Property Tax Increases Caused by a Sale: Should Commercial Tenants Have to Pay?

It’s pretty common for a commercial lease to require a tenant to pay for a property tax increase due to the sale of the property.  But is this fair?

What benefit does a tenant derive from the sale of the property?  None or minimal.  But the landlord/seller and the buyer benefit greatly at the tenant’s expense.

This property tax increase can be expensive and quite a surprise to a tenant who doesn’t understand this issue.  Example:  Suppose a 100,000 square foot office property was bought or even built over 20 years ago when market prices were low for about  20 million dollars and market prices are now high. This is very much like the current market is now.  The property could now be worth 2-4 times or more compared to when it was originally bought or built. Let’s figure on an increase of just 2 times so let’s say it’s worth 40 million now for our example.  This will cause the property taxes to go up in the same amount, so 2 times using our example.  Now the tenant has to pay their share of property taxes at this increased rate even though there is no real benefit to the tenant.

In California, the tax rate for increases is usually about 1.1% of the property value.  So, if the tenant has just 5% of the project which would equate to about 5,000 square feet and the property taxes increase as per our example above, you are going to pay the following amount now annually over and above what you were paying before:  $20,000,000 (value increase) x 1.1% (property tax rate) x 5% (your share of property tax increase) = about $11,000 per year for the remainder of your lease term.

This expense is usually quite a surprise to a tenant.  There are ways to negotiate this type of increase away but you usually have to have a very good broker to make that happen.

And this is just one example of where tenants aren’t aware of the true costs of leasing space as there are many more.  Don’t lease office space without a broker who can show you the true cost or you will be sorry.

Have more questions about: property tax or other operating expense/NNN increases, leasing, buying or selling of commercial real estate, and more?  Please feel free to get in touch!  You can contact me for help on these matters at 805-217-0791 or david@djmcre.com.

2 Replies to “Property Tax Increases Caused by a Sale: Should Commercial Tenants Have to Pay?”

  1. I have an interesting twist on this issue of increased property taxes. In this case, a company leased a portion of the building and then applied for a marijuana growing permit, increasing the value of the property that was then purchased for 4X its former value and raising property taxes significantly. Would existing NNN tenants be responsible for paying the increased taxes triggered by the other tenants speculation on marijuana growing venture?

  2. The answer to your question is probably yes. It usually is written in a lease document that each tenant has to pay their % share based on their square footage of the project for any property tax increase no matter what the cause.

    But it does depend on the specific language of the lease regarding this issue so to know for sure I would have to review this information.

    Thanks for you comments and question.

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