Property Taxes refers to the ad-valorem tax, calculated by a local government, that is paid by the owner of the property. The tax is usually based on the value of the owned property, including land. The local governing body will use the assessed tax to fund water and sewer improvements, provide law enforcement and fire service and other items deemed necessary.
Property Taxes may increase as a result from change of ownership, changes in improvements and/or levies on machinery or equipment provided by the Lessor. Therefore, many tenants protect themselves from increases in property taxes that may results from a sale of the property. They will typically inquire if the Premises were recently sold or if there are plans to sell. Then they will negotiate a cap on the property taxes or at least a cap on the potential increase. If a Lessee plans on making extensive improvements to the Premises they need to be aware that any increase in value to the property will more than likely result in a reassessment and higher Property Taxes. Lessors should be aware of this too, especially if they plan on removing the improvements at the end of the Term.
Payment of Taxes
The Lessee is responsible for paying the Lessor Property Tax 20 days prior to the delinquency date. The amount in each payment is prorated based upon the Term of the Lease. If the Lessee fails to pay on time, the Lessor may require the Property Tax to be paid in advance monthly, based upon an estimate of the tax bill with a reconciliation of the bill when the amount of the actual bill is known. If the Lessee Breaches their obligation, such advanced payments may be treated as additional Security Deposit.
Sometimes the Premises is not separately assessed. If this is the case, then the Lessor is responsible for prorating the Property Taxes accordingly for each of their tenants. This protects the Lessee from having to pay Property Taxes for building/improvements that are not part of the Premises that the Lessee occupies.
Personal Property Taxes
Most of the time, the taxes assessed against any improvements to the Premises will be made a part of the Property Tax bill that the Lessor receives. It can be time-consuming to have these improvements billed separately, so the Lessee may try to have this portion of the Lease modified ahead of time.