Businesses owners seeing the light at the end of the “Great Recession” tunnel most likely owe their ability to cut expenses as a significant factor in riding out the storm. The hesitancy to hire and spend is clearly documented with our faltering economic indicators; but there may be one untapped source that can provide additional help, the inflated real estate taxes commercial property owners pass onto their tenants.

The benefits of Proposition 13 and its maximum increase of 2% are well known, but in today’s environment an even more valuable proposition is its sister, Proposition 8. Passed with Prop 13 in 1978, Prop 8 provided property owners with the ability to temporarily reduce their assessed value, and with commercial properties these reductions are truly significant. Since most businesses do not own their buildings, landlords throughout the county should be making the annual trip to the assessor’s office to ensure a proper assessed value for taxes. This is especially true for property owners that acquired their assets during the peak of the roaring 2000’s.

While it may appear the benefits of such an appeal will end up in the landlord’s pocket, it is actually the tenant that should be seeing the greatest benefit. It is for this reason that many property owners elect not to pursue this benefit and why businesses need to be proactive and encourage their landlord take action. The amount of savings to San Diego businesses is staggering. In 2009 the County granted commercial properties a reduction in assessed value of approximately $4 billion. Assuming a 1.1% tax rate, this puts the savings at approximately $44 million for San Diego businesses in one year alone.

How the savings reaches the business depends on the type of lease. Most leases are either triple net or full service with an expense escalation clause. The math on a triple net lease is straight forward since the tenant pays for its share of actual expenses, including taxes, based on their percentage of the building. So for a tenant occupying 20% of a building, a $100,000 reduction in property taxes means they just saved $20,000. Tenants in full service leases also benefit. In a full service lease the landlord typically charges the tenant for increases in operating expenses, including taxes, above a “base year”. So depending on how far above your “base year” operating expenses are running, the savings will still be substantial, if not the same as for the tenant under a triple net lease.

So how can you ensure you are getting your piece of the pie? Each year, usually by mid-year, landlords provide their tenants with a reconciliation or “true-up” of operating expenses for the prior year and projections for the upcoming year. Take time this year to study the figures. If you didn’t receive a refund for 2010, your landlord probably chose to pass on the Prop 8 process or isn’t sharing in the savings you are likely entitled to.

While there is much to gain from Prop 8 reductions, there are also some significant and costly traps that businesses need to address. Going back to the “base year” concept previously described, if your company entered into a lease or renewed its lease in the past three years, there is a good chance your basis for determining future operating expense charges is artificially low if your landlord pursued the Prop 8 reduction during your “base year”. It is therefore critical to ensure your “base year” did not include a temporary property tax reduction. This is a reasonable protection that a good commercial real estate broker should negotiate when representing tenants in their transactions. While tenants under a triple net lease get the benefit of the reduction in their initial year, one would hope the landlord was still upfront and let the tenant know that taxes were temporarily low during lease negotiations so the eventual return to Prop 13 value doesn’t come as a surprise.

The ability to take advantage of these Prop 8 reductions will eventually diminish with a rebounding real estate market, but for now the market is ripe for some serious savings. The 2011-12 tax appeal season started July 2 and runs through November 30. To improve your bottom line, contact your landlord now and make sure they don’t miss this opportunity.

Hughes Marino’s Lease Audit Service division was developed as a resource for clients to challenge landlords with their operating expense and CAM charge pass-throughs to tenants. Hughes Marino LAS helps San Diego businesses determine if a landlord is complying with both the provisions of the lease and industry standards, and when necessary, challenge San Diego landlords.