Real Estate Taxes

The New York City Department of Finance employs appraisers to determine market values for each property. They also assess the building’s taxes and liability. This is all public information and available through the New York City Department of Finance.

Once a building’s market value is determined, that value is multiplied by 40% to figure out the assessed value. To calculate the taxes for a property for the year, the assessed value is multiplied by the tax rate.

For example, a building’s tax rate for the year 2000/2001, is $6.00 per rentable square foot. When the lease is signed the following year 2001 / 2002, the tax is $6.35 per square foot. The tax escalation is $0.35 per rentable square foot. If you had 10,000 rentable square feet you would have to pay a $3,500.00 increase above your base rental rate for that year.

The landlord generally pays taxes twice a year, in June and December. The tenant is billed between 15 and 30 days before the owner's payment is due. The owner's tax bill should be attached to the bill the tenant receives. Often the tenant may work out a monthly installment plan with the landlord.

Occupancy Tax (Tenant Tax)

The New York City Occupancy Tax for tenants is currently 3.9% of the base rental rate and is paid by the tenants. Most people do not know this tax exists.

Hidden Taxes

There are three hidden tax increases to be considered before the lease is signed:

  1. High vacancy rate: A tenant should always be concerned about real estate taxes in a building that is not fully occupied. The real estate taxes will increase as the building’s occupancy improves. Higher occupancy/ income translates to a higher market value and ultimately higher taxes. This could result in a significant increase in tenant’s real estate taxes.
  2. Major Improvements: If there are major improvements pending for the building, the taxes could go up. These improvements could be a new lobby or a major overhaul of the elevators or HVAC capacity for example. It is always a good idea to ask if any major improvements are in the works before a lease is signed.
  3. Sales and refinance: Sales and refinance of properties poses a risk to the tax base due to reassessment the city makes on the property.
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A solution to these hidden tax increases is to negotiate a tax base that reflects the value of the building on a fully occupied, built out and assessed basis.

Tax Incentives

Lower Manhattan Revitalization Plan (LMRP)

The benefits only apply to tenants who sign leases between April 1, 1995 and March 31, 2001 in buildings built prior to January 1, 1975 in downtown Manhattan. The plan was originally brought into law in 1996 to encourage tenants to relocate to lower Manhattan due to the extremely high vacancy rate at the time. This plan offers tenants tax incentives to move downtown and change and renovate both residential and commercial properties.

Industrial & Commercial Incentive Program (ICIP)

This program is available to owners of some commercial real estate properties. The goal of the ICIP is to persuade building owners to renovate their properties. If the owners abide by the proposed procedure and meet all of the program's requirements, the ICIP will exempt the increase in value associated with the new improvements. This increase will be subtracted from the property’s assessed value. For example, in New York City North of 96 Street and South of 59 Street, the increases will be fully exempt for the first 8 years after receipt of a Certificate of Eligibility. This exemption will be phased out in 20% increments over years 9-12 beginning at 80% in the ninth year.

The ICIP could have a significant cost to the tenant.  Check the wording on the lease’s operating clause because the cost of the improvements can be passed on to the tenant’s imputed share.

Business Improvement Districts (BIDs)

The cost of belonging to BIDs is customarily passed along to a building's tenants. BIDs are neighborhood associations to which many building owners belong. They provide services in the applicable neighborhood such as security and street cleaning.

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