tenant improvements - who pays the property tax??

[california]

I'm about to sign a lease on a space for a bar. We need to do $34,000 worth of improvements to bring it up to ADA code. We are paying for the improvements out of pocket, but because we don't own the building, the landlord will own all of the improvements (new restrooms, new plumbing, etc). I'm trying to plan our projected profit-loss but I've never done improvements on someone else's property before. It seems unfair that we would pay the property tax on them, since we don't own them and the landlord is reaping the benefit of having an updated space, but I've read that sometimes this is the case. WHY? Can anyone tell me who is actually on the hook for TI taxes? I'm in California.

[vangogh]

This is far from my area of expertise, but are you sure you'd have to pay property taxes? I would think only the only of the property would have to pay taxes. Out of curiosity was the space specifically leased as space for a bar? If so wouldn't the owner be responsible for bringing it up to code? I would think the owner couldn't lease the space for a specific purpose without being up to code. Again though this is hardly my area of expertise.

[Freelancier]

The property owner -- the one whose name is on the tax bill -- is the only person truly liable for a property tax bill.

However, there may also be a "business property tax" based on the assessed value of the improvements, fixtures, etc. that you use to run your business. Your accountant will work with you to determine the proper value for these items and to make sure you depreciate it properly. Most municipalities exempt a certain amount of the value of your business property and then assess a tax on the rest. Most of us never pass the exempted amount, but if you own a bar, the value of everything you put into the building may very well exceed the amount that's exempt, so you might owe a tax each year on that.

An example: our rental home -- like all homes -- is assessed a property tax by the county. Additionally, because we're using the home as a business, everything we purchased to put inside the home is considered "business property" and is assessed a tax if the total assessed (depreciated) value is over $15,000. Two different taxes.

[vangogh]

However, there may also be a "business property tax" based on the assessed value of the improvements, fixtures, etc. that you use to run your business.

That's interesting. I hadn't considered a business property tax, but it makes sense. I take it the two never overlap though. You shouldn't have to pay taxes twice on the same items. How does one determine when the item in question is part of the property and when it's exclusively a part of the business instead?

[Freelancier]

How does one determine when the item in question is part of the property and when it's exclusively a part of the business instead?

The land/property is appraised by the county appraiser's office. The business property is self-reported and usually matches what you put down on your IRS forms to take depreciation of that property (to reduce your tax liability). There are guidelines that the county will give you to explain what gets included with the business property tax. An example for LA County is here: Los Angeles County Property Tax Website - (http://lacountypropertytax.com/portal/contactus/ppa.aspx)

[california]

I fully expect to pay business property taxes on what I own inside of the building (trade fixtures, etc) but the things that the landlord owns (improvements to the building such as new plumbing, ADA restrooms, electrical work, installing a necessary fire exit), it seems like the landlord should pay the taxes on THOSE, since I don't own them and if the landlord decided to kick me out when my lease term ended I'd obviously have to leave them there. This is where it gets murky to me and seems unfair and arbitrary (me paying for improvements to the landlord's property, which he immediately owns those improvements, and then me being taxed on HIS property! Or am I interpreting the forms wrong? Should I leave tenant improvement construction blank or "N/A" if I don't own the improvement, and just list fixtures that belong to me?)

[Freelancier]

When it gets down to the specifics on what you should put down on a legal document going to a tax authority, relying on advice from a free forum is really stupid. We are not accountants familiar with your local laws.

Spend a few hundred... go get a small business accountant in your area to help you out with the filings.

[jamesray50]

@vangogh - it may be called Tangible Property tax, or Tangible Business tax, or something along those line.

[Business Attorney]

The lease should cover who is obligated to bear the taxes. In cases where there is a triple net lease, the tenant pays all the taxes as "additional rent". In many office and retail leases, increases in property taxes over the base year are also passed through to the tenant as "additional rent." In both cases, increases in real estate taxes as a result of improvements would end up being the responsibility of the tenant. But it depends on the lease. In the absence of any lease provision, real estate taxes (including taxes on improvements that become part of the building) are the responsibility of the owner of the property.

[vangogh]

it may be called Tangible Property tax, or Tangible Business tax, or something along those line.

Thanks Jo Ellen.


The lease should cover who is obligated to bear the taxes

I can see it being written into the lease. Good to know that unless specifically there the owner of the property pays the taxes. That just makes more sense to me. I can see how an increase in taxes from the improvements fall to the tenant, though it seems unfair if the tenant is paying those taxes they don't get any benefit from the increase in property value. I suppose the business itself benefits from being located in a nice place, but it seems like there should be something back for improving the property itself.