Property Tax Pass-Throughs in CAM Reconciliation: What Landlords Must Document

Q: Are property taxes subject to CAM caps?

In most leases, property taxes are classified as non-controllable expenses and are therefore excluded from CAM caps. The lease must be reviewed carefully — some leases define controllable and non-controllable expenses differently. When in doubt, assume property taxes are non-controllable unless the lease explicitly subjects them to a cap.

Q: How do I prorate property taxes when the tax year and lease year don't align?

You must prorate two partial-year tax bills. For example, if your lease year runs July 1 through June 30 and the tax year is calendar year, you prorate 50% of the current calendar year's bill (July–December) and 50% of the prior year's bill (January–June). Use actual assessed values for each year, not estimates.

Q: If a property tax appeal reduces the assessment, do I have to credit tenants?

Yes, in virtually all well-drafted NNN leases. If an appeal results in a reduced assessment — whether in the current year or as a refund for a prior year — the credit must be passed back to tenants on a pro-rata basis. Some leases specify that the landlord may deduct reasonable appeal costs before distributing the refund.

Q: Are special assessments recoverable as part of property taxes?

Special assessments (for street improvements, utility districts, public improvement districts) are generally not included in 'real estate taxes' unless the lease explicitly includes them in the definition. Most well-drafted leases separately define special assessments and either include them with explicit language or exclude them. Review the lease definition carefully before billing special assessments.

Property taxes are typically the largest single line item in a commercial CAM reconciliation — often exceeding maintenance and insurance combined. They are also among the most audited. This guide covers the documentation requirements, the proration problem, tax appeals, and special assessments.

By Angel Campa, Founder, CapVeri · Updated April 2026

Quick Answer

Property tax pass-throughs are typically non-controllable CAM expenses — not subject to CAM caps in most leases — and must be documented with actual tax bills for the reconciliation period. Proration by lease year is critical and frequently done incorrectly. When fiscal tax years and lease years don't align, you must prorate two partial-year bills to avoid over- or under-billing.

How Property Taxes Work in NNN Leases

In a triple-net (NNN) lease, tenants pay their pro-rata share of real estate taxes, property insurance, and maintenance. For property taxes, the typical pass-through mechanism is:

1. The landlord pays the tax bill directly to the county assessor.
2. The landlord includes actual taxes paid (or accrued per the lease) in the annual CAM reconciliation.
3. Each tenant pays their pro-rata share — calculated as the tenant's leased SF divided by the total rentable SF of the building or applicable tax parcel.

In some full-NNN structures, particularly for single-tenant properties and ground leases, the tenant may pay property taxes directly to the taxing authority. In that case, the landlord's role is limited to ensuring the tenant provides proof of payment and timely filing.

In modified gross or gross-plus leases, property taxes above a base year amount (or above an expense stop) are passed through. The documentation requirements are the same — actual tax bills — but the calculation involves comparing current-year taxes against the base year amount.

The Proration Problem: Fiscal Years vs. Lease Years

The most common property tax reconciliation error is billing the wrong year's taxes. Fiscal tax years rarely align with lease years, and the mismatch requires careful proration.

Worked Example — Texas Calendar-Year Assessment, July-June Lease Year

Texas property taxes are assessed January 1 for the calendar year and typically paid in the following December. For a lease year running July 1, 2025 through June 30, 2026:

Period	Tax Bill Used	Months
Jul 1 – Dec 31, 2025	2025 calendar-year tax bill	6 of 12 months = 50%
Jan 1 – Jun 30, 2026	2026 calendar-year tax bill	6 of 12 months = 50%

2025 annual tax bill: $180,000 × 50% = $90,000 allocated to this lease year

2026 annual tax bill: $196,000 × 50% = $98,000 allocated to this lease year

Total taxes for the lease year: $188,000

Note: Do not simply use the $180,000 or $196,000 full-year bill — this would over- or under-charge by the difference in assessed values.

Different states have different assessment and payment schedules. California taxes are due in two installments (November and February for a July–June fiscal year). Florida uses a calendar year with discounts for early payment. Always confirm the actual payment dates and proration methodology for the jurisdiction.

