What it means for office tenants

New York City recently announced tentative property tax assessments for 2023 and the assessment for Manhattan office properties increased by 9.21%. The jump wasn’t a complete surprise as we’ve seen a rebound in rents and increase in leasing activity in 2021 but this could be a big surprise to tenants when they see their rent bills. Here’s why:

Most office leases are gross leases meaning that taxes, insurance, and operating costs are included in the base rent and that the landlord will pass through certain increases in costs. One of those costs are the real estate taxes. If you’ve looked at a commercial office lease you’d see a provision that reads that the “Tenant will pay its proportionate share of real estate taxes over a 20xx base year. This means that if taxes in the Base Year were $10.00/ RSF and increased by 3% to $10.30/ RSF then the Tenant would pay the $0.30 difference to the landlord as additional rent. With this in mind, the tenants will typically want to negotiate a later Base Year-because taxes always go up you’d want as high of a base amount as possible. But in some cases, like in a pandemic year, it might be more advantageous to negotiate an earlier Base Year. While in others it may make more sense to negotiate a  Base Year several years in the future like in the case of a real estate tax moratorium where to taxes are artificially low and will see a big spike when the moratorium expires. Also, in the case of an empty building it’s important to ensure that the Base Year is established after the building has completed its initial lease up. Therefore it’s important to pay particular attention to often overlooked lease provisions.

Click here to learn more about what you need to know about real estate taxes before signing a lease for office space in NYC or reach out to Spaces Commercial Real Estate at 212-300-3265 to discuss your lease.

Leave a Reply

Your email address will not be published.