Potential Benefits of Owning Commercial Real Estate
Cash Flow
Properties earn income from tenants who pay rent. The more stabilized the property, or higher its occupancy, the greater the chance of a steady and predictable stream of cash.
Inflation Protection
Over the long-term, real estate is considered a hedge against inflation, since property values and rental income typically increase during periods of inflation.
Diversification
In a diversified portfolio of investments, real estate offers diversification to traditional investments such as stocks and bonds.
Investment Strategies
Core
- Property characteristics - Stable, fully leased, well-located and typically Class A
- Risk/Reward – Lower
- Leverage – None to Low
Value Add
- Property characteristics - Lower occupancy or secondary market locations with potential value-add opportunity through renovations
- Risk/Reward – Low to Medium
- Leverage – Low to Medium
Opportunistic
- Property characteristics - Typically raw land or ground up development with little to no near-term cash flow
- Risk/Reward – High
- Leverage – High
Specialization in Multi-Family and Hospitality Assets
Multifamily
Includes properties that have five or more residential units in a single building and may be further classified as garden style, mid-rise, or high-rise. Economic drivers include demographic trends, home ownership, household formation rates, and local employment growth. Leases are typically short term and adjust quickly to market conditions. Multifamily is generally considered to be one of the more defensive investment types within commercial real estate, though they are still subject to competitive pressures from newer construction.
Hospitality
Hospitality Property means a full service or limited service hotel or resort, a condominium or timeshare hotel or resort, an extended stay property, or a conference center, and other facilities incidental to, or in support of such property, including without limitation, restaurants and other food-service facilities, spas, golf facilities or other entertainment facilities or club, conference or meeting facilities and Intellectual Property related thereto; provided that such property shall not include any casino or other gaming property (even if only a part of a Hospitality Property) or senior living property.
Cost Segregation
A Cost Segregation study will identify components of your building or improvements that should be depreciated over a much shorter time, and at an accelerated rate.
What does this mean to you? Higher tax deductions in the early years of your building ownership, which means cash in your pocket based on the economic rule of time value of money.
Considerations of Cost Segregation:
- Certain finishes, as well as mechanical, plumbing, HVAC, and electrical components, if properly identified and qualified, can be depreciated over 5 years, at an accelerated depreciation rate.
- Land improvements, such as parking lots, site lighting, signage, walkways, retaining walls and landscape, etc. could be depreciated over 15 years, also at an accelerated depreciation rate.
- If your property is a restaurant, or you’ve made improvements to your lease or retail space, all of your improvement costs may be depreciable over 15 years.
- With the new Repair and Maintenance regulations, the IRS now allows you to write off portions of the building that have been removed or demolished. Example: if you replace your roof, you get to write off the remaining cost basis of your old roof in the current year which is 39-year property.
- Via these regulations, the IRS has divided buildings into different units of property (Elevators, escalators, plumbing system, gas distribution system, fire protection system, mechanical system, electrical system, security system, general building, etc.). A Cost Segregation study will assign costs for these systems, as well as the personal property and land improvements to create a long-term tax planning strategy.
- ***As part of the Trump Tax Package, assets that were placed in service after September 2017 that are classified as “20 year or less assets” are subject to 100% bonus depreciation. This could create massive amounts of immediate depreciation expense creating a one‐time, first year cash infusion.
What type of building qualifies? Shopping centers, apartments, office buildings, manufacturing facilities, warehouses, hotels, restaurants, data centers, industrial / flex spaces, fitness centers, medical office – pretty much any building type will have shorter life property which are building components that “support the businesses activity.” And don’t forget – improvements made to your building or lease space are also great candidates!
Without a Cost Segregation Study
With a Cost Segregation Study
1031 Exchange
Our creative team of 1031 exchange professionals help enables our clients to defer capital gains tax and depreciation recapture by reinvesting the proceeds from the sale of investment property into replacement property, thus preserving significant wealth in their estate. 1031 exchange deferrals can be continued through as many exchanges as our clients wish with the ultimate goal to help our clients experience capital gains and depreciation recapture tax liability at the sale of their real estate asset.
