's actual cost, not generate revenue or recover costs the lease excludes. The accuracy of a pass-through depends on three inputs: the underlying expense amount from the source document, the pro-rata share from the lease, and the included-categories list the lease defines.
Why these two pass-throughs deserve a separate review
Most pass-through review work happens inside the larger CAM reconciliation review. Real estate taxes and insurance get treated as just two more categories in the operating-expense reconciliation. That works, but it understates the value of looking at these two items separately for three reasons.
The first is materiality. Real estate taxes are often the largest single category in a CAM reconciliation, sometimes thirty to fifty percent of the total. Insurance is smaller but predictable. Together they account for a meaningful share of what the tenant pays through pass-throughs. An error in either is a material dollar number for the client.
The second is verifiability. Unlike most CAM categories, the source document for taxes and insurance lives outside the landlord. The county tax bill is public record. The insurance declarations page comes from a third-party carrier. Either document can be obtained and verified independently of the landlord's accounting records, which is not true of categories like landscaping or repairs.
The third is calculation simplicity. The pass-through math is a single multiplication: total bill, times pro-rata share. There are no allocations, no exclusions, no occupancy adjustments to make. The simplicity means errors are detectable with a tied-out worksheet rather than a forensic analysis.
The four-step review
For each pass-through bill, the review has four steps that can be completed in fifteen minutes per client per year if the documents are on file.
Step one: pull the source document. For real estate taxes, the county property tax bill or the equivalent assessment record. For insurance, the carrier's premium invoice or declarations page. If the landlord has not provided the source document with the bill, request it with a short, specific request letter referencing the lease's audit-rights or backup-rights clause.
Step two: confirm the source amount and period. Read the tax bill or insurance invoice. Note the total amount, the period it covers, and what specifically is being billed. For taxes, this means the parcel identifier, the assessed value, and the tax rate. For insurance, the property covered, the coverage period, and the premium amount. The period is important because tax bills sometimes cover a fiscal year that does not align with the calendar year, and insurance policies have stated terms that may straddle the reconciliation period.
Step three: apply the pro-rata share. The pro-rata share comes from the lease and should match the lease abstract. Multiply the source amount by the share. The result is the expected tenant pass-through.
Step four: compare to the billed amount. Tie the calculated expected amount to what the landlord billed. If the two match within a small tolerance (rounding and timing), the pass-through is consistent with the source document. If the two differ materially, one of three things is wrong: the share is wrong, the source amount the landlord used was different (often because the landlord included non-recoverable items), or there is a timing mismatch.
The output of the four steps is a tied-out worksheet for each pass-through, with the source amount, the share, the calculated expected amount, and the billed amount. The worksheet either supports posting the bill as billed or surfaces a variance that justifies follow-up.
Common error patterns and what they look like
A few error patterns repeat often enough across the reconciliations I have seen tested through CAMAudit that they are worth flagging by name.
Gross billing without pro-rata application. The landlord bills the full property tax amount to the tenant rather than the tenant's share. This is rare in standard commercial leases because the lease almost always specifies a share, but it happens occasionally with poorly administered single-tenant or pad-site leases. The check is simple: does the billed amount match the source amount, with no application of share? If yes, the share is missing.
Inclusion of non-recoverable items. The landlord includes items in the pass-through that the lease excludes. For taxes, this can include taxes on personal property, taxes on land that is excluded under the lease, or special assessments that the lease specifies as landlord's responsibility. For insurance, this can include the landlord's separate liability coverage, business interruption policies on the landlord's revenue, or coverage for property the tenant has separately insured. The check is to map the source document line items against the lease's included and excluded categories.
Timing mismatch. The landlord bills a tax payment that covers a period outside the reconciliation period, or bills an insurance premium that runs into the next year. The result is the pass-through over-recovers in the current year and under-recovers in the next, or vice versa. The check is to compare the period on the source document against the reconciliation period.
Stale share percentage. The landlord applies a share that has changed under an amendment but the landlord's records were not updated. The check is to confirm the share against the current lease abstract, not against historical data.
"Tax and insurance pass-throughs are where the cleanest CAM audit findings come from in my testing because the math is mechanical and the source documents are obtainable. A fifteen-minute review against the source bill catches most of the errors that would otherwise sit in the books all year." — Angel Campa, Founder of CAMAudit
What to do with a finding
A variance from the tied-out worksheet is a finding. It is not yet a dispute. The controller documents the finding on the close memo, captures the calculation, and decides on next steps with the client.
For routine variances that are small in dollar terms or attributable to known timing differences, the finding goes into the file and the bill posts. For material variances, the controller writes a short request to the landlord asking for either a corrected bill or an explanation of the basis for the original billing. The request is procedural, references the lease, and includes the controller's worksheet so the landlord's accounting team can respond against the same numbers.
If the landlord's response resolves the variance, the file closes. If the response does not resolve it, or if the response itself raises questions about the lease's pass-through definitions, the finding escalates to a specialist for further analysis. The escalation comes with the worksheet, the lease abstract, the source document, and the landlord's response, which is the documentation a specialist needs to evaluate the finding.
The client sees a short note in the variance commentary explaining what was reviewed and what was found. Tax and insurance pass-throughs that pass the four-step review get a sentence; the ones that produce findings get a paragraph. Either way, the client sees that the firm is doing the work, and the file is documented for follow-up if anything escalates.
Why this is the right place to spend review time
Across a portfolio of commercial-tenant clients, the time spent on tax and insurance pass-through review has the highest detection-yield-per-hour of any single review activity. The math is mechanical, the source documents are available, and the errors are detectable without lease-language interpretation. The firm gets meaningful client value at low effort, and the close-process discipline of doing the review the same way each year compounds across cycles.
A reconciliation that has been tax-and-insurance reviewed every year for three years is also a reconciliation where the trend tells a real story. Year-over-year movement in the verified pass-through amounts reflects actual changes in taxes and insurance, not changes in landlord allocation methodology. That clean trend feeds the cash forecast, the annual budget, and the client's long-term occupancy planning. The fifteen-minute review is the work that makes the longer-term advisory cleaner.