At the beginning of 2023, various new regulations affecting the commercial real estate sector came into force. What can tenants and landlords of commercial properties expect, and what do they need to know and bear in mind?
Gas price cap for small businesses and industrial companies
(Cologne, January 18, 2023) The price cap on gas and district heating will benefit not only residential users, but also small and medium-sized enterprises (SMEs) that have rented office space, for example, provided that their gas consumption is less than 1.5 million kilowatt hours (kWh) per year. This rule also applies to care, research, and educational institutions. The gas price cap stipulates that prices will be capped from March 2023. In addition, relief amounts for January and February will be credited retroactively. The cap will remain in place until the end of April 2024. The government is capping the gas price at 12 cents per kWh for 80 percent of consumption and at 9.5 cents for district heating. For the remaining 20 percent, the utility price must be paid if this consumption volume cannot be saved. "The utilities will pass on the lower amounts to their contractual partners as part of their monthly bills. Commercial tenants or landlords therefore do not need to do anything," explains Uwe Mortag, managing director of Larbig & Mortag Immobilien in Cologne.
The gas price cap also supports industrial companies with very high energy requirements. The price per kWh is capped at 7 cents net for them and applies to 70 percent of the previous year's consumption.
Electricity price cap also for commercial tenants
The adequate electricity price cap applies to consumers and SMEs with an annual consumption of up to 30,000 kWh; the price is capped at 40 cents per kWh gross. This includes taxes, levies, surcharges, and grid fees. This price also applies to 80 percent of the forecast consumption. For industrial customers, the electricity price cap is 13 cents plus taxes, levies, and surcharges for 70 percent of their forecast consumption.
SMEs that have exceptionally high energy consumption and for which these measures are not sufficient are to receive additional support funds through a hardship provision. However, these funds from the Economic Stabilization Fund must be applied for separately. The federal government intends to work out the details in the coming weeks.
Submission of property tax returns by the end of January 2023
The deadline for submitting new property tax data is the end of January 2023. It was originally supposed to expire at the end of October 2022, but has been postponed once to the end of January 2023. For commercial properties, owners must provide information on the gross floor area (GFA) of their property in addition to various other building data. The devil is in the details, especially when it comes to ancillary areas. For example, external staircases, unusable roof space, and technical rooms are not included in the calculation. This can be a challenge for owners, especially in the case of older commercial properties for which there are no plans, or only outdated or incomplete plans. You should hire an expert to calculate the floor space in accordance with the regulations, as real estate expert Mortag advises.
CO2 prices: Special considerations for landlords and tenants of commercial properties
At the beginning of the year, the Carbon Dioxide Cost Allocation Act (CO2KostAufG) came into force. Landlords and tenants of residential buildings and mixed-use buildings (e.g., shops on the ground floor with apartments above) must now share the costs. Previously, tenants were solely responsible for these costs. The allocation is based on a ten-step model that is consumption-oriented. If the energy balance is poor (52 kgCO2 emissions per square meter per year or more), the landlord must bear up to 95 percent ofthe CO2 tax. If the energy balance is very good (less than 12 kgCO2), the costs are borne entirely by the tenant. There are eight intermediate levels between these two extremes.
A transitional solution applies to non-residential buildings such as offices. Until 2025, landlords and tenants will share theCO2 tax. If a different distribution is desired, this can be agreed upon within the framework of the contractual autonomy of commercial leases. The law provides that a tiered model will also come into force for non-residential buildings from 2025, replacing this 50/50 cost allocation for commercial properties.
Rising operating costs for commercial real estate
For the majority of commercial tenants, operating costs will rise as a result of price increases. There are several reasons for this. Almost all building insurance companies will increase their premiums significantly or have already done so. One reason is their expenditure in connection with the flood disaster in the summer of 2021, where over 90,000 buildings were damaged or destroyed. High inflation is also having an impact on the insurance business: Insurance companies have to pay higher costs for repairs, not least due to increased expenditure on energy, building materials, and the increase in the minimum wage in July and October 2022.
Other types of costs that are usually passed on to commercial tenants are also rising, such as expenses for building cleaning, security personnel, facility management, etc.
Tax law: Inheriting real estate may become more expensive
With the start of 2023, the basis for assessing inheritance and gifts of real estate has changed. For almost all types of property, a higher property value is now applied than before. Because, on the other hand, the allowances have not increased, this means a higher tax burden for the majority of heirs and donees.
In addition to single-family homes, the new regulations also affect rented properties, mixed-use properties, and commercial properties such as office buildings. The value of purely commercial properties is determined using the income approach based on achievable rental income. This is based on the revised property interest rate, which has been reduced from 6.5 percent to 6 percent for commercial properties. This means that the value of real estate will often increase, as the deduction amount determined using the property interest rate will be lower with this percentage adjustment. A lower deduction amount is equivalent to a higher real estate value.
In many cases, this will increase the tax burden for the beneficiaries and recipients of gifts. In case of doubt, an expert opinion can be obtained to attempt to prove a lower property value.
Income from photovoltaic systems on commercial properties is tax-free
In order to promote the use of renewable energies, income generated by photovoltaic systems on commercial and residential properties has been exempt from income tax (zero tax rate) since the beginning of 2023. For commercial properties, the system must have a maximum output of 15 kilowatts per commercial unit.
Commercial rents with value guarantee clauses are likely to fall
After many commercial tenants with index-linked leases had to pay higher rents in 2022 due to high inflation, many experts expect the inflation rate to fall in the current year. In that case, rents may have to be reduced.
Because a noticeable decline in the inflation rate has been rare in recent decadesand index-based increases have only ever gone in one direction, landlords and tenants of commercial properties with index-linked leases should be particularly vigilant and adjust rents accordingly if the inflation rate falls. All rental agreements with value guarantee clauses must also include provisions for the event that the base rent is reduced if the underlying index, such as the consumer price index, falls sharply.
