how do NYC real estate taxes work in a commercial lease

If you’re a commercial tenant in New York City, you may be wondering: how do NYC real estate taxes work? We’ve got you covered. 

As commercial leasing tenant reps, one key aspect of our job is to negotiate the economics terms of your new lease. This includes negotiating base rent; rent escalations or operating expenses; free rent; security deposit; cost of electric; and work performed to meet your specific floor plan requirements, whether it’s through tenant improvement allowance, the landlord building your space to meet your specifications, or a combination of both. 

NYC real estate taxes all start with a base year.

When it comes to real estate taxes, our job is not to negotiate the amount you pay, but rather to negotiate what’s called a “base year”, which in turn determines how much you pay in real estate taxes each year. Real estate taxes are specific to each building, and like taxes on a residential property, are determined by the assessed value of that building. Like any property, if an owner does substantial work on a building or the building goes from being partially empty to fully leased, the assessed value will increase and each tenant’s real estate taxes will also increase (unless you are a not-for-profit that owns your space, in which case you’re exempt from real estate taxes).


That’s where the base year comes in. You will pay your proportionate share of the building’s increase in real estate taxes over a base year. In other words, if you enter into a lease in year x , regardless what the building taxes are in that year, you shouldn’t pay real estate taxes until the following tax year; year x is your base year. In the following tax year, you will pay your proportionate share –or a percentage based on your square footage divided by the total building square footage- of the increase in your building’s real estate taxes above your base year. If building taxes are $100,000 in year x and $110,000 in the following year, and you occupy 10% of the building, you will pay $1,000, or 10% of the increase over your base year. 

Why does this matter?

Real estate taxes tend to start off as a small cost, but can accumulate over a long term lease into a big number. It’s important that you as the tenant understand what you will be paying in each year of your lease; this should be one line in the detailed financial analysis your tenant rep prepares for you, detailing by line item what costs you can expect and when. It’s also important that you use this financial analysis as a comparative tool when comparing multiple “top choice” spaces as part of your move. Because real estate taxes are building specific, they can play a key role in determining the affordability of one space over another, especially if you’re looking to sign a long term lease. 

 

Much like any tax, exact real estate taxes in any coming year are fundamentally unknowable as the building has not yet been assessed. As part of preparing your comparative financial analysis, we take a 5 year historical average to project your expected real estate costs, paired with knowledge about the building’s construction and improvement activity. In other words, if the 5 year historical average is a 10% annual increase, but in 2 of those years the owner did a massive capital improvement on the building that drove taxes up dramatically, we factor that into your projection. 

In other words, get a tenant rep who knows what they’re doing….like Vicus!