Episode 3 – Beware of RE Taxes in California, Cost Drivers, Changes Clause

In this episode we cover two GSA Shell Cost drivers (cyclical paint and carpet) and a bit more nuance that owners may not have previously considered.

We are get into some VERY interesting language in the Real Estate Tax Clause for assets in California.  If you are looking to by a GSA-occupied asset in CA, PLEASE watch this video and read the pertinent clause.

Finally, we briefly touch on the power of the GSA “Changes” clause.  This has been an issue I have touched on a few times on the GOV CRE Podcast but wanted to hit it one more time here as well.

Highlights of the Topics Discussed:

  1. If you haven’t already, please consider subscribing to the GOV CRE podcast. This is another platform where Arco provides a deep dive into valuable information to people within the Government Leasing space that might come in handy!
  2. Please sign up for our mailing list, so you don’t miss an episode of both Arco Answers and the GOV CRE Podcast. We aren’t here to spam you; we are here to just reach out when new applicable content is ready for you to view.
  3. Cost Drivers – Cyclical Replacement Paint & Carpet
    • GSA leases generate different expenses than other tenants and if you have never owned a building with a GSA lease, you might not be aware of them.
    • One specific cost I see most building owners be unaware of is Section 6, the cyclical replacement paint & carpet. Then even if you are aware of the cost laid out within this Section, most don’t know that you are also responsible for the disassembly, movement, and reassembly of all agency furniture. PLUS, you have to do all those things in accordance with the warranty of that furniture, so the warranty is still valid.
  4. Real Estate Taxes in California – GSA Leasing Clause
    • In California, if you bought a building in the 80s the real estate taxes are either frozen in place or significantly reduced compared to the current real estate tax rate. However, where this becomes interesting is when the property is sold, those taxes are then reassessed for the new owner. Generally, when the building and the real estate taxes are reassessed, you will see a MASSIVE increase in real estate taxes as they are pushed back up to the current real estate tax rate.
    • Specially in my clients lease there is a Tax Adjustment Clause Cal Standard 2014 that I feel is pretty common in building GSA Leases in California. If you are looking to purchase a building in California you need to pay close attention to Section A, item 4 which says the following: The definition the term current year taxes means real estate taxes paid for each tax year following the base year. Excluding increases in real estate taxes attributable to any improvements or change in ownership which occurs after the base year.
    • Basically, what this means the GSA states they will pay for the real estate tax increases you might have, BUT they specifically won’t pay the real estate tax increase if it is because you bought a building in California. This is important for you as a buyer because now you are exposed and responsible for this increase.
    • I am not a real estate lawyer or a lawyer in general, but I strongly recommend that if you are looking to purchase a building in California that you discuss this clause with your lawyer and GSA to make sure you are covered with this.
  5. Changes Clause
    • I have recently discussed this with Diana Curren on the GOV CRE podcast so if you would like to learn more about this topic please check those podcast episodes out!
    • https://govcrepodcast.com/common-gsa-legal-issues-part-1/
    • https://govcrepodcast.com/common-legal-issues-part-2-post-award/
    • In my opinion, the Changes Clause is a bit under appreciated and I wanted to explain why. The Changes Clause allows the government to change the contract or asset in whatever way it sees fit. The clause also mentions that you can negotiate how the expenses of the change will be distributed, but the Changes Clause does say they can make any changes they want.
    • This clause is very powerful, and I really recommend you understand this clause when you have GSA tenant.