Rentable vs Rented Space
Some owners, in an effort to attract tenants, agree to pay all property taxes for the base year, the first year of the net lease. The tenant is then expected to pay a portion (or all) of any increase in property taxes for the duration of the net lease.
As an owner, you’ll also need to decide whether the tenant will pay property taxes on the total space they’ll be renting from you, or a percentage of the property’s total rentable space. The latter is significantly higher for the tenant.
For example, let’s say your tenant leases 2,500 sq ft of the total rentable area, which is 12,500 sq ft. Another 5,000 sq ft is rented out by tenant B. There are then two ways to calculate the tenant’s portion of the property taxes.
In the first one, the tenant pays according to the rented space. To calculate how much each party would pay, divide the amount of space leased by your tenant by the amount of space leased on the property. In this instance, the total leased space is 7,500 sq. ft. Tenant A pays 2,000/7,500. Tenant B pays 5,000/7,500. Between them, the property tax is paid, and the landlord pays nothing.
The second method uses rentable space. So Tenant A pays 2,000/12,500 and Tenant B pays 5,000/12,500. The owner pays 5,500/12,500.
Limiting The Amount Of The Net Lease Property Taxes
Property taxes rise over time, thus the percentage of property taxes the tenant agrees to pay over the length of the lease will change as well.
The most common reason this happens is that the property is reassessed. If the taxes have stayed the same over the last few years and property values for the neighborhood have risen, or the building has undergone improvements, then the value of the property will rise.
Another instance where property taxes may rise is if the building is sold for a substantially larger sum than it was bought for. This could be a problem, especially since many tenants would find it financially difficult to cover a huge tax increase. As an owner, you’ll want to check and make sure there is no clause in the net lease stating the tenant will not be held liable for property taxes over a certain amount – leaving you holding the bag for the rest.
When Other Tenants Make Improvement On A Property
When another tenant in a multi-tenant property makes improvements to a commercial property, the value of the property goes up, since it is calculated by adding up the cost of all tenant improvements. If another tenant has made very few improvements, then they could end up paying more than their fair share of property taxes.
Since you won’t be able to get the tax assessor to determine the value of each tenant space separately, the best way to remedy the situation is to
allow tenants to pay their pro rata share for the taxable value of the entire property – not the rentable space.
The easiest way to do this is to estimate the cost of rebuilding the entire property and the cost of renovating tenant A’s space. Then divide the cost of rebuilding tenant A’s space by the cost of rebuilding the entire building; this will end up being the same amount as tenant A’s share of the property’s taxable value. Use this number to as a percentage multiplier to determine tenant A’s fair share of property taxes.
All Tenants Must Allocate Taxes According To The Same Method
The law states that all tenants in a multi-tenant property must allocate taxes using the same method. For example, if tenants A, B, and C are allocating taxes according to rentable space, any new tenants who come in after them will not be able to ask for their taxes to be allocated according to rented space.
If you the owner, or a tenant, would like to switch to a different method of allocating taxes, you will need to wait until only one tenant is left (usually the one with the longest lease), and make an agreement that will change the method of tax allocation upon conclusion of the other tenants’ leases.
How To Allocate Liability Insurance Costs
Liability insurance is essential for both the owner and the tenants.
They protect both parties from claims, whether it’s due to injuries suffered by a customer or employee, damage from someone else on your property, damage or harm due to carelessness, as well as less obvious harm, such as the invasion of privacy, defamation, and false imprisonment.
The question of how to divide up liability insurance premium costs applicable to double net lease, and is fairly easy if all tenants are similar in terms of business type: simply allocate the cost of the premium according to the percentage of leased space for each tenant.
This method works fine if all the businesses are more or less the same in terms of risk. But what about if there are one or more businesses that are radically different in terms of risk from the other tenants?
In that case, the insurance company will not address the risk for each tenant separately. Instead, if the property has one or more higher-risk businesses, the premium for the entire property will rise.
In this case, if you can get an estimate of how much fewer insurance costs for each tenant would be without the high-risk tenant, then you can try calculating what the appropriate percentage of the premium would be for the high-risk business.
This works, however, only if a tenant hasn’t yet signed a lease with you since if the higher-risk business is already a tenant, you as an owner would need to absorb the extra cost.
Maintenance costs include those expenses needed in order to maintain a property’s common areas. These include elevators, garages, and of course lobbies and hallways.
You might also decide to require net lease tenants to pay a percentage of the HVAC costs, as well as a management fee, which covers the amount you pay each month for a team to manage the property.
These are just some of the costs involved in owning a single net or double net property. Keep in mind, however, that triple net lease pass all expenses, including capital expenditures, on to the tenant.