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By AZ Advisory Team, February 17, 2010 1:51 pm

Build-out a space, making it as generic and functional as possible. The tenant and buyer can then go in and add more offices if they want. The use of modular furniture is popular in these instances. It shortens that six-month period to where they can take immediate occupancy.

Other landlords identify a niche sector where the building and location will fit in best and target tenants in that niche to keep improvements at expected controlled levels eliminating major costly improvements for both landlord and tenant.

This concludes our topic on Ways to Reduce the Cost of Tenant Improvements. Feel free to contact us to discuss this with you further or for any other topics you are interested in.

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, February 15, 2010 12:11 pm

Reducing Costs

All players involved in tenant improvements, from the contractor to the tenant, are looking at ways to save or get the best value for their money. Tenants are trying to be efficient with their space planning and that they are looking at any way they can keep down the costs.

This value engineering analysis oftentimes involves tenants determining what TIs they must have and what TIs they want. Some ways tenants and landlords are cutting TI costs are by reducing or eliminating built-in cabinets, 4- to 6-foot-high divider walls, and any unnecessary frills, such as sidelights on doors and windows next to doors.

The trend is away from multiple coffee stations and back to one central break room, to avoid the costs of multiple sinks.

Tenants are spending more money on the highly visible, public places, typically lobbies and conference rooms, while keeping the remainder basic. As far as interiors and finishes, color schemes that will last 10 or more years are popular. Tenants are moving away from a lot of color – such as pink – and toward the use of neutral shades that won’t go out of style.

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, November 24, 2009 2:58 pm

Overlooked Opportunity

Accounting professionals must be able to suggest and help implement cost segregation for their clients or employers so they can achieve maximum tax savings. In the past when taxpayers purchased real estate, they traditionally allocated 20% of the purchase price to land and 80% to buildings. While the IRS rarely questioned this simplistic approach, purchasers did themselves a financial disservice: They forfeited opportunities to achieve a better tax result.

Although the cost segregation technique always was available to real estate purchasers, it often was overlooked as a tax-savings tool. Recently, however, buyers have begun to recognize that despite some drawbacks, cost segregation can dramatically increase tax savings. They are, therefore, taking advantage of this opportunity, challenging the “business as usual” mantra.

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, November 23, 2009 2:59 pm

Add Amenities

Finally, you can also consider adding amenities to the property to make it more appealing and valuable. Value enhancing amenities can include something simple like creating a playground in a multifamily property or adding free wireless Internet for your retail tenants. Or you can add more extravagant amenities like a daycare center in your office building or an outdoor courtyard in a hotel property.

In summary, when scouting for commercial properties, look beyond the historical data and see what things you can employ to make the property more valuable. All other important factors considered, choose the one that gives you a lot of room to utilize value-generating strategies that is non-existent or yet untapped by the present owner and therefore not part of the price.

Know your property’s potential before you close the deal to realize maximum gains — after you have modified its usage to a more profitable one, after you have made improvements and added amenities, after increasing rents accordingly, and after decreasing expenses. The best deals are made when you buy a property, not when you sell a 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, November 18, 2009 11:27 pm

Decrease Expenses

Evaluate the historical operating statements of the property to determine if there are areas where you can decrease expenses. For example, perhaps improving the property with more energy efficient light bulbs in the common areas will drastically reduce your monthly electrical bills. Or perhaps you find that the gas company can individually meter the units so that instead of paying for the gas, you can fairly pass that expense onto the tenants. In the vast majority of instances, a commercial property owner can cut expenses without significantly impacting the operations of the real estate itself.

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, November 13, 2009 8:00 am

How the Technique Works

The process of cost segregation begins at the time of purchase. Accounting professionals should advise clients or employers buying real estate to use an engineering report to segregate assets into four categories. This article focuses on cost segregation for buildings.

