This nugget is the fourth in a series discussing real estate issues related to the purchase of a business that uses real estate owned by the seller or its owner. This nugget will discuss ongoing tax issues that can arise during the term of a lease.
In most states, including Maryland, real estate has specific taxes associated with it. For example, the government imposes an annual real estate tax on real property, based on its value. Leases often contain provisions requiring the tenant to reimburse the landlord for either 100% of the real estate tax each year or the increase in the real estate tax over the initial year of the lease. Although the real estate tax is due in one annual installment, leases typically require the tenant to pay the real estate tax in advance in monthly installments. In Maryland, every three years, property values are reassessed by the state, with resulting changes in the real estate tax. If you encounter a lease that requires you to pay only the increase in the real estate tax over the tax in effect in the first year, you should determine when the next assessment and tax change will be made by the state. Another tax issue arising in leases is recordation tax. In Maryland, recordation tax is assessed on the value of real estate transferred. Unbeknownst to many, recordation tax is also assessed on the value of a lease that is recorded. The lease agreement usually states that the tenant will be responsible for paying recordation tax if the lease is recorded. The recordation tax can be substantial, because it is based upon the value of the lease, which is computed by adding the rent for the entire lease term. In Maryland, only leases with terms of more than seven (7) years are subject to recordation tax.
When negotiating the lease with your seller, make sure you understand the implications of a common tax issue (the annual real estate tax) and an infrequent but costly issue (the recordation tax).
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress
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