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Essential Elements of a Commercial Real Estate Lease – Part 2

By Howard C. Stross
May 01, 2013

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What Does Florida Do That No Other State Does With a Commercial Real Estate Lease?

(Hint: It deals with sales tax.)

Florida is the only State in the U. S. that imposes sales tax on rent paid by a tenant to its landlord in a commercial real estate lease. And, it’s not just on the base rent. With few exceptions, anything paid or reimbursed to the landlord by tenant is rent to calculate the sales tax that must be paid.

The limited exceptions include utility charges paid by tenant as part of common area maintenance (CAM) if the landlord pays sales tax on its purchase of the utilities. Lease termination payments are exempt if the landlord and tenant record the payment as rental income and rental expense in their respective books. Florida law imposes the tax on the tenant and requires the landlord to collect and remit to the Department of Revenue (DOR).

One controversial issue associated with sales tax on rent is imposing the tax on tenant improvements (TI). If the cost of TI is construed by the DOR as part of the rent or “consideration” paid by tenant to landlord, sales tax will be imposed on the cost of the TI.

It is essential to include language in the real estate lease, if the space will be remodeled for the tenant’s use, so sales tax is lawfully not required to be paid based on the cost of the TI. This issue is an evolving area of Florida law.

Before the commercial real estate lease is signed is the time to negotiate and include language in the lease to address this issue.

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