Monday, May 14, 2012

Cost Segregation Studies Can Be Deal Makers

In today's competitive commercial real estate market, you need
to use every tool available to make a deal happen. One tool
that is underutilized that could make a difference in creating a
viable deal from one that is border line is a Cost Segregation

How can a Cost Segregation Study help? (I'll explain what a
Cost Segregation Study is later.) The future owner benefits
from the study by creating tax benefits that result in almost
immediate increased cash flow. All this can occur very soon
after the purchase of the property. So this can be taken into
account when working the numbers in a deal. The increased cash
flow can push the deal over the top. It will also put the owner
in a position for additional transactions sooner than

Cost Segregation is a strategic tax benefits tool that allows
property owners who have constructed, purchased, expanded, or
remodeled any kind of real estate to increase cash flow by
accelerating depreciation deductions and deferring federal and
state income taxes.

Cost Segregation is the identification, separation and
reclassification of building components to shorter, accelerated
depreciation lives that are less than the traditional 39-year
life required for the building itself.

In general, it is easy to identify furniture, fixtures, and
equipment that are depreciated over 5 or 7 years for tax
purposes. However, a Cost Segregation Study goes far beyond that
by dissecting construction costs that are usually depreciated
over 27 ½ or 39 years.

The primary goal of a Cost Segregation Study is to identify all
construction-related costs that can be depreciated over 5, 7 or
15 years. For example, 30% to 90% of the total electrical costs
in most buildings can qualify as personal property (depreciated
over 5 or 7 years). Reducing tax lives results in accelerated
depreciation deductions, a reduced tax liability, and increased
cash flow.

Here's a table showing the typical eligible percentages of a
property's value (not including land) that can be reclassified
to shorter depreciation lives:

Property Type: Typical Eligible Percentages

Assisted Living: 15 - 25%

Apartment Building: 20 - 35%

Automobile Dealership: 25 - 50%

Bank/Financial Institution: 15 - 30%

Computer Technology Center: 20 - 60%

Distribution: 5 - 15%

Fitness/Health Club: 20 - 30%

Golf/Resort: 20 - 40%

Heavy Manufacturing/Processing: 30 - 60%

Hospital/Medical Office Building: 20 - 50%

Hotel and Motel: 20 - 30%

Light Manufacturing: 20 - 40%

Office Building: 20 - 40%

Research and Development: 20 - 60%

Restaurants (single or multiple): 20 - 40%

Retail (dept/specialty store): 20 - 30%

Self Storage Facility: 20 - 80%

Strip or Regional Mall: 10 - 30%

Supermarket: 20 - 30%

Tenant Improvements: 10 - 50%

Theater: 20 - 30%

Warehouse: 5 - 10%

Here's a table of some actual examples:

Property: Acquired Outpatient Surgery Center

Tax Basis: $1,843,000

Percent Reclassified: 45%

Present Value of Tax Benefits: $154,000

Property: Acquired Office/Warehouse

Tax Basis: $6,050,000

Percent Reclassified: 15.9%

Present Value of Tax Benefits: $148,000

Property: New Bank Building

Tax Basis: $3,600,000

Percent Reclassified: 31.7%

Present Value of Tax Benefits: $180,000

Property: New Assisted Living Center

Tax Basis: $2,860,000

Percent Reclassified: 32.1%

Present Value of Tax Benefits: $156,000

Property: Acquired Retail Shopping Center

Tax Basis: $7,140,000

Percent Reclassified: 18.4%

Present Value of Tax Benefits: $215,000

As you can see, a Cost Segregation Study can help increase cash
flow and may be enough to make a deal viable. The actual study
would not be performed until after the acquisition of the
property but a fairly good estimate can be made beforehand by an
experienced firm based on industry knowledge and their own
database of performed studies.

Even if a transaction is financially sound, it would be wise to
recommend a Cost Segregation Study to the new owners because of
the potential tax benefits and resulting cash flow. It could
only enhance your position in their eyes and could lead to more
business from them and referrals as well.

Don't overlook recommending a Cost Segregation Study to your
existing clients. By saving your clients potentially hundreds
of thousands of dollars, you will keep them as clients a long
time and make asking and receiving referrals much easier. It's
a great strategy that will pay dividends over and over again.

Mark Lauber is an Authorized Affiliate of Commercial Property Consultants (CPC). CPC has over 20 years combined experience conducting almost 4,000 Cost Segregation Studies resulting in hundreds of millions of dollars of tax benefits to clients. For a Free Course on Cost Segregation, use this link: For any questions, call Mark at (866) 378-4310 or email him at