A Comprehensive Guide to Commercial Real Estate Taxes

Navigating the world of commercial real estate taxes can be a daunting task and understanding how these taxes are calculated and assessed is crucial to budgeting effectively and making informed financial decisions. Below, we'll delve into the intricacies of commercial real estate taxes in NYC, demystifying the process and shedding light on how these tax assessments work. Whether you're a business owner or a tenant, this comprehensive guide will equip you with the knowledge you need to navigate the complexities of real estate taxes.

Calculating Commercial Real Estate Taxes

For commercial properties in NYC, real estate taxes are typically calculated based on the assessed value of the property, with a focus on the building's reported income. Tenants may encounter the "real estate tax escalation" provision in lease agreements, where they agree to pay a pro-rata share of any increase in real estate taxes over a predetermined base tax year. NYC's tax assessment year runs from July 1 through June 30, and each year, the total tax amount for a building is reassessed, taking effect on July 1. Landlords may pass on this tax amount to tenants either quarterly or annually.

Understanding Tax Base Years in Lease Agreements

In lease agreements, there are two formats used for calculating a tenant's tax base year:

Fiscal Base Year

This straightforward method uses the tax rate that goes into effect on July 1st of a given year and runs through June 30th of the following year. For instance, a 2023/2024 fiscal tax base year would be calculated using the tax rate effective from July 1, 2023, to June 30, 2024.

Calendar Base Year

In this approach, the tax amount is determined using the average of two consecutive fiscal base years. For example, a 2023 calendar base year would be calculated using the average of the building's tax amounts between the 2022/2023 and the 2023/2024 base amounts.

Example

Suppose you take possession of a space totaling 10% of a building in January 2022 and the building's assessed taxes total $1,000,000 in July 2022.
By July 2023, the building's assessed taxes have increased to $1,050,000.

For tax payments in 2023:

1. Fiscal Base Year: Using a 2022/2023 fiscal base year, you would be responsible for a total of $5,000; your proportionate share (10%) of the increased amount ($50,000).
2. Calendar Base Year: Using a 2023 calendar base year, you would be responsible for a total of $2,500; 10% of the increase from the average taxes between 2022 and 2023 ($1,025,000) and the new amount ($1,050,000).

Understanding how real estate taxes are calculated and assessed is essential for commercial tenants and business owners alike. By grasping the concepts of tax base years and real estate tax escalations, you can make informed decisions and effectively budget for your commercial space. Whether you're negotiating a lease or planning your financials, this comprehensive guide will serve as a valuable resource in navigating the complexities of commercial real estate taxes in NYC.