Real estate taxes are one of the most common elements of operating expenses that the landlord passes on to tenants. However, did you know that you could be paying much more than your actual share of real estate taxes for the premises you leased? This blog discusses a few things to consider before you pay your share of RET to your landlord, so you don’t end up paying more than you owe.
Tax Refunds
When the landlord levies property taxes on tenants as per their pro-rata share, they should also credit any tax refunds received to the tenants’ accounts accordingly. However, sometimes, landlords may fail to credit the tax refunds or make errors in refund pro-rata calculations that tenants need to watch out for.
Not pursuing tax certioraris
The landlord must assess the taxes levied upon them every year to ensure they are in accordance with the local real estate laws. Tax certiorari allows landlords to challenge the real estate tax amount levied upon them. However, many landlords may overlook this step as they know their tenants will share the tax load anyway as per the lease agreements.
Including personal taxes
Landlords may erroneously include their personal taxes such as the tax on personal property or tax on income from a rental property in the real estate tax calculations for the leased premises, thus passing it on to their tenants.
Tax professional’s fees
Your landlord may incorrectly bill you for the expenses they incur when they hire a tax professional to work out their real estate taxes. While, as a tenant, you may be obligated to pay your share of the real estate tax as stipulated in your lease, the clause most likely won’t cover tax professional’s fees, which means, sharing the fee as a part of the tax pass-throughs would be incorrect.
How are the real estate taxes actually calculated Vs. how they are stipulated as per the lease?
As a tenant, it is very important to ensure that you have a solid understanding of how the real estate taxes will be calculated for you as per your lease.
Are you paying your pro-rata share of RET or are being charged per square feet?
In some cases you will pay only your pro-rata share, whereas in some cases the landlord may have gross-ups and pass-through options that allow them to divide the total real estate taxes among all the tenants present in the building, irrespective of whether the building is fully occupied or not.
If your RET share is calculated per square foot, you need to ensure that the base of this calculation is correct–which is the leased space or sometimes referred to as square footage. Sometimes, even a minute error in lease square footage calculation can make a vast difference.
Verifying real estate tax amount levied upon you as a tenant by your landlord, and ensuring the amounts levied are accurate is complex especially if you are sharing the premises with multiple tenants. Real estate taxes often involve complicated computations that leave room for interpretation and also increase the chances of miscalculations. For example,
- What happens if you moved into a fairly empty building that’s only gradually filling up?
- How are the real estate taxes divided among the existing tenants including you, until the time there’s 100% occupancy?
- What will be the repercussions on your real estate tax share as new tenants are signed up.
It is also essential that you are on top of these calculations to ensure there are no errors, as errors that are embedded in the lease, year, or year can cost you dearly even impacting your key real-estate-related business decisions.
Two things that can help you in this regard are
- Timely CAM audits by an experienced lease services provider who will double check the tax computation, invoices and other related charges levied by the landlord to identify any errors and have them rectified for you.
- Accurate lease abstracts that simplify complex lease terms for you without diluting their essence so you understand your rent roll and related components clearly.
Tax pass-throughs are just one of the many items in operating expenses that need to be audited by tenants to ensure they are not being overcharged. A lease audit that covers all elements of CAM charges and operating expenses is a must on an annual basis to ensure you, as a tenant, don’t pay more than what’s due.