When paying the property tax bill, it usually makes sense for the tenant to be responsible for appealing a property tax assessment. But that’s not always the best move. Leaving an appeal to your tenant could result in unintended legal and financial consequences. 

Pros and Cons

When you aren’t paying the property taxes, it’s understandable why you’d rather avoid spending time and money on an appeal. You could have other reasons to want to stay above the fray, too. For example, the party appealing an assessment generally must obtain a property appraisal to support the argument that it’s worth less than assessed. You might not want a new appraisal, particularly if you’re refinancing or plan to use the property as collateral.
 
Often, though, it can be wise to step in on an appeal. For starters, you’ll probably enhance tenant relations. Tenants generally appreciate a landlord who takes steps to save them money on their tax bills. Plus, lower taxes make your property more appealing and position you to increase rent or require higher rates from new tenants.
 
It’s also important to remember that the party filing the appeal controls the process — and you don’t want the wrong tenant in control. For example, if you own a shopping center, you probably don’t want a smaller nonanchor tenant pursuing an appeal. (Typically, only one appeal of an assessment can be made.) A tenant with a small pro rata tax liability could potentially play a big role in determining the future tax liability of much larger tenants with larger tax issues.
 
In addition, at some point you’re likely to have some vacancies. This means you’ll be responsible for paying a share of the property taxes. Because your bottom line stands to be affected as well, it’s probably best to have some control over the process. 

Lease Matters

Addressing this issue in your lease can save headaches later. Even if local law specifically allows tax-paying tenants to appeal an assessment if a landlord doesn’t, your lease generally can restrict your tenants’ right to file an appeal. Conversely, your lease could explicitly authorize the tenant to appeal assessments and control the appeal process. In the latter circumstances, you might want to expressly retain some control regarding strategy and settlement decisions.
 
The lease terms alone aren’t necessarily decisive, though. When a tenant’s right to file an appeal in the landlord’s name is challenged, a court will likely consider several additional factors, including: 

• The lease duration, the burden of the tax surcharge on the tenant, and the possibility that the issue can be resolved quickly by renegotiation;
• The tenant’s relationship to the property (lead or minor tenant);
• Whether the tenant will adequately represent the landlord’s interests and those of other tenants; and

The tenant’s ability to pursue an effective appeal. Finally, the courts will consider the landlord’s overall relationship with the taxing authority and whether a landlord with multiple properties may eventually want to appeal its other property tax assessments.
 
You may never have a tenant that wants to appeal a property tax assessment, but, if you do, the best defense usually is a good offense. Negotiate the issue with tenants in advance and clearly state your position in the lease from the beginning.
 
Contact Dan Sexton at dsexton@cohencpa.com for more information.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.