A sale resets the tax bill. The leases decide who pays it, and the price has to be solved, because the tax depends on the price.
Only under the leases that allow it. A triple net lease or a base-year stop passes the increase through; a gross lease, a vacant unit or a clause excluding increases caused by a change of ownership leaves it with the landlord. On an illustrative building where half the space falls in the second group, a sale at $70,400,000 lifts the tax bill by $380,000 and the buyer absorbs $190,000 of it. Priced correctly, the building is worth $67,636,364, 3.9 per cent less than a price that assumes every lease passes the tax through.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In many jurisdictions a sale resets the assessed value to the price paid, so the buyer's tax bill is set by the buyer's own price. The seller's operating statement carries the old assessment, and the seller's NOI is the one the asking price capitalises. Whether that higher bill comes out of the buyer's NOI is not a question about the tax at all. It is a question about the leases, and it has to be answered tenant by tenant. All figures are illustrative; tax rules differ by jurisdiction and this is not tax advice.
| Tenant | Lease treatment of the tax increase | Share of area | Passes through? |
|---|---|---|---|
| A | Triple net, full pass-through | 30% | Yes |
| B | Triple net, increases from a change of ownership excluded | 25% | No |
| C | Office, base-year stop set before the sale | 20% | Yes |
| D | Gross lease, fixed rent | 15% | No |
| Vacant | No tenant to bill | 10% | No |
The building has 100,000 sq ft. The seller's NOI is $4,400,000 with a current tax bill of $500,000. The tax rate on a reassessed value is 1.25 per cent and the market cap rate is 6.25 per cent.
New tax = price × tax rate; increase = new tax − old tax
Landlord's cost = increase × share of area whose leases do not pass it through
Price that holds the cap rate: P = (NOI + s × old tax) ÷ (cap rate + s × tax rate), where s is the absorbed share
Step 1, the naive price and its tax. $4,400,000 ÷ 6.25% is $70,400,000. Reassessed at 1.25 per cent, the tax is $880,000, up $380,000, or 76.0 per cent: $3.80 per sq ft across the building.
Step 2, read every lease. Tenant A pays its 30 per cent, $114,000. Tenant C's base year was set on the old bill, so the increase sits above its stop and it pays $76,000. Tenant B's lease excludes increases caused by a sale, so its $95,000 stays with the landlord, as do $57,000 for the gross lease and $38,000 for the vacant space.
Step 3, the NOI the buyer actually gets. The landlord absorbs 50 per cent of the increase, $190,000, and NOI falls to $4,210,000. At $70,400,000 that is a going-in yield of 5.98 per cent, not 6.25.
Step 4, solve the price. A lower price means a lower assessment, so the cost is circular. With s = 50 per cent, P = ($4,400,000 + 50% × $500,000) ÷ (6.25% + 50% × 1.25%) = $4,650,000 ÷ 6.875% = $67,636,364. Check: the tax is $845,455, the increase $345,455, the landlord's half $172,727, NOI $4,227,273, and $4,227,273 ÷ 6.25% returns the price.
| Tenant | Area, sq ft | Tenant pays | Landlord absorbs |
|---|---|---|---|
| A, triple net | 30,000 | $114,000 | 0 |
| B, change-of-ownership exclusion | 25,000 | 0 | $95,000 |
| C, base-year stop | 20,000 | $76,000 | 0 |
| D, gross lease | 15,000 | 0 | $57,000 |
| Vacant | 10,000 | 0 | $38,000 |
| Total | 100,000 | $190,000 | $190,000 |
A buyer paying $70,400,000 overpays by $2,763,636 against the price that delivers the 6.25 per cent it thinks it is buying. The shortcut of capitalising the lost $190,000 at the cap rate gives $3,040,000, which overstates the discount because it ignores that a lower price lowers the tax.
| Share absorbed | Price | Discount to $70,400,000 | Discount, % | NOI lost |
|---|---|---|---|---|
| 0% | $70,400,000 | 0 | 0.0% | 0 |
| 25% | $68,952,381 | $1,447,619 | 2.1% | $90,476 |
| 50% | $67,636,364 | $2,763,636 | 3.9% | $172,727 |
| 75% | $66,434,783 | $3,965,217 | 5.6% | $247,826 |
| 100% | $65,333,333 | $5,066,667 | 7.2% | $316,667 |
Even a fully triple net building is exposed through its vacancy, and a multi-let office on gross leases can lose 7.2 per cent of value to its own purchase.
Reading "triple net" on the rent roll summary and stopping. The change-of-ownership exclusion is a negotiated carve-out, usually buried in the tax clause, and it turns a net lease into a gross one for exactly the increase a buyer creates. The second mistake is time. A base-year tenant passes the increase through today, but any lease signed after the sale will set its base year on the new, higher bill, so the recovery the buyer enjoys from tenant C ends at C's expiry. Underwrite the increase lease by lease and expiry by expiry, not once. For how the base year itself is measured, see how a base year expense stop works, and for the other adjustments to the seller's year, T-12 NOI against underwritten NOI.
The clause-by-clause value bridge, with each lease's effect on NOI and value, is in the free workbook for this book.
Usually, unless the lease excludes increases caused by a change of ownership, a common tenant protection. On the worked building, the 30 per cent triple net tenant without that clause pays $114,000 of a $380,000 increase, while the 25 per cent tenant with it pays nothing and the landlord bears $95,000.
Solve it, because the new tax depends on the price. With s the share the landlord absorbs, price = (NOI + s x old tax) / (cap rate + s x tax rate). On the worked case that is $4,650,000 / 6.875% = $67,636,364. Capitalising the lost NOI at the naive price gives $3,040,000 of discount, which overstates it.
Not if the base year was set before the sale: the increase sits above the stop and passes through. In the worked case the 20 per cent office tenant pays $76,000 of it. Leases signed after the sale set their base year on the new, higher bill, so that recovery disappears at expiry.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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