September 2011: Commercial News Round Up

Green still adds value, and Medicare tax takes a bite.

September 1, 2011

Green Still Adds Value

Even in a volatile market, green office buildings post significantly better returns than their less-environmentally friendly competitors. Those are among the findings from a recent study by Nils Kok and Pier Eichholtz of Maastricht University in the Netherlands and John M. Quigley of the University of California at Berkeley. Using data from more than 25,000 commercial buildings on the listing site of the CoStar Group, the authors determined that buildings holding either the Energy Star rating from the U.S. Environmental Protection Agency or the LEED certification from the U.S. Green Building Council had rents that averaged 3 percent higher than comparable office buildings in the same market. In 2007, effective rents—the rent multiplied by the occupancy rate—for green buildings averaged 7.5 percent higher; by 2009, the rent premium had dropped to 5.1 percent. The authors note that some of this variation could occur because green buildings are often newer and larger than competitors.

The study, “The Economics of Green Building,” also determined that between 2004 and 2009, green buildings listed on CoStar sold for about 13 percent more than comparable properties. “This strongly suggests that property investors value the lower risk premium—perhaps the insurance against future increases in energy prices—inherent in certified commercial office buildings,” conclude the authors.


 

Medicare Tax Takes a Bite

Real estate investors got a lot of good news with the passage of the 2010 Tax Relief Act, including a continuation of the 15 percent capital gains rate and the extension of the leasehold depreciation provision. However, there was also some bad news, in the form of the Unearned Income Medicare Contribution Tax. This little-publicized provision would add a tax of 3.8 percent on all unearned income—including interest, dividends, net rents, and payouts to the passive investors in real estate investments like limited partnerships and limited liability companies. The tax applies to individuals with incomes over $200,000 and married couples with incomes over $250,000 and goes into effect January 2013.

Fortunately, the tax bite may not be as bad for real estate because the tax is levied on net income, say tax consultants Amada Han and Matt MacFarland of Keystone CPA in Orange, Calif. Because real estate investors can often offset rental income with depreciation, taxable net income may be lower than for some other types of investments. Han and MacFarland also suggest that investor clients can avoid the tax by using funds from a self-directed retirement account to purchase real estate. And they point out that this tax applies only to passive income, so general partners in real estate investments aren’t affected.

Finally, the pair notes that the Medicare tax has an “evil twin” that taxes active income. Called the Hospital Insurance Tax, it levies an additional tax of 0.9 percent on all earned income for individuals making more than $200,000 or $250,000 for married couples filing jointly. More information is available at REALTOR.org; search for small business health coverage.

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