Taxes and inflation are coming. Real estate has historically been a good hedge against inflation and with interest rates at levels never seen before, this might be an opportunity of a lifetime to acquire property. However, it is sobering to think how we, the taxpayers, will pay back the trillions of dollars of deb recently created by the Fed. Likely, the politicians will target the “wealthy” landlords and increase taxes, maybe even terminate Prop 13. Ultimately, these taxes will be passed on to the tenant which, in turn will pass the expenses on to the consumer. This is an example of the inflation to come.
Please see the discussion below from our local industrial real estate association, the AIR.:
On November 3, 2020, California voters will decide whether to adopt the “Split Roll” Initiative, Prop. 15. If passed, many commercial and industrial properties would lose “Prop. 13 protection,” and would be re-assessed and taxed based upon market value.
Properties can be reassessed as early as the July 1, 2022 – June 30, 2023 fiscal tax year, as discussed in California’s Controversial “Split Roll” Initiative (Prop. 15):
If a tenant enters into an AIR CRE lease today, would it be required to pay the increase in property taxes resulting from the potential passage of Prop. 15?
Short Answer: Yes, except under the rarely-used AIR CRE month to month lease (entitled “Standard Industrial/Commercial Multi-Tenant Month To Month Lease – Gross”).
Tip for Tenant Brokers: Consider advising tenants about Prop. 15 and the possibility that their property tax obligation could increase substantially, depending on the current property tax basis in the property.
How does each individual AIR CRE Lease allocate responsibility for increased Real Property Taxes resulting from Prop. 15? The following is a breakdown.
Single-Tenant Lease – Gross: Lessee pays increases in Real Property Taxes over the fiscal tax year during which the Commencement Date Occurs. (Paragraph 10.2.)
Single-Tenant Lease – Net: Lessee is responsible for Real Property Taxes. (Paragraph 10.2.)
Multi-Tenant Lease – Gross: Lessee is responsible for Lessee’s Share of any increase above the Base Real Property Taxes (i.e., the Real Property Taxes assessed during the calendar year in which the Lease is executed). (Paragraph 4.2(a)(v).)
Multi-Tenant Lease – Net: Lessee pays Lessee’s Share of Real Property Taxes (Paragraph 4.2(a)(v).)
Multi-Tenant Month To Month Lease – Gross: Paragraph 10 provides: “Lessor shall pay any Real Property Taxes.” In this AIR CRE Lease, Lessor is responsiblefor all Real Property Taxes.
Land Lease – Gross: Lessee is responsible for increases in Real Property Taxes over the fiscal tax year during which the Commencement Date occurs. (Paragraph 10.2.)
Multi-Tenant Office Lease – Gross: Lessee pays Lessee’s Share of the amount by which all Operating Expenses (including Real Property Taxes) for each Comparison Year exceeds the amount of all Operating Expenses for the BaseYear. (Paragraph 4.2(a)(v).)
Multi-Tenant Office Lease – Net: Lessee pays Lessee’s Share of all Operating Expenses (including Real Property Taxes (Paragraph 4.2(a)(v).)
Shopping Center Lease
Multi-Tenant Shopping Center Lease – Net: Lessee is responsible for Lessee’s Share of all Common Area Operating Expenses (including Real Property Taxes). (Paragraph 4.2(a)(v).)