Highlights
- Landlords of General Services Administration (GSA) property in Zone 2 should be on the lookout to ensure that administrators have correctly calculated the entitlement to a tax adjustment.
- Upon review, it appears that there are systemic errors in the Zone 2 processes that have resulted in substantial underpayments to lessors, often totaling millions of dollars over the term of the lease.
- Zone 2 – which includes GSA Regions 4, 6 and 7 – encompasses Alabama, Arkansas, Florida, Georgia, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas.
- Landlords of GSA property in the state of Virginia should be aware that the government continues to improperly disallow the inclusion of certain ad valorem real estate taxes in calculating tax adjustments such as the Fairfax County and Arlington County transportation, stormwater service and infestation prevention taxes.
Landlords of General Services Administration (GSA) property in Zone 2 should be on the lookout to ensure that the administrators have correctly calculated the entitlement to a tax adjustment. Upon review, it appears that there are systemic errors in the Zone 2 processes that have resulted in substantial underpayments to lessors, often totaling millions of dollars over the term of the lease.
Zone 2
Zone 2 – which includes GSA Regions 4, 6 and 7 – encompasses Alabama, Arkansas, Florida, Georgia, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas.
Based upon review of tax adjustments in Zone 2, Holland & Knight has observed repeated instances where GSA calculated the amount owed to a lessor by using a methodology that differed from the calculation instructions in the applicable lease. The standard GSA Template Form L100 requires the U.S. government to calculate real estate tax adjustments as follows:
The amount of the Tax Adjustment shall be determined by multiplying the Government's Percentage of Occupancy by the difference between the current year Unadjusted Real Estate Taxes and the Real Estate Tax Base, less the portion of such difference not paid due to a Tax Abatement (except if a Tax Abatement comes into effect after the date of award of the Lease).
In other words, the government is required to use the following methodology:
(Government's Percentage of Occupancy)
x (Unadjusted Real Estate Taxes – Real Estate Tax Base)
= Tax Adjustment
Despite the terms of the lease, the government deviated from the instructions and instead incorrectly multiplied the percentage of occupancy by the unadjusted real estate taxes, and then subtracted the real estate tax base from this amount.
The below represents a side-by-side comparison of the calculation required by the lease and the government's calculation:
|
Correct Calculation |
Government Calculation |
|
(GPO) |
(GPO x URET) |
|
X (URET – RETB) |
– (RETB) |
|
= Tax Adjustment |
= Tax Adjustment |
Deviating from the specific order of operations set forth in GSA Template Form L100 to calculate the appropriate tax adjustment amount has resulted in a significant underpayment in the amount of funds to lessors. For many lessors, this mistake will lead to underpayments in excess of $1 million over the term of their leases.
Therefore, it is of the utmost importance that landlords in Zone 2 be on the lookout to ensure that GSA is correctly calculating tax adjustments. The Contract Disputes Act mandates that landlords submit claims for entitlement within six years of claim accrual, so it is vital that landlords reach out as early as possible to preserve the maximum potential for recovery.
The government will often acknowledge this mistake and reimburse the lessor for its entitlement, but only if the lessor takes the time to file a formal claim and request a Contracting Officer's Final Decision.
Virginia Real Estate Taxes
Landlords of GSA property in Virginia should be aware that the government is routinely refusing to take a number of taxes into consideration when calculating tax adjustment entitlements. Local taxing jurisdictions in Virginia – typically counties – rely upon a state statutory authority to levy ad valorem real estate taxes to fund general services such as stormwater treatment and improvements in transportation infrastructure. These taxes can be substantial over the term of a lease, resulting in millions of dollars of additional tax liability. The government is required to take these taxes into consideration when calculating annual tax adjustments but has been consistently refusing to do so, even in the wake of a decision that explicitly mandates consideration of these taxes.
In 2022, the Civilian Board of Contract Appeals (CBCA) in CESC Mall, LLC v. GSA addressed a case in which the lessor sought a tax adjustment that took these additional taxes into account. The CBCA held that "[t]axes to fund government services that directly impact the general welfare of the county's citizens" are compensable real estate taxes for the purpose of calculating tax adjustment entitlements. The CBCA went on to conclude that certain Arlington County taxes that are assessed against the values of the property – ad valorem taxes – that fund general services are reimbursable taxes under the Tax Adjustment provision that is standard in GSA leases:
[The leases] define real estate taxes as taxes that are "[1] assessed against the building and/or land upon which the building is located, [2] without regard to benefit to the property, [3] for the purpose of funding general Government services." [citing cases]. Per this three-prong definition, the Transportation Tax and Sanitary District Tax are real estate taxes. Both taxes are assessed against the building and/or land and are based on the assessed value of the property (an ad valorem tax). The taxes are not assessed against specific property owners to fund services or improvements specific to those properties but are assessed against all non-exempt property and used to fund general government services which benefit the County as a whole.
****
We conclude that GSA is responsible to pay both the Transportation and Sanitary District Taxes as real estate taxes under all six leases.
Despite this clear admonition that ad valorem taxes must be included the in the calculation of tax adjustments, numerous instances have been uncovered in the past year of GSA contracting officers refusing to acknowledge Fairfax County and Arlington County real estate taxes assessed against properties for stormwater treatment, transportation and infrastructure improvements, leaf collection and infestation prevention, among others, when calculating tax adjustment entitlements. These mistakes often result in substantial underpayments that can total in the hundreds of thousands of dollars, if not higher.
Again, the Contract Disputes Act mandates that claims for underpayments be submitted within six years of accrual, so landlords should promptly review their tax adjustment payment history and file a claim and request for a contracting officer's final decision as soon as possible, as they will only be entitled to a six-year lookback. And, as with the Zone 2 issue highlighted above, the government may eventually elect not to dispute the entitlement to these taxes, but lessors can typically only recover their entitlement through the submission of a formal claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.