Retail leases typically contain provisions allowing the landlord to charge the tenant a pro rata share of taxes paid by the landlord. The particular wording of the lease governs what the landlord can and cannot charge a tenant. Looking for ways to cut costs, more tenants are monitoring the taxes passed through by landlords and challenging certain charges.
Several questions arise when tenants review tax pass-throughs:
- What types of taxes are landlords allowed to include in their calculation of taxes that may be allocated to tenants? The lease usually defines what is meant by “taxes” that may be passed on. The lease may explicitly exclude certain types of taxes, such as business license taxes or gross receipt taxes. Alternatively, it may define “taxes” narrowly in a manner that excludes such taxes.
- What parcel(s) are included in the calculation? A shopping center may sit on more than one tax parcel. The lease may explicitly dictate whether the landlord can charge for all parcels or just the parcel on which the store sits.
- How are taxes apportioned to the tenant? The portion of taxes that can be charged to the tenant is typically calculated by taking the square footage of the tenant’s space (the numerator) and dividing it by some measure of total square footage of the center (the denominator). The denominator is often an issue for dispute. For example, are anchor stores excluded? Does the denominator include all “leaseable” space, or just “leased” space? If leaseable space is used, what happens if part of the center is converted to non-retail use?
At the link is an article I recently co-wrote with my colleague, Gregory Call, discussing this issue in more detail.