Assessment vs. Actual Payment: What to Use for Reconciliation

Most leases specify whether the landlord bills based on actual taxes paid, accrued taxes, or the assessed amount for the period. These differ when:

A tax appeal is pending (actual payment may differ from assessed amount)
Taxes are paid in installments across calendar years
A supplemental assessment is issued mid-year (common in California after a sale)

The safest approach, and the one most consistent with standard lease language, is to use the actual taxes paid (or accrued on a cash basis per the lease) during the reconciliation period — prorated as described above. If a tax appeal is pending, some landlords bill the assessed amount and later credit the reduction when received.

Tax Appeals: Crediting Tenants for Reductions

When a property tax appeal succeeds, the reduction or refund must be passed back to tenants in most NNN lease structures. The mechanics depend on the lease:

Current-year reduction: Bill the reduced amount in the reconciliation. No separate credit needed unless estimates were already sent.
Refund for a prior year: Allocate the refund to the lease year(s) to which it relates and issue credits to tenants who were in occupancy during those periods — including tenants who may have since vacated.
Appeal costs: Most leases allow the landlord to deduct reasonable appeal costs (legal fees, appraisal fees) from the refund before distributing credits. The lease language controls — some leases cap deductible appeal costs at a percentage of the refund.

Texas landlords face additional complexity under the HCAD (Harris County Appraisal District) process, where property tax protests must be filed annually by May 15. The two-year lookback period on refunds means credits may be owed to tenants for prior lease years.

Special Assessments: Usually Not Included

Special assessments — charges for public improvements like street widening, utility districts, public improvement districts (PIDs), or municipal utility districts (MUDs) — are not automatically included in "real estate taxes" or "property taxes" under most leases.

The lease definition of "real estate taxes" controls. Many leases specifically list what is included: "all real property taxes, personal property taxes, and general and special assessments levied against the Property." If the word "assessments" appears in this definition, special assessments may be recoverable. If the definition is limited to "real property taxes and governmental impositions," special assessments may be excluded.

PIDs and MUDs are common in Texas suburban commercial developments and can be significant line items ($5–$15/SF annually in some districts). Verify the lease definition before billing these as property taxes.

What Can Go Wrong

Billing the wrong tax year without proration

Using a full calendar-year tax bill for a non-calendar-year lease period overbills tenants when the current year's assessment is higher — or underbills when it's lower. Always prorate two partial-year bills when the fiscal tax year and lease year don't align.

Failing to credit tenants when a tax appeal succeeds

When a property tax assessment is reduced — whether through a formal appeal or an informal correction — the reduction must be credited back to tenants who paid based on the original (higher) amount. Retaining the refund creates overbilling liability.

Including special assessments without explicit lease authority

PID and MUD assessments can be substantial, and including them as "real estate taxes" when the lease definition doesn't cover them creates a tenant audit exposure. Review the lease definition of real estate taxes before adding any special assessment line items.

Frequently Asked Questions

Are property taxes subject to CAM caps?

In most leases, property taxes are non-controllable expenses and are excluded from CAM caps. Some leases define controllable and non-controllable separately — verify the lease before applying any cap to the tax line item.

How do I prorate property taxes when the tax year and lease year don't align?

Prorate two partial-year tax bills based on the months each tax year overlaps with the lease year. For a July–June lease year in a calendar-tax-year state, you use 50% of the prior calendar-year bill and 50% of the current calendar-year bill.

If a property tax appeal reduces the assessment, do I have to credit tenants?

Yes. In virtually all NNN leases, tax refunds from successful appeals must be passed back to tenants pro-rata. The landlord may typically deduct reasonable appeal costs before distributing credits, but only if the lease permits it.

Are special assessments recoverable as part of property taxes?

Only if the lease definition of "real estate taxes" explicitly includes special assessments. Review the lease definition carefully — PIDs, MUDs, and similar district assessments can be significant in some markets and are often contested when billed without clear lease authority.

Related Resources

Recoverable vs. Non-Recoverable CAM Expenses

Complete guide to which operating expenses can be passed through to tenants.

CAM Reconciliation Checklist

Step-by-step checklist for preparing and reviewing CAM reconciliation statements.

CAM Cap Enforcement

How to apply lease caps correctly, including controllable vs. non-controllable separation.

CAM Reconciliation Software

Automate property tax proration and reconciliation with CapVeri.

Eliminate Property Tax Proration Errors

CapVeri automatically prorates property taxes across fiscal year boundaries and flags missing tax bill documentation before your reconciliation goes out.

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