Of interest to Commercial Property Owners and Renters

ConcreteCactus - http://concretecactus.com/blog

7/21/2007

CA office tenants may get hit with property tax pass-thru

Proposition 13 in California puts a cap on property tax increases until a property sells. After the sale, the property taxes are re-assesed based on the sale price.

California has seen a huge amount of speculative activity in the commercial market, and tenants whose leases allow a pass-through of CAM expenses may be in for a surprise.

From this week’s Wall Street Journal:

Take One Market Plaza as an example: The 1.4 million-square-foot complex in San Francisco was assessed at less than $300 a square foot until recently, says Kevin Brennan, executive vice president of Studley, a tenant-representation firm.

In April, Morgan Stanley Real Estate purchased the complex for about $631 a square foot as part of its 10-building portfolio acquisition from the Blackstone Group, according to data provided by Real Capital Analytics.

If the city should use something close to the purchase price to calculate the new assessed value, tenants without Prop 13 protection in their leases could see their annual rent rise about $4 a square foot for taxes. Thus a tenant using 100,000 square feet would pay $400,000 more. Morgan Stanley had no comment.

We’ve seen property taxes rise in Arizona too. The Maricopa County Assessor’s Office is trying to catch-up with the property value increases seen the last few years.

Potential deals that we’ve analyzed show that buyers of commercial property will likely see property tax increases of around 20% - 30% for each of the next two years.

But the impact on tenants depends on the type of lease in place. If it’s a true gross lease, the tenant probably has no concern. But for triple net, modified gross, or leases with landlord expense stops, tenants may need to take a look at their budgets going forward.