Property Tax Increases and Leases
By Harold S. Small, J.D., CPA (inactive), AEP
When negotiating a lease, consider the implications/repercussions associated with Proposition 13 and how it may impact you.
LESSEE: There are two primary areas relating to real property taxes to watch for when you are negotiating a lease or the renewal/extension of a lease.
1. The first is a provision that indicates that as lessee you are responsible for all increases in the real property taxes for the real property or the pro rata share of occupancy. As lessee, you should try to modify the provision to indicate that it includes only the standard changes from year to year and not an increase as a result of a change of ownership. A savvy lessor will be familiar with the issue and generally will not agree to this type of limitation.
2. The second is where you have an obligation to pay for increases in the Common Area Maintenance (“CAM”) charges each year, and the CAM charges include real property taxes. By excluding from the definition of the CAM charges increases in real property taxes relating to a transfer/sale of the real property or by negotiating for and obtaining a ceiling on the annual increase in the CAM charges (i.e. 3%) you may be able to limit the exposure to a substantial increase that may occur when the real property is transferred/sold.
3. Also, when using a base year for comparison (i.e. for CAM charges), ask for it to be the first full calendar year (all 12 months) of the lease term. This may eliminate some of the increases that may otherwise be payable if a date prior to the commencement of the lease or an anniversary before the expiration of the first year of the lease is used.
LESSOR: The converse to the provisions stated above for lessees is applicable for a lessor to obtain the benefit of additional payments from the lessee. That is, lessors should include provisions in their leases that have net features for real property taxes to have language that directs the lessee to pay for all increases in the real property taxes on the real property or their pro rata share of same. In the case of CAM charges, lessors should exclude from the definition increases due to a transfer/sale of the real property and provide in another provision of the lease for it to be paid or exclude from any cap in the CAM the increase in real property taxes from a transfer/sale. As for the last item regarding a base year, try to use the last full calendar year prior to the commencement of the lease as the base year definition.
As with all agreements, there is a certain amount of negotiation between lessor and lessee. The stronger the bargaining position of lessee or lessor, the better the end result in the terms of the lease.
There are plenty of small planning issues and considerations with regard to the many terms contained in a lease. You should consult with an attorney before executing a lease. Hopefully the suggestions indicated above will be of assistance to you.
IRS CIRCULAR 230 DISCLOSURE: INTERNAL REVENUE SERVICE REGULATIONS GENERALLY PROVIDE THAT, FOR THE PURPOSE OF AVOIDING FEDERAL TAX PENALTIES, A TAXPAYER MAY RELY ON FORMAL WRITTEN ADVICE MEETING SPECIFIC REQUIREMENTS. TO ENSURE COMPLIANCE WITH THE IRS REQUIREMENTS THIS NOTICE INFORMS YOU THAT ANY FEDERAL TAX ADVICE CONTAINED IN THIS ARTICLE OR ANY OTHER ARTICLE OR COMMUNICATION ON THIS WEB SITE (INCLUDING ATTACHMENTS) DOES NOT MEET THOSE REQUIREMENTS. ACCORDINGLY, THE TAX ADVICE IS NOT INTENDED, WRITTEN OR PROVIDED TO BE USED, AND IT CANNOT BE USED FOR THE PURPOSE OF (i) AVOIDING FEDERAL TAX PENALTIES OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTER ADDRESSED ABOVE OR ON THIS WEB SITE.
THE FOREGOING CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS FOR CONSIDERATION IN BUSINESS AND TAX PLANNING. CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE READER REGARDING THE USE AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF THE IDEAS INDICATED ABOVE OR USE OF THE INFORMATION CONTAINED IN THIS ARTICLE. SHOULD YOU HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT 12526 HIGH BLUFF DRIVE, SUITE 300 , SAN DIEGO , CALIFORNIA 92130 OR AT 858.759.4600.
© 2011 by Harold S. Small, J.D., CPA (inactive) , AEP