B-163123, JAN. 10, 1968

B-163123: Jan 10, 1968

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LESSOR PAID REAL ESTATE TAXES WHICH WERE LESS THAN AMOUNT P.O. WOULD HAVE AS PART OF RENTAL. EXCESS AMOUNT IS PROPERLY FOR RECOVERY FROM RENTAL PAYMENT DUE FOR DECEMBER. THE ESSENTIAL FACTS IN THE MATTER MAY BE SIMPLY STATED: THE LEASE WHICH WAS EXECUTED FOR A 30-YEAR TERM COMMENCING AUGUST 6. IT IS MUTUALLY UNDERSTOOD AND AGREED THAT THE RENT HEREIN RESERVED IS BASED IN PART UPON THE PAYMENT BY THE LESSOR OF GENERAL REAL ESTATE TAXES UPON THE LAND AND THE BUILDING APPURTENANT THERETO IN THE SUM OF $37. IS AGREED THAT THERE SHALL BE A READJUSTMENT OF THE RENT HEREBY RESERVED IN EACH YEAR OF THE TERM HEREBY DEMISED ON THE FOLLOWING BASIS: "/A)IN THE EVENT THAT THE AMOUNT OF THE GENERAL REAL ESTATE TAXES LEVIED ON SAID LAND AND BUILDING FOR ANY TAX YEAR OR PART THEREOF WITHIN THE TERM HEREBY DEMISED SHALL BE LEVIED AT A RATE GREATER THAN THE SUM LAST-ABOVE MENTIONED.

B-163123, JAN. 10, 1968

LEASES - RENT - TAX ESCALATION DECISION TO POSTMASTER GENERAL CONCERNING PROPRIETY OF TAX CREDIT UNDER LEASE WITH NATIONAL CONSTRUCTION COMPANY IN LAWRENCE, MASS. WHERE UNDER 30 YEAR LEASE CONTAINING TAX ESCALATION CLAUSE, LESSOR PAID REAL ESTATE TAXES WHICH WERE LESS THAN AMOUNT P.O. DEPT. WOULD HAVE AS PART OF RENTAL, EXCESS AMOUNT IS PROPERLY FOR RECOVERY FROM RENTAL PAYMENT DUE FOR DECEMBER.

TO MR. POSTMASTER GENERAL:

BY LETTER OF DECEMBER 18, 1967, THE ASSISTANT POSTMASTER GENERAL, BUREAU OF FACILITIES, REQUESTED THAT WE REVIEW CERTAIN DOCUMENTS FURNISHED IN CONNECTION WITH APPLICATION OF THE TAX PROVISIONS CONTAINED IN A POST OFFICE DEPARTMENT LEASE DATED AUGUST 31, 1965, WITH THE NATIONAL CONSTRUCTION COMPANY. THE ESSENTIAL FACTS IN THE MATTER MAY BE SIMPLY STATED:

THE LEASE WHICH WAS EXECUTED FOR A 30-YEAR TERM COMMENCING AUGUST 6, 1965, CONTAINED THE FOLLOWING "TAX ESCALATION CLAUSE RIDER":

"13. IT IS MUTUALLY UNDERSTOOD AND AGREED THAT THE RENT HEREIN RESERVED IS BASED IN PART UPON THE PAYMENT BY THE LESSOR OF GENERAL REAL ESTATE TAXES UPON THE LAND AND THE BUILDING APPURTENANT THERETO IN THE SUM OF $37,700.00 PER ANNUM. IT, THEREFORE, IS AGREED THAT THERE SHALL BE A READJUSTMENT OF THE RENT HEREBY RESERVED IN EACH YEAR OF THE TERM HEREBY DEMISED ON THE FOLLOWING BASIS:

"/A)IN THE EVENT THAT THE AMOUNT OF THE GENERAL REAL ESTATE TAXES LEVIED ON SAID LAND AND BUILDING FOR ANY TAX YEAR OR PART THEREOF WITHIN THE TERM HEREBY DEMISED SHALL BE LEVIED AT A RATE GREATER THAN THE SUM LAST-ABOVE MENTIONED, THAN AFTER THE LESSOR HAS PAID SUCH TAXES THE GOVERNMENT SHALL PAY THE LESSOR UPON DEMAND, ACCOMPANIED BY SATISFACTORY PROOF AS TO CORRECTNESS OF THE CLAIM AS ADDITIONAL RENT DUE HEREUNDER A SUM EQUAL TO SUCH EXCESS; OR IN THE EVENT THAT THE AMOUNT OF GENERAL REAL ESTATE TAXES LEVIED ON SAID LAND AND BUILDING FOR ANY TAX YEAR OR PART THEREOF WITHIN THE TERM HEREBY DEMISED SHALL BE LEVIED AT A RATE LESS THAN THE SUM LAST- ABOVE MENTIONED, THE RENT DUE HEREUNDER SHALL BE DECREASED BY THE AMOUNT OF SUCH DECREASE, IT BEING UNDERSTOOD THAT SAID READJUSTMENT OF RENT SHALL BE MADE IN EACH YEAR OF THE TERM HEREBY DEMISED INCLUDING THE TERMS OF ANY RENEWAL OPTIONS. IN THE EVENT THAT GENERAL REAL ESTATE TAXES ARE LEVIED ON THE LAND ONLY FOR ANY TAX YEAR OR PART THEREOF WITHIN THE DEMISED TERM, THIS ENTIRE PARAGRAPH SHALL BE AND REMAIN OPERATIVE IN THE SAME MANNER AND TO THE SAME EXTENT AS THOUGH SAID TAXES WERE LEVIED ON BOTH LAND AND BUILDING. THE LESSOR SHALL PAY THE GENERAL REAL ESTATE TAXES LEVIED HEREUNDER BEFORE ANY FINE, PENALTY, INTEREST OR COST MAY BE ADDED THERETO FOR THE NON-PAYMENT THEREOF AND AT SUCH TIME AND MANNER AND AMOUNT AS TO OBTAIN ANY DISCOUNT ALLOWED BY THE TAXING AUTHORITY.

