Furthermore, as long as the REIT distributes the majority of its taxable income to its shareholders, the company does not need to pay corporate income taxes. Therefore, shareholders have a much higher after-tax return. This growth, combined with aggressive acquisition behavior, has continued to drive up property sales prices, first in Class A buildings and followed by Class B properties. Meanwhile, sales prices in selected office markets are surpassing replacement costs, causing more REIT construction to begin. Of course, REITs are not the only players.
Pension funds are also extremely active buyers.
In general, REITs have the competitive advantage due to their low cost of funds, but pension funds have been more successful in acquiring properties with lower near term cash flow but with significant upside potential, since they can afford to hold properties longer. And following last year's strong performance, market values for both office and industrial properties are increasing. In commercial office markets, property values increased an average of 70 percent, with the values in some suburbs doubling. According to the 1998 BOMA Experience Exchange Report , property taxes constitute approximately 31 percent of total expenses for metropolitan, class A buildings in the U.S. Real estate taxes, as the largest single expense, should therefore command a great deal of attention as we establish strategies for the remainder of this year and beyond. A properly managed appeal process can capitalize on idiosyncrasies, which have been built into each jurisdiction and result in significant savings of taxes, time and expenses.