What is a Tax Reproration Agreement?
When commercial real estate is sold, property taxes must be divided appropriately between the buyer and seller based on their respective ownership periods. This allocation is called tax proration. Most often, the initial proration of taxes at closing is based on estimates, before final tax figures are known - which can result in an inequitable tax burden for one party.
A tax reproration agreement is a contract between the buyer and seller to adjust the initial tax proration after closing when actual property tax bills are received. This allows the parties to allocate responsibility fairly based on the ultimate tax liability rather than estimates.
Key Provisions of a Tax Reproration Agreement
A tax reproration agreement will contain provisions such as:
- Time Periods: Defines the timeframe for reproration such as the prior calendar year of ownership.
- Calculation Methodology: Sets out the formula for how revised taxes will be allocated between the parties, usually based on respective ownership days.
- Documentation Requirements: Specifies what documentation must be provided to verify any revised tax bills.
- Payment Mechanics: Describes how funds will be transferred and payments made if ownership percentages change.
- Dispute Resolution: Provides a mechanism for resolving any disputes over reproration, often arbitration.
Benefits of a Tax Reproration Agreement
The key benefits of a tax reproration agreement include:
- Accuracy: Basing tax allocation on actual figures rather than estimates provides precision.
- Fairness: Allows both parties to either recoup overpayment or pay additional taxes according to exact ownership periods.
- Avoid Disputes: Contractual formula and mechanics reduce potential disagreements down the road.
- Flexibility: Parties can agree to customized terms rather than relying on a basic contract provision.
By providing for true-up and reallocation after closing, a tax re-proration agreement ensures buyers and sellers share tax liabilities equitably based on ownership periods, protecting both parties financially. As property taxes are a major expense, tax reproration agreements are recommended for most commercial real estate transactions.
The Bottom Line: A relatively small upfront investment in a well drafted tax reproration agreement that carefully considers all aspects of the specific commercial property can save substantial sums of money and time in years to come.