A participation clause (also called a tax participation clause or a tax stop clause) is a provision in a lease stipulating that the lessee will pay a share of or all of any increases in property taxes or assessments above an established base year and amount.
Why is this important?
As a landlord of a condo or a house in a subdivision with an HOA, let’s pretend that you’ve secured a two-year lease with a great tenant. You’ve done all of the math and your net income each month after all expenses are paid is about $500. Then, your condo association hits you with a $1500 assessment to fix the pool, or, your property taxes increase by $700 next year. Because of these taxes and assessments, your annual Net Income starts to deplete. You may find yourself thinking that you should have better padded the rent each month to compensate for these unforeseen changes, or, you may find yourself wanting to revisit this two-year contract to see if there is any possible way to raise the rent on your tenant in year two.
Had you had a participation clause in place, you wouldn’t be in this predicament. With a participation clause, both the landlord and the lessee understand from the beginning that there may be increases or unforeseen expenses throughout the year. Upon signing the lease, the lessee agrees to contribute toward these increases should they occur, therefore lessening the financial burden of the property owner.