19 November 2019/ rent_commercial_property_guide

Who pays property taxes on a commercial lease?

A commercial lease is an agreement between a tenant/business and a landlord that outlines the terms and conditions of the property rental. This type of lease is specific to tenants that are using the property for a commercial purpose as opposed to residential use. For instance, offices, shopping centres and warehouses. In this blog post we’re going to explore the different types of commercial leases and who pays the property taxes – landlord or tenant?

The basics of commercial leases and property taxes

The tax provisions of a commercial lease will outline what taxes the tenant and the landlord must pay for, as well as when and how they need to be paid. You can’t gauge the true cost of a commercial lease without understanding the taxes you are responsible for paying and who’s liable when tax rates rise or additional ones are introduced. With commercial leases, it’s possible that you’ll be responsible for some operating costs, which can include property taxes.

Look at the tax definition in your commercial lease

This is usually split into two sections. One outlines what taxes will be the landlord’s responsibility, and the other details what will be the tenants. This is the standard approach with a gross lease, where the landlord defines the tenant’s ‘separate taxes’ instead of allocating all of their tax risk to the tenant.

Whereas, with triple net lease structures, the tax section will typically be written so that almost all taxes are the tenant’s responsibility.

It’s a good idea to make sure you’ve fully considered the risk of tax increases. Otherwise you can’t be sure that you can still afford the commercial property if the tax rates go up.

Who pays property taxes on a commercial lease?

In leases where the landlord passes the property taxes to the tenant (most leases that aren’t true gross leases), the tax provisions will detail how the tenant will pay taxes that the landlord owes. This is often achieved by using taxes called ‘additional rent’ when referring to how common area maintenance and other expenses will be dealt with.

Therefore, the cost of taxes imposed on the property will be paid by the tenant to the landlord at an estimated value every month. These approximates will be reassessed at the end of the year and then the tenant will pay the actual share.

Typically, the tenant will pay the general property taxes to the landlord as a reimbursement. While tenant specific taxes, e.g. income tax, are paid directly to the taxing authority.

It’s crucial that tenants find out whether the landlord has the right to pay taxes on their behalf if they aren’t paid on time. This is on top of what costs and fees may be imposed if the landlord doesn’t end up paying the taxes on the tenant’s behalf.

Can my landlord change the lease in response to increased property tax rates?

No, your landlord isn’t allowed to one-sidedly alter your commercial lease agreement and increase your rent if property tax rates increase. However, long-term leases can have escalators in them that increase rent periodically for situations like that.

We’re now going to provide a full run down of the different types of commercial lease and what this means for who pays property taxes. We’ve touched on a couple of these already, but this should iron out any confusion between the different types.

What are the different types of commercial lease?

When growing a business, taking out a commercial lease is one of the most important things you’ll do. If you make the right decision it could significantly increase your revenue. Therefore, it’s important to get a clearer picture of which one suits you the best. Don’t forget that with all leases, the terms can be adjusted if both the tenant and landlord agree on it.

Gross Leases

With this type of commercial lease the landlord is responsible for paying property tax, maintenance costs and insurance. These are different to net leases, which are where the tenant is accountable for some of the additional property costs. With gross leases, the tenant can pay one flat fee for leasing the property.

When the landlord is working out how much the gross lease will be, they will consider all of the costs associated with using the property. These will be combined to one monthly rent cost.

Pros:

  • As these are a one-off payment, they tend to be easier to manage.
  • Tenants can plan their finances easier as there won’t be any unexpected bills popping up.

Cons:

  • They aren’t always the cheapest option. Landlords can over-estimate what the extra costs will be to make sure they don’t end up losing money.

Net Leases

Most commercial leases on the market are net leases. These mean that tenants have to pay a portion if not all of the additional costs. This is everything from utility bills to maintenance costs to property taxes. These are split into three types:

Single Net Lease

  • Property taxes become the responsibility of the tenant instead of the landlord, but the landlord is still obliged to pay other expenses.
  • These are the least common out of the three because they don’t pass as many costs to the tenant.

Double Net Lease

  • Tenants are accountable for the property taxes and the insurance premiums. But the maintenance expenses remain the responsibility of the landlord.
  • Payments are made to the landlord alongside the rent.
  • These are the most common type of commercial property lease.

Triple Net Lease

  • In this agreement the tenant is responsible for all of the property costs.
  • They therefore have to pay the net amount for property taxes, maintenance costs and net building insurance.
  • For this reason, the rent is often lower with this type of lease in comparison to the others.
  • Triple net leases are popular with investors who don’t want to take as much risk but still get a steady income. Offices, industrial parks and shopping centres are often available under this type of lease. If you’re unsure how much retail space you’d need, you can read another one of our blog posts

At Realla we have a range of commercial properties to rent and for sale that you can browse at a click of a button. Click here to get started. You can also follow our top seven steps to a profitable rental commercial property.