Ad Valorem Tax Clause

Ad Valorem Tax Clause

An Ad Valorem Tax Clause is a provision commonly found in contracts, particularly in real estate leases and loan agreements, that stipulates the responsibility for paying property taxes based on the assessed value of the property. "Ad valorem" is a Latin term meaning "according to value," and in this context, it refers to taxes that are proportionate to the value of the property.

The Ad Valorem Tax Clause typically outlines that the property owner or the tenant must pay any applicable property taxes assessed by local governments. This can include real estate taxes, assessments for local improvements, and any other taxes levied on the property. The clause serves to protect the interests of the party that is financing or leasing the property by ensuring that tax liabilities are accounted for and paid in a timely manner.

For example, in a commercial lease, an Ad Valorem Tax Clause may specify that the tenant is responsible for paying a share of the property taxes based on the square footage they occupy. If the property is assessed at $1 million and the tax rate is 1%, the annual property tax would be $10,000. If the tenant occupies 20% of the property, they would be responsible for paying $2,000 in property taxes as stipulated by the clause.

In summary, the Ad Valorem Tax Clause is an essential element in property agreements that helps clarify tax responsibilities and ensures that all parties are aware of their financial obligations related to property taxes.