Avoid Over-Assessment of Tenant Improvements
Before you plan on making any improvements to your space, you need to understand how the improvements are assessed as it relates to property taxes. Unfortunately, most tenants do not understand the method and end up paying more than they should. The following are two common ways that tenants are over-assessed:
1. Tenant does not classify improvements correctly. When you make improvements to your space, they can be classified as “new construction” or as “regular maintenance.” New construction is subject to re-assessment, whereas regular maintenance is not. Also, the classification of tenant improvements as a “structure” or a “fixture” determines the amount of the assessment on those improvements and the amount of property tax that will be due.
2. Tenant does not know who owns the tenant improvements. Because tenants are not always sure who actually owns the tenant improvements, there is often confusion about who should report the improvements to the taxing agency. As a result, both the tenant and owner end up reporting the improvements and the improvements are assessed twice.
Here are some tips to avoid being over-assessed on your tenant improvements:
1. When negotiating the lease, determine who owns the tenant improvements and add the findings to your lease.
2. Determine whether the tenant improvements will be labeled as new construction or normal maintenance and repair. As a general rule, if a tenant improvement is capitalized, this may be an indication that it’s taxable new construction. Any addition, alteration, renovation, or rehabilitation that essentially makes the property “like new,” is considered new construction.
3. Know whether the improvement is a “structure” or a “fixture.” Flooring, storefronts, and light fixtures are examples of structure items. Fixtures include plumbing, electrical wiring, countertops, etc.