TenantSee Weekly: Underwriting Tax Increases (Before You Lease)
Over the past decade, may office buildings in San Francisco have been sold, some multiple times. For tenants, these sales translate to material increases in the cost of the lease. Why? Primarily because of taxes.
California has Prop 13, which limits annual increases in real estate taxes to 2%, excepting at the time of a sale or financing of the asset, at which point the tax base is adjusted to market, often causing a big spike in taxes. It’s in these latter scenarios, a sale or financing, when tenants are exposed to potentially large cost increases. This is true because the tax attributable to a sale or financing is passed on to the tenant.
For every $100/sf in increased asset value, the rent increases by $1.50/sf. So if a company leases space in a building that has a tax base value of $400/sf and the building subsequently sells for $800/sf, there is a $6.00/sf/year increase in the lease cost. For a 10,000 sf lease, the added annual cost is $60,000.
