Cost Saving Strategies: Cost Segregation Your Competitive Advantage

The medical industry is dealing with some significant obstacles right now with the latest regulations from Obama Care.  Fortunately, there still does exist a legitimate investment strategy, fully supported and validated by Congress, which the Treasury Department states should be considered for every taxpayer who owns or is constructing, renovating, acquiring or even leasing a commercial property. This often overlooked and misunderstood opportunity is available now utilizing a unique IRS approved tax program called Cost Segregation.

Cost-Segregation studies allow taxpayers to write off a much greater percentage of their buildings (and tenant improvements) over a shorter time period.  More specifically, the IRS code (Rev. Proc. 96-13, Rev. Proc. 2002-19, 2004-11) is designed to encourage business investment, by allowing building owners to reallocate Real property to Personal property, which increases depreciation deductions, thereby reducing the owner’s tax burden and increasing cash flow.

“In some cases, rather than renting space, a business owner may purchase the buildings in which they operate their companies.

Many CPAs who work with these types of business owners feel their clients are passive investors and cannot take advantage of cost segregation. In reality, many of these property owners can benefit from cost segregation tax savings if the accountant knows what to look for.” http://www.accountingtoday.com

Utilized properly by the Medical Industry, the FEACSA© (Fully Engineered and Accounted Cost Segregation Analysis Study) employed by cost-segregation specialists can be vital to a business owner’s bottom line.  It allows the taxpayer to reclassify as much as 25 percent to 50 percent of a medical building into the shorter-lived personal property asset classes than traditional “accounting method” used by CPA firms.  Just when you thought it couldn’t get better there can be additional benefits found in “looking back” in the past to reclaim unrecognized depreciation deductions.  Amended tax returns are not required; instead, a “catch-up” depreciation can be taken in one year by filing IRS Federal Form 3115 Change in Accounting Method, with IRS consent granted automatically.

HOW THE TECHNIQUE WORKS

The process of cost segregation begins at the time of purchase or construction.  Accounting professionals should advise clients or employers buying real estate to use an engineering report to segregate assets into four categories:

Personal property.
Land improvements.
Buildings (which should be further broken down into component parts).
Land.

Each of these categories has a unique depreciation recovery period under the Modified Accelerated Cost Recovery System (MACRS). The IRS rulings and court cases support the idea that systems which directly serve equipment that qualifies for accelerated depreciation, also qualifies for accelerated treatment.  The proper documentation using the engineering approach is required to justify what is claimed.

THE BOTTOM LINE $$$

An example of a fully engineered cost segregation applied to a medical building:

Medical Building Value                      $1,580,000

Cost Segregation Tax Savings            $   553,000

Net Cash Benefit to Owners             $   193,550

Most CPAs and accountants are familiar with MACRS but may not be aware of the benefits of a full engineering based study. Also they typically do not have the experienced manpower needed to perform an engineering based examination of the medical building. In order to properly classify the items within the building, an engineering-based segregation by qualified individuals is required to create an in-depth analysis.  These individuals need to be skilled in engineering, construction and taxation for the purpose of identifying the individual building assets, their associated costs and appropriate recovery period classification for federal, state and property taxation.

CONCLUSION

The Journal of Tax Accountancy has stated that …without a doubt, a cost segregation study is among the most valuable tax strategies available to owners of commercial real estate.  The sooner the medical community becomes educated; the sooner owners can begin to realize substantial increases in cash flow, which in turn encourages additional business spending and investment.

 

Article Contributed By:

Frank A Buonemani
Partner

ELB Consulting, Inc.

(O) 888-796-2112 (X100)

(C) 727-504-6579

www.elbcostseg.com

Receive your complimentary cost segregation feasibility assessment today! frank@elbcostseg.com

 

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Cost Saving Strategies: Case Study on the Benefits of Early Lease Renewals and Lease Audits

If you are like most medical practices, you are constantly looking for ways to decrease your overhead costs. In a lean market, it can mean a more competitive position in the market. It can also be the difference between profitability and loss. One area that you may be overlooking is your current lease agreement. If you are up for renewal within the next year or two, you may have more leverage than you think.

This past year, the Equity Healthcare Team was hired to review Dental Care Alliance’s (DCA) renewal option. The following case study shows the benefit of having a formal lease audit conducted by a commercial real estate expert.

The Situation: DCA felt that their base rent and common area maintenance charges (CAM) were above market.  Since occupying their space, the tenancy in the building and surrounding area was on the decline.  The anchor tenant in the building was Suntrust, whose relocation could stigmatize the building.  In addition, the elevator in the building was inadequate and needed replacement or repairs. Since DCA occupied second floor space, this was an inconvenience for their patients.

