1. Advanced Real Estate Taxes
Presented by:
Michael Delman, Lease Administration Solutions
and
Brian Ponchak, Cresa

2. Agenda
Foundations
Issues and Case Studies
Summary and Q&A

3. Foundations

4. Want to buy a car?

5. Know How It Works Before
Last Year’s Statements
Development, infrastructure, financing
Contingencies

6. Denominator Exclusions
CAM
TAX
Vacancy X ?
Majors
Temp
Pads / Outlots
Key Considerations: Negotiating Power (always!), Variable/Fixed

7. Understand the deal to negotiate a fair deal
Definition of Taxes
General Rule (After-the-fact): everything qualifies
What should we pay for?
Taxes and assessments
Development fees
Margin taxes
Changes in ownership
Tax Benefits go to whom?
Tax-Exempt
Understand the deal to negotiate a fair deal

8. Understand The Definitions
That portion of the Southeast quarter of Section 32, Township 12 South, Range 21 East, Mount Diablo Base and Meridian, according to the official plat thereof, in the City of Clovis, County of Fresno, State of California, described as follows:Commencing at the South quarter corner of the Southeast quarter of said Section 32; thence North 00°00'01" West, along the West line of the East half of the Southeast quarter of said Section 32, a distance of feet to a point, said point being the intersection of the Easterly prolongation of the South line of Parcel 5 of Parcel Map No , recorded in Book 56 of Parcel Maps at Pages 7 and 8, Fresno County Records, with the West line of the East half of the Southeast quarter of said Section 32, said Point being the True Point of Beginning; Thence continuing North 00°00'01" West, ; Thence North 75°19'05" East, a distance of feet; thence North 89.56° 07' East, a distance of feet; thence North West, a distance of feet; thence South 89°56'07" West, a distance of feet to a point being feet East of the West line of the East half of the Southeast quarter of said Section 32; thence North 00°00'01" West, parallel with and feet East of the West line of the East half of the Southeast quarter of said Section 32, a distance of feet; thence North 89°56°12' West, a distance of feet to a point on the West line of the East half of the Southeast quarter of said Section 32; Thence North 00°00'01" West feet more or less to a point on the Southerly line of State Route 168; Thence along said Southerly line, South 61°51'59" West feet; Thence South 61°52'10" West feet; Thence South 56°45'53" West feet to a point located feet, measured at right angles, East of the East line of Parcel 2 of said Parcel Map No ; Thence South 0°00'01" East, parallel with said East line, feet to a point on a portion of the Easterly boundary of said Parcel 2; Thence South 89°58'52" East 5.00 feet to a corner of said Parcel 2; Thence South 0°00'01" East, along the East line of Parcels 2, 3 and 6 of said Parcel Map No , feet to a point on the Northerly line of Herndon Avenue; Thence North 85°56'32" East feet to a point located 8.30 feet, measured at right angles, East of the West line of Parcel 4 of said Parcel Map No ; Thence North 0°00'01” West, parallel with said West line, feet to its intersection with the Westerly prolongation of the South line of said Parcel 5; Thence South 89°55’12” East feet to the True Point of Beginning.

9. Audit Rights = Audit Limitations
Generally apply to CAM, not Taxes
Rarely need to inspect LL’s books and records to find LL’s breach
Statute of Limitations – business trumps legal concerns; from date of infraction or should have known?
First Rule of Audit Rights: You do not talk about Audit Rights
Second Rule of Audit Rights: You do not talk about Audit Rights

10. Issues and Case Studies

11. CAM and TAX Interactions
Once upon a time …
CAM was CAM, and TAX was TAX
But then a big scary landlord …
CAM was CAM plus the taxes on the Common Areas

12. Amendment #1 Section 6 - Standard CAM definition ….
Section 6 – plus taxes on the land and common areas of the S/C
Section 7 – Less any taxes included in Section 6
Section 7 - Standard Tax definition ….

