In arrears

A payment method in which a financial obligation is settled after the service, work, or billing period has been completed. Commonly used for expenses such as property taxes, rent, or employee wages, this term implies that payment is due after the benefit or service has been received.

Putting ‘In Arrears’ in Context

Clearwater Capital, a real estate investment manager, recently acquired the High Desert Office Center, a 120,000-square-foot suburban office property in Boise, Idaho. The property was purchased as part of a core investment strategy, given its stable tenant base and long-term leases with creditworthy tenants.

In Idaho, property taxes are assessed on an annual basis but are paid in arrears. This means that taxes for a given year are not due until the following year. For example, property taxes assessed for 2023 will be billed and paid in 2024.

Tax Payment at Closing

When Clearwater Capital acquired the property in June 2024, the seller had not yet paid the property taxes for the 2023 calendar year. As part of the closing process, Clearwater and the seller negotiated a proration of these unpaid taxes.

Here’s how the calculation worked:

• 2023 Total Property Taxes: $120,000
• Proration Period: January 1, 2023, to June 30, 2024 (18 months)
• Proration at Closing: The seller was responsible for taxes incurred during their ownership period (January 1, 2023 – June 30, 2024), while Clearwater assumed responsibility from the acquisition date forward.

To calculate the proration:

• Taxes for 2023: $120,000
• Seller’s 2023 Responsibility: $120,000 (entire year)
• Buyer’s 2024 Responsibility (first half of 2024): $60,000 (half-year estimate)

At closing, Clearwater received a credit of $120,000 from the seller to cover 2023 taxes and agreed to pay the tax bill when it became due in early 2024. For the first half of 2024, Clearwater accrued $60,000 in tax liabilities but paid nothing until the bill arrived in arrears in 2025.

Operational Considerations

Understanding the concept of paying taxes in arrears was critical for Clearwater’s underwriting. They accounted for the lag between tax accrual and payment to avoid cash flow surprises. This is especially important in Idaho, where arrears are standard practice, and not all states follow the same system.

This hypothetical case highlights the importance of recognizing local tax payment structures when investing in real estate.