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

 

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.

What is a Lease Audit?

A lease audit is an in-depth review of a tenant’s occupancy costs to ensure that the costs are in compliance with the lease requirements.

What are some Red Flags that might indicate discrepancies and overpayments?

 

·Changes in the management company
·Accounting changes in billings from the Landlord
·Move-in activity
·Tenant Fit-up
·Marketing and promotional events around the     building
·Increases in annual costs greater than 2% – 4%
·Building Construction
 
 If any of these circumstances have happened to you contact us today. You could be paying more than your fair share.
%d bloggers like this: