Who Pays Property Tax in Commercial Lease

The tax provisions of a commercial lease describe the taxes that the tenant and landlord must pay and when and how they must be paid. You cannot estimate the true cost of a commercial lease without understanding the taxes for which you are responsible and who is responsible if tax rates increase or if additional tax rates are introduced. With commercial leases, you may be responsible for some operating costs, which may include property taxes. No, your landlord cannot unilaterally change your commercial lease and increase your rent as property tax rates rise. However, long-term leases may include escalators, which regularly increase rent in such situations. This principle nevertheless stimulates the discussion, considering that the burden of property tax transferred to the tenant corresponds to the use of the premises. When including a type of lease, the tenant must take into account that their rent payments, whether they include additional costs or bills, may increase. A landlord may increase the rent due to legal increases approved by local governments. However, rent can also increase due to property tax assessments or increased insurance premiums. In leases where the landlord passes property taxes to the tenant (most leases that are not real gross leases), the tax provisions are detailed on how the tenant pays the taxes that the landlord owes. This is often achieved through the use of taxes called “extra rent” when it comes to how the maintenance of common areas and other expenses are managed.

1. Most California leases are structured as a gross lease, with the tenant paying property taxes on a base year or triple net basis (NNN), the tenant paying all property taxes (or a proportionate share if they occupy only part of a building). Homeowners who live on their own properties and tenants in California will see their occupancy costs rise when Proposition 15 is passed. These agreements, also known as an absolute lease or an absolute triple net lease, place all financial responsibilities of the building on the tenant, including taxes, maintenance, insurance, repairs, etc. This gives them control and freedom over the property, but also means full responsibility in the event of disaster or total loss. In large commercial developments with more than one area for rent such as shopping malls and sprawling office complexes, tenants may have a different area than their neighbors. Therefore, landlords typically allocate taxes and insurance costs to tenants in proportion to the amount of rented space. 1 Vorprop 15 also exempts certain small businesses from wealth tax; For other businesses, it offers an exemption of $500,000. 2 Read the law or talk to your lawyer to determine if it applies to you. The full text can be found on this link by scrolling down this page. Market forces will tend to offset the rental prices of comparable properties, regardless of the type of lease. Tenants should expect to pay approximately the same amount with an NNN, modified gross or full-service lease for similar quality offices in the same area.

When maintenance costs are higher than expected, triple net lease tenants often try to get out of their leases or receive rent concessions. To avoid this, many landlords prefer to use a net bondable lease. This is a type of triple net lease that cannot be terminated before its expiry date. In addition, the amount of rent cannot be changed for any reason, including unforeseen and significant increases in incidental costs. Single net leases, often referred to as net leases or n, are not as common in the rental world. In such a lease, the landlord transfers minimal risk to the tenant who pays the property taxes. This means that all other expenses – such as insurance, maintenance and repairs, and utilities – are the responsibility of the owner. The landlord is also responsible for all maintenance and/or repair work that must be done inside the property during the lease. One-time net leases are the least common type of net lease where most costs are not passed on to the tenant. In this agreement, property taxes are paid by the tenant, but the landlord pays all other expenses.

Like the single net lease, landlords should have the additional payments passed on to them so that they can pay them to the municipality and the insurance company. While the tenant`s lease includes these payments, the landlord`s name appears on the tax and insurance bill, which means they are ultimately liable. By paying these fees directly, the landlord can avoid problems associated with late or missed payments from tenants, which can lead to additional charges. In a net lease, the landlord charges a lower base rent for the commercial space plus some or all of the “usual costs,” which are operating, maintenance, and usage expenses that the landlord pays. .