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By Alex Zylberglait, October 30, 2009 8:25 am

We have been talking about Cost Segregation for quite sometime now in my print and e-newsletters – the Real Estate Investment Digest, as well as in one of  my past conference calls.

For those of you who missed it, Cost Segregation is a strategic tax savings’ tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled real estate to increase their cash flow by accelerating depreciation deductions and deferring their federal and state income taxes.

The goal of a Cost Segregation study is to identify, segregate, and reclassify project-related costs that are currently classified as real property to shorter depreciable tax lives for federal and state income tax purposes.  Recent IRS rulings and procedures have allowed taxpayers to change accounting methods to take advantage of these previously understated depreciation expenses–back to 1987.  This is done without amending tax returns.

Cost Segregation started in the 1960’s and has been called component depreciation studies, investment tax credit studies and various other names.  No matter what name you use–Cost Segregation can save you tax dollars and increase your cash flow.  There are over 300 court cases and I.R.S. rulings supporting the benefits of Cost Segregation.  The following is an example.

Hospital Corporation of America v Comm. 109 TC 21 (1997) ruled that certain assets associated with a specific piece of equipment not linked to the normal operation and maintenance of the building qualify for five-year depreciable tax lives instead of 39-year depreciable tax lives.

Essentially, the tax courts and IRS have agreed that the taxpayer can use a Cost Segregation study to segregate the cost of his assets.

Standby as I elaborate on what Cost Segregation can does.  At the end of this series, I would recommend companies specializing in this field.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 29, 2009 1:05 pm

Foundation

If all of the supporting subterranean materials were completely uniform beneath a structure, with no significant variations in grain size, density, moisture content or other mechanical properties; and if dead load pressures were completely uniform, settlements would probably be uniform and of little practical consequence. In the real world, however, neither is likely. Significant deviations from either of these two idealisms are likely to result in unequal vertical movements.

Monolithic masonry, generally incapable of accepting such movements will crack. Such cracks are most likely to occur at corners, and large openings. Since, in most cases, differential shears are involved, cracks will typically be diagonal.

Small movements, in themselves, are most likely to be structurally important only if long term leakage through fine cracks may have resulted in deterioration. In the event of large movements, continuous structural elements such as floor and roof systems must be evaluated for possible fracture or loss of bearing.

Pile foundations are, in general, less likely to exhibit such difficulties. Where such does occur, special investigation will be required.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 28, 2009 8:09 am

The University of Miami Field House, a multipurpose facility at the Coral Gables campus, has been honored for its sustainability components. It was awarded the LEED® Gold designation established by the U.S. Green Building Council and verified by the Green Building Certification Institute (GBCI). LEED is the nation’s preeminent program for the design, construction and operation of high performance green buildings.

The UM Field House achieved LEED certification specifically for its energy use, lighting, water and material use as well as incorporating a variety of other sustainable strategies. By using less energy and water, LEED certified buildings save money for families, businesses and taxpayers; reduce greenhouse gas emissions; and contribute to a healthier environment for residents, workers and the larger community.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, October 27, 2009 7:21 pm

Make Improvements to the Property

Improvements can take the form of cosmetic improvements or substantial rehabilitation. Cosmetic improvements include such things as new paint or wallpaper, new decor to the common elements, new landscaping, new carpeting/flooring, etc. Substantial rehabilitation involves making structural improvements to the property – for example a substantial rehab may involve redoing all the units of a multifamily property, or changing the structural façade of a shopping center, or making major renovations to the lobby of a large office building. While doing rehabilitation, it will be a bright idea to make improvements toward LEED certification. In any case, you increase the value of the property for not only your tenants, but for your own portfolio as well.

LEED certification

LEED (Leadership in Energy and Environmental Design) is a third-party certification program and the nationally accepted benchmark for the design, construction and operation of high performance green buildings. LEED gives building owners and operators the tools they need to have an immediate and measurable impact on their buildings’ performance.

This strategy uses five categories to guide building performance: Sustainable Sites, Water Efficiency, Energy Efficiency, Materials and Resources, and Indoor Air Quality. It can be implemented for new or existing buildings of any size.

The federal government already requires LEED for all military projects and most projects where government offices are housed, because of the environmental benefits of the process. Cities such as Chicago require all their public buildings to be of this high quality. Major retailers like Best Buy have made the commitment to building LEED Certified stores.

LEED Certified buildings are said to have better occupancy rates because LEED is considered a “premium amenity”, something that separates the wheat from the chafe. Clearly, there are benefits to getting ahead of the curve in the commercial real estate market. Do not be left behind. If you are truly interested in maximizing your cash flows and to start saving real money you should consider engaging a LEED consultant and see how you can upgrade your performance.

I will be glad to put you in touch with reputable companies to help you get LEED certification.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, October 26, 2009 5:46 pm

If you are thinking about purchasing commercial real estate, it’s important to know that there are things that you can do to enhance and increase the value of your investment. As such, when you search for a commercial property, look at the property’s potential in addition to its historical data. Because the value of commercial real estate is primarily driven by the cash flow that the property generates, any strategy you employ has the potential to increase your cash flow, decrease your expenses, and increase your overall equity and the value of the property.

Case in point is a Class B office building known as Golden Eagle Plaza at 525 B St. in downtown San Diego which was turned into an arguably Class A superstar by Hines Interests LP.  The San Diego Business Journal reports that Hines upgraded this well-located, 22-story office building, by refurbishing it with a new lobby, new roof, elevators, controls and systems, and by getting a LEED certification.  Read full article here.

