A virtually unknown strategy called Cost Segregation can help you to not only secure loans, but build your business with commercial and multi-unit residential investors. A Cost Segregation Study is a time-proven and powerful technique for increasing cash flow immediately upon acquisition of a commercial or multi-unit residential investment property. Traditionally, these studies are completed after the acquisition of a property. However, when commercial mortgage professionals use the analysis during the loan application process, it positions the borrower as more loan-worthy and makes the loan application (banking guidelines) stronger. Best of all, the analysis is free.
What is a Cost Segregation Study and a Cost Segregation Analysis Report?
A Cost Segregation Study identifies and reclassifies personal property (HVAC, plumbing, fixtures, landscape, etc.) from what is real property (bricks and sticks). Typically all of these assets are depreciated over 39 years (commercial) and 27.5 years (residential investment). A study changes the method of depreciation following IRS guidelines to greatly accelerate the depreciation of personal property assets to as little as five years. Oftentimes, up to 60 percent of building costs can be depreciated for these shorter periods—typically saving property owners hundreds of thousands of dollars.
Cost Segregation Studies are performed by a team of engineers, certified public accountants (CPAs) and construction specialists. The cost of a study tends to be 10 percent of the increased cash flow that the study produces. Benefits of a Cost Segregation Study are substantial, immediate and enduring. The Cost Segregation Study is only required once. Its cost is not recurring, but the benefits are recurring during the term of property ownership. A Cost Segregation Analysis Report conservatively identifies and estimates the savings that can be achieved for specific properties.
What type of borrowers and properties can benefit?
Any commercial or residential multiunit building owner (or those in process of purchasing a building) whose property is valued more than $750,000 or who is constructing a building. Any owners of commercial or residential multiunit buildings who acquired that property post-1986 and have not had a Cost Segregation Study completed yet.
Commercial mortgage professionals that use a Cost Segregation Analysis as part of their loan application process show a commitment to their financial institution by improving the position and security of a loan for the lender and to the welfare of the borrower by enhancing their cash flow immediately upon acquisition of the property. This is a win-win situation for all parties involved.
How does Cost Segregation benefit the borrower beyond positioning to secure a loan?
Commercial real estate investors are always looking for ways to improve their project's cash flow. Cash flow is often the most critical factor investors analyze in the decision mix to purchase a facility. Cost Segregation Studies accelerate depreciation deductions and defer federal and state income taxes. This helps the prospective property owner increase his cash flow.
Once a property is purchased, a study may also materially reduce local property taxes by separating real and personal property. Most importantly, a Cost Segregation Study puts cash into the hands of commercial and residential real estate properties now! What real estate investor wouldn’t want you to show them how to obtain the financing they need and a way to significantly increase cash flow once they acquire a property? These studies are one-time property specific events that are completed in 30 days, saving multiunit owners tens of thousands of dollars. They pay for themselves tenfold. Consider these examples:
◄ For a $1.28 million multifamily investment property: A Cost Segregation Study was performed, netting a tax savings of approximately $85,000 that the owner could not have otherwise obtained without a study.
◄ For a $4.8 million multifamily investment property: A Cost Segregation Study reduced federal and state income tax burden by $231,000 that this owner could not have otherwise obtained.
◄ For a $7.2 million multifamily investment property: A study produced additional depreciation of over $900,000, generating almost $400,000 in tax savings.
Scott Marchand is with Albany, N.Y.-based Cost Segregation Partners Inc. He may be reached at (518) 608-4283.
For information on obtaining a free Cost Segregation Analysis Report, e-mail Scott Marchand at
[email protected].
