Real Property Taxes and Reassessment

What this clause does

Under most industrial net leases the owner receives the tax bill and you reimburse it, either through monthly estimates collected with your operating expenses or in a payment due shortly before the tax deadline. The clause defines real property taxes broadly: the regular property tax, special assessments, bond levies and sometimes new charges a government adds later. The owner's own income, estate and transfer taxes are normally excluded.

If your space shares a tax parcel with other tenants, the clause explains how the bill is split, usually by square footage. A separate provision makes you responsible for taxes on your own equipment, racking and trade fixtures, and sometimes on improvements you install that raise the building's assessed value.

Reassessment is the real exposure

Property tax rules vary by state, and the variation matters. In California, value is generally reset when a property changes ownership or undergoes new construction, then grows slowly between those events. If your building sells mid-lease at a much higher price than the prior owner paid, the new assessed value can raise your tax pass-through sharply and for the rest of your term.

Your own projects can trigger a reset too. A mezzanine, an office expansion, a power upgrade or new dock positions can be assessed as new construction. In states that reassess every year, the question is different: whether the owner will protest a high valuation. Justin's landlord book notes that tax protest consultants working on contingency are common in some states, and that assessors occasionally apply the wrong classification or rate. A careful review of the bill is often how that gets caught.

Where it goes wrong

Tenants get surprised by supplemental bills that arrive months after a sale and reach back to the closing date. Leases that start mid-tax-year can produce proration errors in both directions. In multi-tenant parks, a tenant can end up paying part of a tax on a parcel or improvement that has nothing to do with its space. Special assessments for streets or infrastructure can be billed in one lump sum when the owner could have paid them in installments over many years.

What to negotiate

Before you sign, ask whether the building has sold recently or is being marketed. On a longer lease, ask for protection against reassessment from a sale, either an exclusion for a period of years or a cap on the increase you absorb. Owners often resist, but the request is common and sometimes obtainable, particularly on longer terms or at renewal.

Also ask that special assessments be paid over the longest period allowed, that penalties from the owner's late payment stay with the owner, that you can request a protest or appeal, and that you share in any refund for the years you paid. Coordinate with your tax advisor on who reports and pays taxes on your equipment. Then have a real estate attorney review the definitions, because the definition of real property taxes decides what can be passed through.

How payment works in practice

Leases handle the mechanics in one of two ways. Some have you pay a monthly estimate along with your other operating expenses, then reconcile against the actual bill once it is issued. Others have you reimburse the owner in a lump sum shortly before each installment is due. If you fall behind under the second method, many leases let the owner switch you to monthly estimates, and those funds may be held as additional security.

Supplemental bills complicate the picture. When a sale or new construction triggers reassessment, the assessor may issue a separate bill that covers the period since the event, and it can arrive long after the fact. Ask how those bills are handled and prorated at the start and end of your term.

In a gross or modified gross lease, taxes are usually built into your rent at a base year amount, with increases above that base passed through. Confirm what the base year is, because a base year set before a pending sale can leave you absorbing the entire jump.