Commercial real estate

Commercial Real Estate - Commercial real estate refers to property that is used primarily or exclusively for commercial purposes, such as office buildings, retail space, manufacturing facilities, logistics centers, or medical offices.

What exactly does commercial real estate mean?

Commercial real estate differs fundamentally from residential real estate in legal, economic, and tax terms. Compared to residential lease law, commercial lease law offers significantly greater contractual freedom. Rent control, protection against termination, and rent caps do not apply here. Leases are typically concluded for fixed terms of five to ten years or longer, often with indexed rent adjustment clauses linked to the consumer price index. This contractual structure offers investors a predictable income base but carries the risk of being unable to find comparable new tenants in the event of a tenant change or vacancy.

The valuation of commercial real estate is generally performed using the income approach. In this method, the sustainable rental income is capitalized and added to the land value. In addition to location and structural condition, a key factor in determining value is the so-called versatility-that is, whether the property is suitable for other commercial users without significant renovation costs. An office building with flexible floor plans has high versatility, while a specialized property such as a car dealership or gas station has low versatility.

Commercial real estate is typically divided into several categories: office properties (ranging from individual offices to office towers), retail properties (retail stores, shopping centers, retail parks), logistics and industrial properties (warehouses, distribution centers, production facilities), and special-purpose properties (hotels, restaurants, medical centers, nursing homes). Each category has its own valuation criteria, expected returns, and risk profiles.

A special tax aspect of commercial real estate is the VAT option under Section 9 of the German Value Added Tax Act (UStG). Landlords may opt for VAT liability provided that the tenant uses the property almost exclusively for transactions subject to VAT. This makes the input tax on construction and renovation costs deductible, which can significantly reduce investment costs. However, this option must be carefully evaluated, as switching back to tax-exempt status can result in an input tax adjustment.

Returns, Financing, and Risks

Commercial real estate generally offers higher gross rental yields than residential real estate. Depending on location, property quality, and type of use, initial yields range from 4 to 7 percent for office properties, 4 to 6 percent for logistics properties, and 5 to 8 percent for retail properties. However, these higher yields come with greater risk, particularly due to vacancy risk, cyclical demand, and higher maintenance costs.

The financing of commercial real estate presents banks with different requirements than residential real estate financing. Lending institutions primarily assess the tenant’s creditworthiness, the term of the lease, and the property’s suitability for third-party use. As a rule, banks require a higher equity share of 25 to 40 percent and offer shorter fixed-rate periods. Institutional investors often finance commercial real estate through real estate funds or bonds.

Practical Tip for Investors in Nuremberg and Franconia

The Nuremberg metropolitan region is one of the most important economic hubs in southern Germany, featuring a diversified industrial structure encompassing automotive technology, medical technology, the energy sector, and logistics. The Nuremberg office market is concentrated in the city center, the Plärrer district, and office locations along Fürther Straße and in northern Nuremberg (Nordostpark, Marienberg). Logistics space is particularly in demand at the Nuremberg Port Logistics Center (GVZ) and along the A3, A6, and A73 highway corridors. Retail space can be found in the downtown shopping streets as well as in retail parks on the outskirts of the city.

Our network of experts recommends paying particular attention to tenant creditworthiness, the remaining term of existing leases, and transportation access when considering commercial real estate in the region. A professional appraisal using the income approach and a review of the zoning plan regarding permitted uses are essential steps before any purchase decision.

Frequently Asked Questions

How does commercial lease law differ from residential lease law?

Commercial lease law offers significantly greater contractual freedom. There is no statutory protection against termination, no rent control, and no cap on rent increases. Lease agreements are freely negotiated, typically with fixed terms, renewal options, and index-linked rent adjustments. Formal requirements, such as the written form for contracts exceeding one year, are also particularly important for commercial real estate, as a lack of formality can lead to ordinary termination.

What returns are realistic for commercial real estate?

The achievable returns depend heavily on the type of use, location, and tenant creditworthiness. In the Nuremberg metropolitan region, office returns currently range from about 4.5 to 6.5 percent, logistics properties from 4 to 5.5 percent, and smaller retail spaces from 5 to 7 percent. Higher returns are generally accompanied by higher risks, particularly in cases of short lease terms, limited suitability for third-party use, or buildings in need of renovation.

What does the sales tax option mean for commercial leasing?

Under Section 9 of the German Sales Tax Act (UStG), landlords of commercial real estate may waive the sales tax exemption and structure the lease to be subject to sales tax. The prerequisite is that the tenant uses at least 95 percent of the space for transactions subject to sales tax. The advantage is that the landlord receives a refund from the tax office for the input tax on construction, renovation, and management costs. However, if the tenant changes to one who is not entitled to deduct input tax, an input tax adjustment may be required.

What special considerations apply when a limited liability company (GmbH) purchases commercial real estate?

Institutional and private investors often purchase commercial real estate through a GmbH or GmbH & Co. KG to optimize liability and tax burden. From a tax perspective, the GmbH benefits from the partial income method and the ability to retain profits without immediately paying full tax on them. A key special feature: When a company makes the purchase, real estate transfer tax is levied on the purchase price-the so-called share deal model (purchasing company shares instead of the property directly) can save on real estate transfer tax under certain conditions, but has been subject to stricter legal regulations since 2021. We recommend seeking tax advice before purchasing commercial real estate through a company, as the correct structuring has a significant impact on acquisition and holding costs.

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