The Strategy:  DCA hired Equity Healthcare Real Estate to represent them in their lease renewal negotiations. The client had two options; move to a new location or stay put. DCA was more inclined to stay in their existing location. In an effort to have a stronger position while negotiating with the Landlord, Equity advised the client to pursue a leverage negotiation. Equity reviewed DCA’S existing lease while also performing a site search for alternative spaces in the market. By understanding the market conditions, including rental rates, CAM charges, tenant improvement allowance, and vacancy rates, Equity was able to have a stronger position in negotiating leverage with the landlord.

The Results: Equity was able to negotiate the following renewal terms for DCA:

  • A five (5) year lease with a starting Base Rent of $12.37 PSF with 2% annual increases. This was a significant decrease from their original Base Rent of $25 PSF with 3% annual increases.
  • Equity discovered inconsistencies in the CAM Charges, which were adjusted and brought the Base Year down to $8.73 PSF from $10 PSF. The landlord also agreed to a 5% cumulative cap on operating expenses.
  • The renewal allowed DCA to terminate their agreement if the bank downstairs left the building at any time during their lease period.
  • DCA was able to obtain exclusivity for dental care in the building.
  • In their initial Lease, DCA agreed to pay back the total build-out allowance ($71,000) if they did not renew their Lease for an additional 10 years.  Equity was able to convince the landlord to terminate the language in the Lease tied to the $71,000 penalty and modify it to include 2 renewal options for 3 years each.
  • The Landlord addressed the significant concerns regarding the elevator problems and provided an acceptable resolution.

Over the course of five years, the renewal negotiation saved DCA approximately $316,207 in base rent alone. Additionally, Equity helped DCA achieve more flexibility in their lease and a stronger control of their environment. Not every situation will yield the same results, however, if you would like an analysis of your current leases, please contact Carleton Compton at 813-490-9812.

Tampa Bay Office Trends

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Tampa Bay office vacancies have been slowly stabilizing over the past year; ending last year with the first positive absorption since the market started to decline in 2006. Tampa is the second strongest office market in the South East; just behind Miami.  Our city is a very appealing location for office growth due to a large range of industries and businesses consuming Tampa Bay, a great quality of life, and affordable living. Another positive trend is reflected in the drop of unemployment from 11% in March last year to 8.5% this year for the Tampa Bay Area. 

With the positive absorption in today’s market, we are seeing a lower vacancy rate of quality Class A office space in the Downtown and Westshore areas.  Overall vacancy in the Tampa CBD is approximately 12% for office space.  Amidst these positive trends for recovery, we are seeing the first new office development project for Tampa CBD in over 20 years. A 400,000 SFT office building will grace Tampa’s Skyline in the coming years.

The demand for efficiently designed office space in Tampa is on the incline.  Companies are looking for floor plans that can not only save money but also keep their team interconnected.  Being able to utilize a single floor plan, your team will have a more enjoyable communication process. 

Equity Healthcare Real Estate has prime office space available in downtown Tampa.  At 501 E. Kennedy Blvd we are marketing a 4,539 RSF office on the 8th floor of the M&I Building. It is conveniently located adjacent to County Center, Chillura Park, and courthouses.  With a view of beautiful Tampa Bay, this office space has great building amenities; including onsite management, Fios, and a parking garage for your employees and guests.

General Office Vacancy vs. Medical Office

     The graph below illustrates vacancy rates for general office and medical office in the United States over the past 11 years (Marcus and Millichap Report Fall 2011). To find out what the market vacancies are in your area please call us today 813-490-9812.

Does Technology play a role in Site Selection?

Tremendous amounts of data and information are available today including 1. Demographic Studies 2. Traffic Counts 3. Mapping and future projections 4. Payor Mixes and 5. Competition.

Ask the Equity Healthcare Real Estate Team how they can help you find the right location for your business/practice. Visit us at: Website

Should you Lease or Buy your Real Estate?

Start-up cost for a business can be costly when considering the following factors: 1. Potential Franchise Fees 2. Interior build-out costs 3. Equipment cost and 4. Future growth. With these cost in mind and knowing new businesses take time to turn a profit makes renting worth considering – especially if access to Capital is limited. All circumstances are different, and tax considerations could come into play as well.

The Equity Healthcare Real Estate Team has the tools to assist in determining whether to Lease or Buy. For more information please visit our website at Website.

Florida Hospital Wesley Chapel slated to open Fall 2012!!

This Hospital will create 400 new jobs and infuse additional economic growth in the area through development spinoff, officials said.
 
Looking to expand in this area? Call us ………..we specialize in site selection for both medical and general office users and know this market well.
 
 
 
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