"/B) THE GENERAL REAL ESTATE TAXES REFERRED TO IN SUBPARAGRAPH (A) OF THIS TAX ESCALATION CLAUSE WHICH RELATE TO A FISCAL PERIOD OF THE TAXING AUTHORITY, A PART OF WHICH PERIOD IS PRIOR TO THE COMMENCEMENT OF THE TERM OF THIS LEASE, AND A PART OF WHICH IS WITHIN THE TERM OF THIS LEASE, SHALL BE SO ALLOCATED THAT THE PORTION OF SUCH TAXES WHICH THAT PART OF SUCH FISCAL PERIOD PRIOR TO THE COMMENCEMENT OF SAID LEASE TERM BEARS TO SUCH FISCAL PERIOD SHALL BE EXCLUDED IN COMPUTING THE AMOUNT OF SUCH TAXES ATTRIBUTABLE TO THE DEMISED TERM AND THE REMAINDER THEREOF SHALL BE CONSIDERED AS GENERAL REAL ESTATE TAXES LEVIED WITHIN THE DEMISED TERM. SIMILAR ALLOCATION SHALL BE MADE TO DETERMINE THE AMOUNT OF GENERAL REAL ESTATE TAXES WHICH SHALL BE CONSIDERED AS LEVIED DURING THE LEASE TERM OR ANY RENEWAL TERM WHERE PART OF THE FISCAL PERIOD OF THE TAXING AUTHORITY IS SUBSEQUENT TO THE EXPIRATION OF THE LEASE TERM OR ANY RENEWAL TERM AND A PART OF SUCH FISCAL PERIOD IS WITHIN THE LEASE TERM OR A RENEWAL TERM.'

THE CITY OF LAWRENCE, MASSACHUSETTS, BILLED AND LESSOR PAID REAL ESTATE TAXES COVERING CALENDAR YEAR 1965, IN THE AMOUNT OF $16,841.16. APPLYING THE LEASE TAX RIDER YOUR DEPARTMENT COLLECTED A CREDIT OF $8,457.84 FROM THE LESSOR BY WAY OF DEDUCTING THAT AMOUNT FROM RENT OTHERWISE DUE FOR DECEMBER 1965.

THE SOLE QUESTION WE HAVE BEEN ASKED TO CONSIDER IS WHETHER YOUR DEPARTMENT'S APPLICATION OF THE QUOTED TAX PROVISION WAS PROPER.

THE TAX ESCALATION CLAUSE RIDER, BY EFFECTIVELY MAKING THE LESSEE RESPONSIBLE FOR THE COST OF REAL ESTATE TAXES, IS OBVIOUSLY DESIGNED TO ELIMINATE THE RISK OF FLUCTUATING GENERAL REAL ESTATE TAXES FROM THE DETERMINATION OF THE LEASE RENTAL AMOUNTS. FROM AUGUST 6, 1965, THROUGH DECEMBER 31, 1965, THE POST OFFICE DEPARTMENT WOULD HAVE PAID THROUGH MONTHLY RENTALS -- BUT FOR THE DEDUCTION OF $8,457.84 REFERRED TO -- THE AMOUNT OF $15,286.58 TO COVER REAL ESTATE TAXES FOR THAT PERIOD. ($37,700, THE BASE LEASE AMOUNT FOR TAXES, TIMES 148/365, THE RATIO OF THE PERIOD FROM AUGUST 6 TO DECEMBER 31, 1965, TO THE FULL YEAR 1965)

UNDER CLAUSE 13 (B) QUOTED ABOVE, PRORATION OF THE AMOUNT OF TAXES PAID BY THE LESSOR FOR THE FULL YEAR 1965 TO ARRIVE AT THE AMOUNT THEREOF APPLICABLE TO THE LEASE TERM FOR THAT YEAR RESULTS IN APPLICABLE TAXES PAID IN THE AMOUNT OF $6,828.74. ($16,841.16 TIMES 148/365)

THROUGH DECEMBER 31, 1965, THE DEPARTMENT WOULD THUS HAVE PAID $15,286.58 TO COVER A REAL ESTATE TAX COST OF ONLY $6,828.74. UNDER THE TERMS OF THE LEASE PROVISIONS QUOTED IT WAS CLEARLY APPROPRIATE FOR YOUR DEPARTMENT TO RECOVER THE EXCESS AMOUNT OF $8,457.84 FROM THE RENTAL DUE FOR DECEMBER 1965 LEAVING A BALANCE FOR REAL ESTATE TAXES INCLUDED IN RENTAL PAYMENTS FOR THE PERIOD AUGUST 6, 1965, THROUGH DECEMBER 31, 1965, EQUIVALENT TO AMOUNT OF TAX PAID BY THE LESSOR FOR THAT PERIOD.

WE FIND NOTHING IN THE VARIOUS DOCUMENTS FURNISHED BY THE ASSISTANT POSTMASTER GENERAL -- INCLUDING CORRESPONDENCE FROM THE LESSOR, NATIONAL CONSTRUCTION COMPANY -- WHICH WOULD ALTER OUR CONCLUSIONS WITH RESPECT TO APPLICATION OF THE TAX PROVISIONS IN QUESTION AS SET FORTH ABOVE.