Cost segregation delivers big savings for real estate properties of all sizes by Eli Loebenberg

Eli Loebenberg, Madison SPECS, LLC

Whether they own a modest multifamily property, mid-sized hotel or nursing home, or mammoth industrial facility, owners of real estate are especially eager this year to lower their tax bill in order to conserve and improve their cash flow. Yet many have overlooked the advantages offered by a cost segregation study, regardless of the size or complexity of their property. A “cost seg” study is a specialized tax and engineering analysis that allows owners to reclassify their real property expenditures, accelerate their depreciation deductions and recover missed depreciation deductions from prior years. This can result in a reduction of tax liability, certainly a significant benefit in these difficult economic times.

When conducted by an experienced team of engineering, accounting and tax experts, a cost seg analysis can be a huge value to owners of all types of property, whether used for business or investment. Madison SPECS, a Lakewood, N.J.-based cost segregation company, recently demonstrated the value of this specialized service for the broadest range of real estate holdings, when it undertook a comprehensive engineering and tax assessment of the largest mixed-used corporate office park in the country. Despite the magnitude and scale of the job, Madison SPECS was able to complete the study in record time, from initial discussion to final report, while simultaneously handling a number of other projects.

Analyzing Largest Corporate Office Park in the Nation

A prominent real estate investment group turned to Madison SPECS to execute a cost segregation study of a 500-acre office park (roughly 4 million s/f). Comprising office, industrial, research, distribution and manufacturing spaces, the facility is spread over 11 primary and three support buildings. The main buildings range from 104,000 s/f to more than 900,000 s/f. After reviewing the lease agreements between the prior and current landlord and the active and retired tenants, SPECS identified an enormous opportunity for the current owners to take advantage of certain tenant improvements that were made and paid for by the prior landlord.

One of the challenges of the project was the facility’s sheer size according to SPECS Engineers Mario Bertinelli and Thomas Varney. Additionally, complex systems and furnishings filled the buildings. For example, all of the offices and lab areas had been designed with walls that could be demounted and reconfigured. Therefore, thousands of linear feet of demountable wall partitions had to be recorded, measured and priced. In case of power shortages, the buildings had colossal, redundant transformers and switchgear, along with 14 emergency generators. An overhead conveyer system snaked through three of the buildings to transport manufacturing parts, as well as entire floors of locker rooms and showers to accommodate the thousands of employees who had worked there three-shifts-a-day. The company even had a wholly-owned utility company located onsite to provide steam, chilled water and compressed air via underground tunnels to the 11 buildings engaged in industrial manufacturing. “They really don’t build on this scale anymore,” said Varney. “We walked for five days straight just to complete the site tour.”

Owners Benefit from Sizable Tax Savings

Although Madison SPECS was unfazed by the project challenges, the clients were delighted by the size of their results. The facility’s total cost was $46.75 million. Of this, the cost segregation study permitted $5.906 million, or 13%, to be reclassified from 39-year to 5-year MACRS (Modified Accelerated Cost Recovery System) property. Six percent, or $2.925 million, was reclassified to 15-year MACRS property. This reclassification of assets resulted in a Net Tax Benefit of $201,260 in the first year and a $2.267 million Net Tax Benefit over the first six years.

Since the results of a cost segregation study depend upon accurate accounting and engineering evaluations, which is not something a typical CPA firm is equipped to handle, it is especially important for property owners to turn to experienced, qualified cost seg specialists. The tax benefits that emerge may vary in size, but they all go to building a better bottom line.

Eli Loebenberg, CPA, is the CEO of Madison SPECS LLC, Lakewood, N.J.