13. Financials Before After Traditional CAM $5.00 Common Area Taxes $2.00
15% Admin
$0.75
$1.05
Total CAM
$5.75
$8.05
Common Area Taxes (derived by LL)
Premises Taxes (derived by LL)
$3.00
Taxes
Total Pass-through Costs
$10.75
$11.05

14. Story Continues
But then the Landlord’s heart grew three sizes that day …
Fixed CAM will help you manage your budgets and avoid surprises
LL will take all the risk
What was your fixed CAM last year?

15. Amendment #2 Section 6 – Delete everything. $8.05 /SF plus CPI.
Section 6 – plus taxes on the land and common areas of the S/C
Section 6 – Delete everything. $8.05 /SF plus CPI.
Section 7 – Less any taxes included in Section 6
No change necessary

16. Financials Before After Traditional CAM $5.00 Common Area Taxes $2.00
15% Admin
$1.05
Total CAM
$8.05
Common Area Taxes (derived by LL)
Premises Taxes (derived by LL)
$3.00
Taxes
Total Pass-through Costs
$11.05
$13.05

17. Other Taxes Texas Franchise Tax Tax on revenue less cost of goods sold
But it sort of (kind of) replaced (or supplemented) a portion of property taxes way back in 2008
Definition – real property taxes, ad valorem, specific exclusion/inclusion
Taxes on Renters
Florida
Arizona
New York City
Philadelphia

18. Prop 13
Tax assessments limited to historical cost plus 2% per year. New assessment triggered under “change of ownership.”
“Tenant shall not pay any tax increase resulting from a change of ownership during the first three years of the Lease Term …”

19. ? Prop 13 Tenant shall not pay any tax increase
resulting from a change of ownership ?
during the first three years of the Lease Term
Are you protected from the increase during the first three years; or from a change of ownership that occurs during the first three years?

20. CA - Prop 13/Prop 8
Tax assessments limited to historical cost plus 2% per year. New assessment triggered under “change of ownership.”
Prop 8 allows for a temporary reduction in assessment when the fair value is less than the Prop 13 assessed value.

21. Prop 13/Prop 8 Base Year
In a base year lease, all pass-through expenses in the first lease year are considered to be in the base rent (offices, rare retail).
Base Year
Year 2
Taxes
$2.00
$2.04
Base Rent
$10.00
Add’l Rent
$0.00
$0.04
Total Rent
$10.04

22. Year 3 Base Year?

23. Mixed Use Allocation Supermarket Small Retail Restaurant (F/S)
Office Tower
Luxury Retail
Supermarket
Small Retail
Office Tower
Luxury Retail
Not Included
Restaurant

24. Mixed Use Allocation (cont.)
What is the Issue?
Different uses in mixed use property demand different rents, i.e. anchor supermarket will pay much lower/SF rent than luxury retail or freestanding restaurant. On assessed valuation using income approach, luxury retail will generate higher real estate tax/SF.
Is this fair to anchor supermarket on a pro-rata share allocation basis?

25. Mixed Use Allocation (cont.)
Lease Language:
“Real Estate Tax means all real estate taxes and other levies and assessments against the Land and Building”
“Building – the mixed use building consisting of approximately 300,000 SF of floor area to be constructed by Landlord on the Land”
“The Retail Portion” means that portion of the Building primarily for retail use consisting of 100,000 SF”
“The Office Portion means that portion of the Building primarily for office use consisting of 200,000 SF”
“The Luxury Retail Buildings are the two (2) buildings for retail use to be constructed along Main Avenue
By Definition, the Building does not include Luxury Retail

26. Mixed Use Allocation (cont.)
Problem:
One tax parcel for entire development, including luxury retail.
Landlord has charged anchor supermarket on pro-rata share basis.
Hypothesis:
Supermarket taxes skewed on SF basis by luxury retail valuation
Solution:
Obtain assessor worksheets to disaggregate improvement values

27. Mixed Use Allocation (cont.)
Protective Lease Language:
“In the event the portion of the Land underlying the Building and/or the Building are part of a larger tax parcel, then the portion of the real estate tax levied on the larger parcel and equitably allocated (on the basis of the respective valuations assigned to such areas by the tax assessor as evidenced by his worksheets) to the portion of the Land underlying the Building and/or the Building shall be included in the real estate tax for purposes hereof.”

