A Fresh Take on CRE

Additional Rent!? Post #2 - Taxes

In a modified gross lease, the tenant is responsible for paying for their proportionate share of the increases in real estate taxes.

Here's how it works; initially any real estate taxes on the space are included in the gross rent, this first year is generally used as the "base year" (although sometimes another year is used). The base year is the year from which all calculations are started and it is specified in the lease.

Now, this is where it gets tricky . . . New York's fiscal year begins on July 1, and this is when tax assessments for buildings take place. It is critical, that you know whether the base year in your lease is based on the Fiscal Year, or the Calendar Year. If it's the calender year, then the taxes are based on half of the fiscal year preceding that calendar year, and half of the fiscal year subsequent to that calendar year.

Anyway, you generally have one year before you have to start paying rent based on real estate tax increases. Once there is an increase in real estate taxes, that increase is divided among the tenants based on their "proportionate share" of the building. This is where things get tricky yet again. It is critical, that the proportionate share you're paying for, really is your proportionate share of the building. As I mentioned in "Loss Factor Demystified," landlords often "grow" the size of the building to compete with prevailing market loss factors or to push the limits on loss factor to increase profits. However, proportionate share of the building should never change - unless the building really does grow. Your remeasured space must be divided by the remeasured total for the building to find out your actual proportionate share. If your remeasured space is divided by the old square footage of the building, you will end up paying for a larger percent of the building than you actually occupy.

One final note on real estate tax escalations. It is generally assumed that real estate taxes will go up. However, landlords often fight tax assessments, and sometimes real estate taxes go down. Make sure that the same way you pay for your proportionate share of tax increases, the landlord pays you for your proportionate share of tax rebates.

Stay tuned for my next post, Additional Rent!? Post #3 - Operating Expenses


For the last post, Additional Rent!? Post #1 - Electricity, click here.
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