The CRA Report: Q2 2024 – “The Tax Man Cometh”
By Robert G. (Gary) Bender on Apr 15, 2024
For this report, I offer a briefing on what is occurring by way of Property Tax and Operating Expense increases for the U.S. Industrial/Warehouse market.
The news that you will likely be receiving soon, if you have not received it already, is notice from your friendly Landlord that the cost of operating (Operating Expenses) the Building your company is occupying has increased. As a result, on top of the significant increases you have experienced for Base Rental charges over the last few years, the second wave has come to shore bringing with it large increases in Operating Expenses principally due to Property Taxes.
With inflation over the last three (3) years, the cost of building a new warehouse building has increased
greatly. Together with this increase in cost has come what appears to be even larger increases in Base Rent for
these buildings. With increased costs of building, higher rents justifying loftier building valuations and sales
“comparables” to support the increased valuations, the Tax Man is back and is in a strong position to collect. In
fact, many Landlords are not even contesting the new assessed valuations and associated taxes in fear of
triggering even higher costs.
As a result of increased Property Taxes, Tenants will be facing both increased monthly escrow payments for
Operating Expenses as well as a one-time payment for the pass-through of Operating Expenses over what the
Tenant paid in for (escrowed) Operating Expenses in 2023. With Property Taxes typically accounting for the cost of between 60% and 80% of all Operating Expenses and generally averaging for Class A Industrial Building in the Central portion of U.S. between $ 1.50/sf to $ 2.00/sf annually and between $ 2.50/sf to $ 3.00/sf annually for the East and West coasts of the U.S., these increases and passthroughs will be between $ .25/sf and $ .50/sf annually and perhaps more if the Tenant’s lease is nearing the end of a property tax abatement program.
Contesting and properly budgeting for increases in Property Taxes and Operating Expenses has become a
challenge. CRA has the experience and resources to assist our clients in reducing Property Taxes where practical and to help our clients avoid costly unbudgeted increases in Property Taxes through analysis, planning and appropriation.
