July/August 2011: Commercial News Round Up

Office space expanding (but not for workers), energy tax deductions, and EB-5 program funding.

July 1, 2011

Office Space Is Expanding, Not for Workers

The cost of office space may be falling, but that doesn’t mean that employees are getting bigger workstations. Although the total space per worker rose to 295 square feet per worker in 2010, according to a recent study by the Houston-based International Facility Management Association, the average worker has to settle for a personal work area of between 75 and 95 square feet. Managers also get squeezed, averaging only 120 square feet. Much of the added space per worker is taken up by conference areas and storage. Worker layoffs have also led to extra space. According to the report, there’s been a 5 percent increase in unoccupied work spaces between 2007 and 2010.

This drop in space per worker is part of a long-term trend, says the IFMA report, "Space and Project Management Benchmarks." The average worker occupied between 90 and 115 square feet in 1994; middle managers got 151 square feet. This trend creates an opportunity for commercial leasing professionals who are willing to help corporations get more productivity from their space, suggests Jeffery Weil, CCIM, SIOR, senior vice president of Colliers International in Walnut Creek, Calif.

Weil suggests teaming up with a creative office design specialist to show your existing tenants how they can incorporate more conference and collaborative seating areas into their existing space. "Smart landlords can keep tenants by underwriting part of the cost of buildout of these collaborative areas, as well as areas with seating and Wi-Fi for impromptu meetings, in return for lease extensions," he says. Keeping tenants in place may also be easier because only 30 percent of the respondents to the IFMA survey anticipated needing more space in the near future.

Another Chance for Energy Tax Deductions

If your clients made energy improvements to a commercial building in the last few years but didn’t take the federal tax deductions allowed under Section 179D of the Energy Policy Act of 2005, this may be their lucky year. A new IRS Revenue Procedure (2011-14) makes it possible for those owners to take deductions for qualifying energy improvements made in earlier tax years without the need to file an amended tax return.

Under this new procedure, it’s possible to take deductions for improvements placed into service as far back as 2006. "These changes make it much easier and less time-consuming for commercial property owners to take the deductions they’re entitled to," says John Cummings, national director of business development with Engineered Tax Services Inc. in West Palm Beach, Fla.

Under the new ruling, commercial property owners can take the deduction for energy improvements by adjusting their current year’s income and expense using the change of accounting rules in Rev. Proc. 2011-14. The taxpayer files a Form 3115, which calculates the adjustment, along with the evidence of energy efficiency required to claim a 179D deduction.

Best Bet for EB-5 Funding: Regional Centers

With many traditional sources of capital unavailable, commercial real estate developers are looking to a long-established investment program for foreign nationals as a potential source of funds.

The EB-5 program enables foreigners who invest $1 million ($500,000 in a targeted employment area) to get a green card for themselves and their immediate families. The investment must create 10 full-time jobs for U.S. workers, either directly through a business owned by the foreign national or indirectly through a pooled investment project at a U.S. Citizenship and Immigration Service certified regional center.

The second option, which now accounts for approximately 95 percent of all EB-5 program petitions, according to the government agency, offers the most viable capital sources for commercial real estate, says H. Ronald Klasko, managing partner of Philadelphia’s Klasko. Rulon, Stock & Seltzer LLP.

The advantage to the regional center idea is that jobs don’t have to tie directly to a building. Instead, econometric analysis can determine how many jobs are indirectly produced. Indirect jobs can include everything from food service workers at nearby restaurants to IT providers for tenants.

There are three ways that commercial real estate developers can access capital through the funds invested toward a regional center, says Klasko. Each has advantages and disadvantages.

  • Starting a new regional center. This gives a developer more control but requires a lengthy certification process, as well as the need to approve any building project undertaken by the center. And with approximately 100 regional centers ­already operating in the United States, there’s stiff competition for foreign investment dollars.
  • Developing a project through an existing center. This option eliminates the need to get a new center approved. The drawback is that the developer cedes some of the control and profit to the center.
  • Purchasing an existing regional center. This option combines the benefits of existing certification with total control of the development decision. The downside here is that an existing center may have negative goodwill or even liabilities from previously failed projects.