Tax Tips for Tenant Improvements

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Tax Tips for Tenant Improvements

By Raymond Gray, as published by Greater Dallas Business Guide, January 2003

Tenant or leasehold improvements are virtually synonymous with commercial real estate. Yet property owners and tenants often do not understand how tenant improvements are assessed for property tax purposes. As a result, many commercial property owners and tenants pay excessive property taxes on tenant improvements.

There are two primary ways tenant improvements can be overassessed:

First, property owners and tenants may not know who owns the tenant improvements. As a result, there is often confusion as to who is responsible for reporting new tenant improvements or changes to tenant's improvements to the appraisal district (CAD).

For example, a tenant may report the estimated value of new tenant improvements on a building construction permit. The property owner may report the cost of the same improvements on the annual property rendition to the CAD. Because appraisal districts review building permits to learn of new construction, this can result in double-assessment or over-assessment of the same tenant improvements. Likewise, the CAD may use the value of the tenant improvements from the building permit (which may have been over-estimated) even though the amount reported on the annual property rendition sets forth the actual cost of the improvements.

Second, property owners or tenants who report tenant improvements may not classify them correctly. Recently installed tenant improvements can be classified as new construction or as regular maintenance. The former may be subject to reassessment, while the latter is not assessed at all.

Here are some tips to help avoid double assessment or over-assessment of tenant improvements:

Determine who owns the tenant improvements (property owner or tenant) and put the owner of the improvements in charge of reporting both new tenant improvements on building permits and additions or deletions to tenant improvements on the annual property rendition. The lease should indicate who owns the tenant improvements.
Find out if the tenant improvements are new construction (which may be assessable) or normal maintenance and repair (which are not). If a tenant improvement item is capitalized, this may be an indication that there is taxable new construction. Conversely, if a tenant improvement is expensed, it is probably a non-assessable maintenance or repair item.
Tenant improvements may have little or no value. In many instances, tenant improvements are "occupant-specific." Property owners need to assess the marketplace to determine if their current tenant improvements really "add value," or if they will be demolished and replaced by a real or hypothetical new tenant.

Commercial property owners, tenants and managers should keep the above in mind as they assess tenant-improvement issues. A basic understanding of how tenant improvements are assessed can go a long way toward reducing the property tax assessment on such improvements for years to come.

Raymond Gray is a partner at the Austin, Texas-based law firm of Popp Gray & Hutcheson, the Texas member of the American Property Tax Counsel.