There is a moment of almost universal dread when a landlord’s initial lease draft is first delivered to the tenant. What had been a 10-page term sheet suddenly mutates into a 200-page document. Yet, buried within the draft is necessary language that serves to protect all parties from potential hazards. While some of the verbiage is legalese, much of it contains significant material elements that could adversely impact the tenant if not fully understood.
Many leases contain a clause regarding the tenant’s Real Estate Tax Escalation. Simply stated, this addresses a tenant’s responsibility for their proportionate share of the building’s real estate tax. While there are several nuances involved in the negotiation of the provision, the leases are typically straightforward. Yet, there are periodic instances when the traditional Real Estate Tax Escalation is replaced by a different mechanism. In these cases, the provision demands extra careful treatment.
These are the buildings that have a Payment in Lieu of (Real Estate) Taxes program, often referred to as a PILOT. Programs such as PILOT were established by property owners in partnership with the City of New York in an effort to incentivize development. A PILOT program exempts landlords and developers from paying real estate taxes, and makes them pay a prescribed fee, which is generally much less than the real estate tax, with the savings typically passed on to the tenant...
Gabe Marans is a managing director with Savills Studley.This Is Your PILOT Speaking
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