Now that commercial real estate assets are anticipated to devaluate in the coming months, investors like you should be seeking new strategic assets to invest in. The economics of purchasing existing buildings (especially when its owners are  distressed) with fairly good fundamentals and then upgrading them is very promising.

Aging properties, making sure it passes its Forty-Year Recertification, must also be upgraded or the best tenants will look elsewhere when they seek additional space in the coming years in response to the anticipated growth in the economy.

Hines’ retrofit strategy seems to be paying off as early as now:  San Diego’s large law firms ares moving to Golden Eagle Plaza like the firm of Procopio, Cory, Hargreaves & Savitch LLP, have already committed to 100,000 square feet in the building.

Stay tuned for my future posts as I elaborate further on how you can increase the value of your commercial real estate property.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 23, 2009 10:45 pm

With five of the selected nine asset managers for the Treasury Departments Public Private Investment Program now fully funded with their debt and equity capital commitments, there is some $12.27 billion in purchasing power aimed at the so-called legacy – or to be more precise, toxic – assets still clogging the real estate markets. In short, the program is close to execution as the asset managers now begin what they were ultimately chosen to do: seek out and purchase toxic debt.  Read full article here.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 22, 2009 2:30 pm

In many cases commercial real estate assets will be generating a steady cash flow or be candidates for a turnaround.  Other assets will just need an experienced management team to come in and stabilize the property.

As the economy improves, by which the improving manufacturing sector shows us, real estate fundamentals should improve with it putting a halt to dropping values, rents and occupancies.

There will be opportunities to buy assets from indebted owners at very good values.  Some properties that will be foreclosed may be dead malls and offices, but many others will not be. There’s a big difference between distressed assets and distressed owners. Both may trigger foreclosures, but the latter will be big opportunities for select astute players in the sector to come in.

It’s just a matter of finding the right commercial real estate investment advisor, to help you find the right fit and the right investment strategy based on your objectives.  Contact Alex Zylberglait.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 22, 2009 1:29 pm

Will the defaults on commercial real estate loans  be enough damage to thrust the financial system back into chaos or hurt the broader economy?

What do you think?

Experts think it would contribute to more bank failures, but overall they won’t threaten the banking industry as a whole.

“The magnitude of the deterioration seems consistent with past recessions. It looks like a manageable problem,” Jeffrey M. Lacker said, president of the Federal Reserve Bank of Richmond.

For one thing, the $3.4 trillion figure is only about one-third the amount of residential real estate debt outstanding. Moreover, a healthy percentage of the $1.4 trillion in debt will be refinanced.

“As far as the impact of commercial real estate on the overall economy, I don’t think it’s going to be the next shoe to drop,” says Robert Bach, senior vice president and chief economist with Grubb & Ellis, a global commercial real estate services firm. “These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don’t see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it.”

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 21, 2009 8:00 am

Written Reports shall be required attesting to each required inspection. Each such report shall note the location of the structure, description of type of construction, and general magnitude of the structure, the existence of drawings and location thereof, history of the structure to the extent reasonably known, and description of the type and manner of the inspection, noting problem areas and recommending repairs, if required to maintain structural integrity.

Evaluation

Each report shall include a statement to the effect that the building is structurally safe, unsafe, safe with qualifications, or has been deemed safe by restrictive interpretation of such statements. It is suggested that each report also include the following information indicating the actual scope of the report and limits of liability. This paragraph may be used: “ As a routine matter, in order to avoid possible misunderstanding, nothing in this report should be construed directly or indirectly as a guarantee for any portion of the structure. To the best of my knowledge and ability, this report represents and accurate appraisal of the present condition of the building based upon careful evaluation of observed conditions, to the extent reasonably possible.”

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, October 20, 2009 8:00 am

Evaluating an existing structure for the effect of time, must take into account two, basic considerations; movement of structural components with respect to each other, and deterioration of materials.

With respect to the former, volume change considerations, principally from ambient temperature changes, and possible long time deflections, are likely to be most significant. Foundation movements will frequently be of importance, usually settlement, although upward movement due to expansive soils actually may occur. However, it is infrequent in this area. Older buildings on spread footings may exhibit continual, even recent settlements if founded on deep unconsolidated fine grained or cohesive soils or from subterraneous losses or movements from several possible causes.

With very little qualification, such as rather rare chemically reactive conditions, deterioration of building materials can only occur in the presence of moisture, largely to metals and their natural tendency to return to the oxide state in the corrosive process.

In this marine climate, highly aggressive conditions exist year round. For most of the year, outside relative humidity may frequently be about 90 or 95%, while within air-conditioned buildings, relative humidity will normally be about 35 to 60%. Under these conditions moisture vapor pressures ranging from about 1/3 to 1/2 pounds per square inch will exist much of the time. Moisture vapor will migrate to lower pressure areas. Common building materials such as stucco, masonry and even concrete, are permeable even with these slight pressures. Since most of our local construction does not use vapor barriers, condensation will take place within the enclosed walls of the building. As a result, deterioration is most likely adjacent to exterior walls, or wherever else moisture or direct leakage has been permitted to penetrate the building shell.

Structural deterioration will always require repair. The type of repair, however, will depend on the importance of the member in the structural system and degree of deterioration. Cosmetic type repairs may suffice in certain non-sensitive members such as tie beams and columns, provided that the remaining sound material is sufficient for the required function. For members carrying assigned gravity or other loads, cosmetic type repairs will only be permitted if it can be demonstrated by rational analysis that the remaining material, if protected from further deterioration can still perform its assigned function at acceptable stress levels. Failing that, adequate repairs or reinforcement will be considered mandatory.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.