Tax Escalation
Provisions governing how real estate tax increases are passed through to tenants, including base year treatment, assessment challenges, and tax abatement sharing.
Model Lease Language Variations
“Tenant shall pay Tenant's Proportionate Share of all Real Estate Taxes, including any increases resulting from reassessment, without reduction for any tax abatement, exemption, or incentive obtained by Landlord. Landlord shall have no obligation to challenge any tax assessment.”
Full pass-through with no obligation to contest. Tax abatements retained by landlord. Tenant bears full risk of assessment increases.
“Tenant shall pay Tenant's Proportionate Share of Real Estate Taxes in excess of Base Year Real Estate Taxes. If Landlord obtains a tax abatement or reduction through protest, the benefit shall be shared proportionately with Tenant (net of Landlord's costs of obtaining the reduction). Landlord shall use commercially reasonable efforts to protest assessments that exceed market value.”
Base year with abatement sharing. Landlord required to make commercially reasonable efforts to contest above-market assessments. Net savings shared after protest costs.
“Tenant shall pay Tenant's Proportionate Share of Real Estate Taxes in excess of Base Year Taxes, provided that (i) Base Year Taxes shall be normalized to reflect a fully assessed, fully completed Building; (ii) any tax abatement or incentive shall reduce Tenant's share dollar-for-dollar; and (iii) if Landlord fails to timely protest a tax assessment that exceeds market value by more than ten percent (10%), Tenant may protest at Landlord's cost.”
Normalized base year for new buildings. Full abatement pass-through. Tenant has self-help right to protest if landlord fails to act.
Calculation Methodology
1. Determine current year Real Estate Taxes (all ad valorem taxes, special assessments, and charges). 2. Subtract Base Year Real Estate Taxes (if applicable). 3. If taxes were protested and reduced, adjust current year taxes to reflect the reduction, net of protest costs. 4. If tax abatement applies, reduce taxes by abatement amount per lease terms. 5. Multiply the excess (or total, for NNN) by Tenant's Proportionate Share.
Common Drafting Errors
Not normalizing base year taxes for a newly assessed building — first-year taxes may be based on unimproved land value, creating a misleadingly low base
Failing to address tax abatements and incentives — landlord obtains an abatement but passes through the pre-abatement amount
Not specifying whether special assessments (improvement districts, BIDs) are included in 'Real Estate Taxes'
Omitting treatment of supplemental tax bills that arrive after the reconciliation year closes
Relevant Case Law
Landlord failed to pass through tax abatement benefits to tenants. Tenants sued and court ordered retroactive sharing of ICAP abatement benefits for 10 years, totaling $12.8M in refunds across 47 tenants.
Billing System Implications (Yardi / MRI)
In Yardi, real estate taxes are typically tracked in a separate recovery pool with their own base year. Common error: not updating the tax amount when a protest succeeds retroactively — the refund must be allocated back to tenants. In MRI, tax escalation is modeled in the Tax Pass-Through module — verify that supplemental and retroactive adjustments flow through to tenant billings and that any abatement credits are properly applied.
CapVeri Analysis
Real estate taxes are typically the largest single operating expense, often 30-50% of total CAM. Tax escalation errors tend to be large-dollar items. The most common error is failing to share tax protest savings with tenants or not normalizing base year taxes for new construction. CapVeri flags tax pass-throughs that exclude known abatements.
Related Resources
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