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In all instances, when a tenant is negotiating a myriad of pro-tenant carve-outs to a real estate tax escalation clause, tenants should propose as many carve-outs as possible to landlord.
A tenant’s proportionate share of real estate tax increases is often calculated based upon its space’s rentable square footage to that of the rentable square footage for the building it occupies.
Generally, it is in the landlord’s best interest to include within a real estate tax escalation provision the basis for the tenant’s square footage pro rata share calculation.
In jurisdictions where real estate taxes are calculated based upon the income generated by a building, landlords at a bare minimum should require tenants to pay their proportionate share of real estate taxes based upon the approximate rent of such commercial tenant to that of the rent of all tenants in the building.
Due to the fact that residential tenants in a mixed-use building generally do not pay for real estate taxes by way of a straight tax pass-through or escalation, it would not be uncommon for a landlord advocate to consider inflating the calculation by making the percentage higher for the commercial tenant than its pro-rata ratio.
Landlord advocates should attempt to pass any business improvement district (“BID”) or equivalent charges on to tenant based on their proportionate share of the same (as opposed to that of including such BID charges within the definition of real estate taxes).
Tenant advocates would prefer to have business improvement district (“BID”) charges as a straight pass-through expense, as opposed to having the expense included within the definition of real estate taxes.
In regards to real estate taxes, to protect against a developers’ tax abatement expiring prior to the time that a tenant’s lease will expire, tenant advocates should attempt to secure language that the base year tax be computed as if the building was fully assessed and no longer subject to any tax abatement.
Generally, it is in the landlord’s best interest at the LOI stage (as opposed to merely including such “reduction” language within the body of their original lease draft), to negotiate language that if in a subsequent year the base year tax is reduced as a result of a settlement or final determination of a legal proceeding with the tax authority, then the base taxes shall be retroactively (and for the future) adjusted to reflect the reduction.
During the LOI stage, it is in the landlord’s best interest to either remain silent on retroactive and future base tax year adjustments (leaving such “reduction” language to be included within the body of their original lease draft), or alternatively, to add “as finally determined” language immediately subsequent to whatever base tax year is agreed to in the LOI.
In situations where a tenant pays its pro-rata share of real estate taxes over a base year, the following is pro-landlord language that landlords should include in its initial lease draft: “In the event that, after an Owner’s Statement has been sent to Tenant, the assessed valuation which had been utilized in computing the Base Taxes is reduced (as a result of settlement, final determination of legal proceedings or otherwise) then, and in such event: (i) the Base Taxes shall be retroactively adjusted to reflect such reduction; and (ii) all retroactive tax payments resulting from such retroactive adjustment shall be due and payable when billed by Owner.”
Tenant advocates should include the following in the definition of real estate taxes: “With respect to any comparison tax year, all expenses, including reasonable legal fees, experts’ and other witnesses’ fees, incurred in contesting the validity or amount of any taxes or in obtaining a refund of taxes or in attempting to prevent an increase in the taxes, may be considered as part of the taxes for such tax year.”
Tenant advocates should permit landlord’s recovery of expenses in obtaining a refund of taxes or attempting to prevent an increase in taxes, only in the event landlord is successful in reducing taxes or preventing an increase in same.
In regards to real estate taxes, landlord advocates should attempt to negate tenant’s ability to bring tax certiorari proceedings or other proceedings contesting the amount or validity of any taxes.
In regards to real estate taxes, tenant advocates should push for language stating that the owner shall contest taxes for the building on an annual basis by tax certiorari or other proceedings.
As opposed to a landlord having the option at any time during the term of a tenant’s lease to make a decision on the payment method, it is preferable for a tenant to definitively know prior to lease execution whether it will be paying its tax escalation payments in a single lump sum, or alternatively, in monthly, quarterly or semiannual installments.
Generally, tenant advocates should negotiate express language within a lease that the following items will be excluded from the definition of real estate taxes: (i) any item included as a building operating expense; (ii) any assessments and/or development fees paid to a governmental or quasi-governmental body or agency in exchange for securing the right to make improvements or alterations to building; and (iii) penalties and/or interest resulting from landlord’s late real estate tax payments.
Tenant advocates should demand that if its landlord receives any rebate or refund of any real estate taxes, the landlord should credit an equitable amount to the tenant to the extent the tenant contributed to same.
Percentage rent provisions are commonly found in office leases and rarely appear in retail leases.
In the context of a retail lease where a landlord shares in the profits of a tenant, the breakpoint is that monetary threshold which, when the gross sales of a tenant’s business exceeds said amount, the landlord will share in the excess of the tenant’s gross sales over and above the pre-established breakpoint.
Generally stated, in the vast majority of retail leases nationally, seven percent (7%) is the percentage that a landlord will receive in the form of additional rent from a tenant for the tenant’s annual gross sales exceeding the breakpoint.
When negotiating a percentage rent provision, it is in the landlord’s best interest to keep the breakpoint amount as low as possible in the lease.
When negotiating a percentage rent provision, it is in the tenant’s best interest to keep the breakpoint amount as low as possible in the lease.
When advocating on behalf of tenants, in regards to percentage rent, the definition of gross sales under the lease should be closely looked at and heavily negotiated.
In regards to percentage rent within a commercial lease, a landlord computes the breakpoint by dividing the fixed rent by the percentage of profit the landlord will receive from the tenant’s gross sales.
A landlord for a retail space doesn’t need to examine a prospective tenant’s gross sales reports when performing their due diligence of the tenant.
A landlord should define “gross sales” narrowly in the percentage rent provision of the lease.
When negotiating a percentage rent provision within a retail lease, a landlord should include language reflecting that the tenant is obligated to continuously operate its business in the premises throughout the term of the lease.
When negotiating a percentage rent provision within a retail lease, landlords should make the definition of “gross sales” as broad as possible.
When negotiating percentage rent provisions within a retail lease, it is imperative that tenant advocates provide the landlord with a list of “gross sale exclusions” and implement as many carve-outs to the definition of “gross sales” as possible.
When negotiating a percentage rent provision, landlords prefer the breakpoint to increase by only 2% to 3% per annum. On the other hand, as a tenant, the preferred annual percentage increase is no less than 5% percent.
It is in the tenant’s best interest for the definition of “gross sales” in a percentage rent provision to include alterations, fitting, repairs, and delivery or shipping charges.
Examples of exclusions to the definition of “gross sales” in a percentage rent provision that a tenant should negotiate for include: alteration, gift wrapping and delivery charges; sales taxes if paid by a customer; interest, service or carrying charges for goods sold; and bulk sales and wholesale transfers of tenant’s goods and inventory.