Landlords Get Some Clarification on Tax Exemptions
By: George Abel
Many landlords lease space to Indiana governmental agencies, including offices for the Family and Social Services Administration, Indiana Department of Veteran’s Affairs facilities, Bureau of Motor Vehicles branches, etc. This is becoming ever more prevalent as agencies seek to maintain the flexibility to close and/or consolidate offices as tax revenues (and their budgets) shrink; leasing space instead of owning real property helps governmental agencies maintain such flexibility.
However, leasing to such agencies creates its own set of challenges, even for landlords who may believe they are receiving the benefit of leasing to a good credit tenant thatwill always pay the rent on time. In this regard, landlords should be aware that leases with such agencies almost always contain a provision that, even though the lease may be for a specified number of years, the agency has the right to terminate the lease on relatively short notice if appropriations are not made for continued operation of the location. In addition, rent is paid by such agencies in arrears, rather than being paid in advance each month (such advance monthly payments are standard in other commercial leases), and the landlord’s remedies may be limited to preclude the landlord from accelerating rent in the event of a default by the tenant. Such provisions are contained in leases with governmental agencies because such agencies cannot pay for goods or services until the goods or services are actually provided.
One common provision in many commercial leases has been the source of some confusion in the past when leasing to governmental agencies. Many commercial leases require tenants to pay their share of real property taxes, either the amount of the actual taxes attributable to the leased property or the amount of any increase in such taxes above a certain amount; even where tenants are not expressly required to pay such real property taxes, the estimated amount of such taxes is included in the rental rate.
Under Indiana Code Sec. 6-1.1-10-2, property owned by the state, a state agency, or the BMV is exempt from real property taxes. Landlords have also been successful on some occasions in receiving an exemption from real property taxes for property leased to state agencies (and even for local governmental agencies), although the authority for such exemptions has been somewhat unclear. The granting of such exemptions was sometimes based on the rationale that requiring governmental agencies to pay real property taxes which may be a source of funding for that agency was, in effect, the agency paying itself in a roundabout way, while placing the burden on the county to assess the property and collect the taxes.
Commencing January 1, 2014, property leased to a state agency is exempt from real property taxes under certain specific circumstances. Indiana Code Sec. 6-1.1-10-2 has been revised to provide that real property leased to a state agency is exempt from real property taxes if the agency is obligated under the terms of the lease to pay real property taxes. If a state agency leases less than all of a parcel of real property, the exemption will be a partial exemption. It is important for landlords to specifically provide in any lease with such agency that the agency will be obligated to pay real property taxes.