28. Mixed Use Allocation (cont.)
Assessor Worksheet Summary:

29. Mixed Use Allocation (cont.)
Savings:
25% Savings by using assessor allocation.

30. Special Assessment Trap
Scenario:
Lease provides for reimbursement of special assessments
Landlord / Municipality finances off-site infrastructure using municipal bond financing
Bonds principal & interest to be paid from sales tax revenue generated by merchant sales at S/C
What happens if S/C underperforming and sales tax revenue falls short of bond payment?
Special Assessment issued to S/C owner via real estate taxes, which is then passed on to tenants.

31. Special Assessment Trap (cont.)
Impact:
Tenant’s store underperforming; sales < projection
Tenant gets whacked with special assessment, thereby further decreasing store profitability
Remedy: Tighten up special assessment language by first understanding how landlord is paying for improvements and what the repayment risks are and how they might affect operating expenses.

32. MultiParcel Properties
Understand what parcel(s) you are to contribute towards, i.e. complete shopping center or parcel that you are on
Impact of pads owned by others
Do pads contain common area / parking area or are footprint only?
Do pads have access to public ways or only thru shopping center?
REA!

33. MultiParcel Properties (cont.)

34. MultiParcel Properties (cont.)
Tax Parcel=Footprint

35. MultiParcel Properties (cont.)
Does anchor get free ride on real estate taxes for parking? Check for REA type agreement.
Example REA provision:
“Anchor reimburses the Landlord for a pro-rata share of taxes assessed against the Parking Areas of the Shopping Center based on a pro-rata share of Anchor’s parking area (based on greater of 4 spaces/1000 SF of Anchor’s floor area or # of parking spaces required by local government for Anchor) to the total parking area of the Shopping Center.”
Ensure that your lease provides for “Net” Real Estate Taxes or for contributions to be subtracted otherwise you may not get credit for contribution

36. Tenant Checklist–Lease Negotiation
Definition of Property – confirm
Substitute or Additional Taxes – is definition appropriate?
Landlord’s Tax Protest – if base year lease, review protest filing for base year to understand landlord position and impact on future years. Better to state base as $/SF
Special Assessments – to be paid over longest possible time period (i.e. if one year left on lease term, pay over max. years)
Tax Protest – require landlord to contest, or if landlord does not, give tenant right to do so with landlord’s cooperation
Tax Refund – require landlord to promptly reimburse tax refunds
Tax Protest Costs – fees should be arms length, reasonable and shouldn’t include any landlord or related party “management fee”
Base Year Reassessment – if base year lowered, reduce base rent

37. Tenant Checklist–Lease Negotiation
Fully Assessed Building – ensure base year is fully assessed reflecting full payment of rent. If supplemental bills issued, be sure to add to base year. Should base year be grossed-up?
Exclusions – pay attention to exclusions to be sure they are comprehensive
Abatement/Incentives (base year lease) – If base year is year X and has existing tax abatements in place expiring on year X+4, then escalation in year X+4 and beyond will be high.
Abatements/Incentives – obligate landlord to apply; who benefits?
Reduced Taxes – if real estate taxes drop below base, tenant to receive a base rent credit.
Operating Expenses – exclude all real estate taxes from CAM
Future Development – don’t pay for taxes on land being held by landlord for future development

38. Brian Ponchak, Director
Summary and Q&A
Michael Delman, VP
Lease Administration Solutions, LLC
Brian Ponchak, Director
Cresa Lease Compliance Services