The building. Buyers should attempt to maximize a building’s value; any residual value will be allocated to nondepreciable land. Although a building’s separate components (such as its roof) all are considered part of the building itself, there is merit to valuing and depreciating each component separately (albeit, on the same depreciation schedule). This way, if one of the building’s components subsequently becomes worthless, the taxpayer can write it off immediately.

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, November 6, 2009 3:51 pm

Present-Value Savings

Each $100,000 in assets reclassified from a 39-year recovery period to a five-year recovery period results in approximately $16,000 in net-present-value savings, assuming a 5% discount rate and a 35% marginal tax rate.

CPAs play a central role in the cost segregation process. They are the most likely people, in addition to a good broker, to recommend use of the technique to their clients or employers. CPAs also will review and implement the findings in the required engineering report. This article will guide CPAs through the process by discussing how cost segregation operates, providing a comprehensive example of the technique in a real estate acquisition and outlining its advantages and disadvantages.

Stay tuned for the continuation next week.  Thanks!

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 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 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 1, 2009 3:08 pm

So here we come at the last part of this topic. I hope you will be able to use them. Please feel free to contact me for more advice.

Leverage and Financing Terms Make a Huge Difference in Investment Performance and Risk

Investment financing is considerably more complex than residential financing and all options should be carefully considered.   Some important considerations when financing investment real estate include:

• Personal liability and recourse
• Rate and term
• Fees on loan origination
• Fees on loan assumption
• Lock out term
• Assumability and costs involved
• Pre-payment and/or defeasance
• Reserves and impound requirements
• Amount of financing leverage expressed as a percentage of purchase price

How to structure investment real estate debt and equity to maximize a commercial real estate investor’s returns and minimize risks is too broad a category to go into depth in this article.  Suffice it to say that it primarily depends on the needs and sophistication of the investor, the goals and risk tolerance of the investor, the expected holding period of the commercial property and any future cash requirements during the holding period for capital improvements, leasing commissions, etc.

Anticipate Tax Implications on Transfer either by Gift, Sale, or Inheritance

How long will you live?  How long will your spouse live?  As you get older, what medical  care will you and your spouse require and what will the cost of that be?  How much cash and/or income will you require annually to meet all your needs and still have enough for emergencies?  What will the estate and gift tax rates be the year that you die?

Unfortunately, the above questions cannot be answered definitively as the tax laws are as unpredictable as our own mortality.  The answer lies in a regular review of your personal and financial situation, the current and expected tax laws, and modifying your commercial real estate investment portfolio regularly to ensure that they meet your current and longer term goals.

When Transferring Wealth to your Heirs Pay Special Attention to the Unique Financial Needs and Commercial Real Estate Investment Experience of Each Recipient or Beneficiary

It is often better to name a professional trustee for a situation where the beneficiaries do not have a strong working relationship.  In the vast majority of cases however, professional trustees are at a loss when it comes to handling real estate assets.  They are illiquid, difficult to forecast value, and generally create a management crisis when left to more than one family member. 

Look at real estate investments as you would a business succession plan.  Create an exit plan in advance for beneficiaries that, due to their personal or financial situation, are not good candidates for owning investment real estate.

People that are not financially responsible, lack business experience or are constantly struggling to make ends meet are generally not good candidates for owning investment real estate.  This is due in large part to the cyclical nature of real estate and the simple fact that forecasting cash flows is an imperfect science. There are too many variables that real estate owners cannot directly control, such as the success or failure of the tenants in the property.  Giving investment real estate to an irresponsible person rarely makes them responsible and often creates more problems as they attempt to make short term decisions, as in managing cash flows, with a long term asset such as a commercial real estate.

There are ways to structure investment real estate portfolios so that the income streams are more consistent over longer periods of time. In this way, a person can give real estate to the “less experienced” and provide for a relatively clean exit path should they desire to cash out of the investment. The structuring process begins with investment management, moves to asset management, and finally property management. This process is constantly in motion as adjustments are made to adjust to changing markets, property conditions and the real estate investor’s personal financial situation.

Read Part 1. Read Part 2. Read Part 3.

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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.