The gap between gross and net yield in commercial real estate is almost entirely due to taxes and mandatory payments. This is a general overview and not a substitute for professional advice based on your specific circumstances.
VAT on Commercial Leases
Unlike residential rentals, leasing a commercial property is a transaction subject to VAT. In practice, this means that the property owner operates as a business, issues invoices and files reports, while a tenant that is a business can usually offset the VAT. Therefore, every price in the commercial market should be explicitly stated as excluding VAT; otherwise, the discrepancy can amount to tens of thousands of shekels per year.
Municipal Tax
Municipal tax rates per sqm for commercial properties are significantly higher than for residential properties and vary between local authorities and classifications, such as office, retail, industrial or storage use. Two points are critical: the classification must match the actual use, and during vacancy periods, the municipal tax is borne by the owner, making it part of the cost of vacancy.
Purchase Tax
When purchasing a property that is not a residential apartment, purchase tax is charged at a uniform rate on the property's entire value rather than in brackets, as is the case with apartments. This is a significant amount that should be included in the equity calculation from day one, together with legal fees, appraisal fees and brokerage fees.
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Taxation of Rental Income
Income from commercial property rentals is not eligible for the exemption schemes available for residential rentals. It is taxed as income, so the choice between holding the property as an individual, through a partnership or through a company directly affects the net yield. This is exactly where it is worth paying an accountant before the transaction rather than afterward.
Capital Gains Tax on Sale
Upon sale, capital gains tax will apply to the gain, taking into account depreciation claimed over the years. Claiming depreciation reduces current tax but increases the taxable gain in the future, so this is a planning decision rather than a technical one.
What This Looks Like in Practice
A property with a gross yield of 7% may generate a net yield of 4.5% to 5.5% after municipal tax on vacant areas, insurance, maintenance, management and taxation. This still represents a positive gap compared with residential property, but it is much lower than what appears in listings.
Want a net yield calculation for a specific property? Contact the Flamingo team for a structured review.
Further Reading
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