Commercial leasing activity in New York City is increasing, with Q4 2024 being widely reported as the most active in office leasing transactions since the pandemic. Given the activity in the commercial leasing market, this client alert will address the basics of the Commercial Rent Tax (CRT) which can be a hidden cost to tenants.
The CRT applies to any individual or entity renting space south of 96th Street for any trade, business, profession, or commercial activity with an annual gross rent of $250,000 or more. There are exemptions afforded to those who rent the space for theatrical productions, not-for-profit organizations, businesses located within the “World Trade Center Area” and pop-up shops that only rent the space for 14 days or less. Businesses with an annual rent below $250,000 are not subject to CRT.
While the tax rate is 6% of the base rent, all tenants subject to the CRT receive a 35% base rent reduction, effectively reducing the tax rate to 3.9%. Tenants are eligible for a tax credit on a sliding scale if the annual base rent before the 35% rent reduction is between $250,000 and $300,000. For calculation purposes, base rent includes utilities and services, such as cleaning, heating, and electricity costs; but charges like insurance, other taxes, and common area maintenance are not included for calculation of the tax.
In June 2018, small-business tax credits were added to the CRT. As a result, tenants with a total income (the income reported on their federal tax return for the previous year) of $5 million or less and an annual base rent before rent reduction of less than $500,000 are exempt from CRT. Tenants with a total income between $5 million and $10 million and an annual base rent before rent reduction between $500,000 and $550,000 may receive a sliding-scale credit against the tax.
Every tenant must file an annual return by June 20 unless the annual gross rent paid for any taxable premises is less than $200,000 and the rent received from any subtenant is less than $200,000. Tenants subject to tax for any period must file quarterly returns due on September 20, December 20, and March 20 of each year.
As a final note, any business that ceases operations in the middle of the year must file its CRT within 20 days of the business’s closing date.
The foregoing is not intended to be comprehensive nor constitute legal advice. If you would like to discuss your specific circumstances or would like more information, feel free to contact us at (212) 625-8505.