Commercial real estate finance does not require an advanced degree from an Ivy League school, but it’s a very complex process. In any given situation, there are many opportunities and pitfalls.
Owners choosing to structure a loan themselves or work with a professional involves considering trade offs of time, money and, especially, risk.
To get the best result, specialized insight is ESSENTIAL. Here is a look at the seven key steps required to put together a deal. (we will go into more detail concerning each step in future blog posts)
Assemble Complete Financial Data
a. Organizing and preparing financial data is the first step in obtaining a commercial real estate (CRE) loan. This will require financial data both about the property (assuming it is an income property) and the sponsor. Sponsor is the term used by lenders to describe the person who is responsible for the property.
Put Together a Pitch book
a. A pitch book is the jargon used to describe the property package, which is needed to make the loan request. It includes the description of the property, property photographs, spread financials for the property, rent comps, and comparable sales and maps of the property. The pitch books function is to make the lender comfortable – this is loan they should pursue and attempt to win.
Select Type of Lender, Compile a List of Prospective Lenders and Send Pitch book
a. With over 10,000 U.S. lenders, there are many types of lenders and loans available. The first step is to understand the benefits and limitations of each type and choose one that best fits the situation. Then, compile a list of lenders within the category to send a pitch book. The primary variables between different types of lenders include the amount of loan proceeds, interest rate, personal liability, ability to prepay without penalty and requirements for escrows (eg. property tax, insurance, tenant improvements, and replacement reserve and operating reserve).
Summarize Loan Quotes
a. Lenders who are interested in the loan opportunity will likely call with questions about the property or sponsor. Allow lenders 10 to 20 days to send a loan quote after sending them the pitch book. After receiving the quotes, summarize them with information, such as loan amount, interest rate, fixed or floating rate, term, term amortization, escrow accounts required, prepayment options, personal liability, deposits required, rate lock, timing to close, legal fees, third party reports and processing fees.
Select Lender and Negotiate Term Sheet
a. Take a deep breath and relax. By this point, the hard work to identify the type of lender is done. The universe of potential lenders has also been identified and information has been sent to allow a fully informed loan quote. The lender will have no surprises after application. This work allows comfort in the knowledge that the lender is a good fit based on loan amount, interest rate and loan terms. Competition is healthy – having lenders compete for customers business ensures the best deal possible.
Put Together Third Party Reports and Loan Documents
a. The final steps after signing a term sheet are third party reports, loan documents and closing. It typically takes two to three weeks to obtain an appraisal, and a few more days to review it. Closing can occur three to six weeks after the term sheet is signed if everything goes smoothly. This includes the third-party reports being delivered on time with no unexpected problems, and limited negotiations for the loan documents.
Grind Through the Closing
a. Closing is such a short, simple word. Depending on the lender, closing a loan can be a tedious and very time-consuming process.
Critical Decision: Is it Worth It?
As detailed here, financing commercial real estate is a tedious and time consuming process. Decide whether there is time and patience to execute the various stages of the process. Read more https://www.enrichedrealestate.com/blog/ere/sevenstepsrefinancing/
The short answer is no. It appears the initial values and hearing results are based on business as normal.
Early data from 2021 informal and commercial appraisal review board (ARB) hearings indicate there will be a record level of judicial appeals in 2021.
Considering the following:
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Big news! During the past 40 years, there was no consequence if the appraisal district or the appraisal review board ignored the laws regarding property tax hearings including the following:
Huge Change -If the TLO is notified of unlawful behavior by the appraisal review board, the TLO is required to investigate. If the complaint is valid, the appraisal district board of directors is required to address the issue with the chairman of the appraisal review board.
This is a Huge Change since the appraisal district board of directors has routinely dismissed complaints about unlawful behavior by the appraisal review board since they are “separate and apart” from the appraisal district.
New Statute – A person who owns property in an appraisal district or the chief appraiser of an appraisal district may file a complaint with the taxpayer liaison officer for the appraisal district alleging that the appraisal review board established for the appraisal district has adopted or is implementing hearing procedures that are not in compliance with the model hearing procedures prepared by the comptroller under Section 5.103 or is not complying with procedural requirements under this chapter. The taxpayer liaison officer shall investigate the complaint and report the findings of the investigation to the board of directors of the appraisal district. The board of directors shall direct the chairman of the appraisal review board to take remedial action if, after reviewing the taxpayer liaison officer’s report, the board of directors determines that the allegations contained in the complaint are true. The board of directors may remove the member of the appraisal review board serving as chairman of the appraisal review board from that member’s position as chairman if the board determines that the chairman has failed to take the actions necessary to bring the appraisal review board into compliance with Section 5.103(d) or this chapter, as applicable.
New Statute Providing for Option for Binding Arbitration if Appraisal District or Appraisal Review Board Do not Comply with Lawful Hearing Procedures
SECTION 20. Chapter 41A, Tax Code, is amended by adding Section 41A.015 to read as follows:
Sec. 41A.015. LIMITED BINDING ARBITRATION TO COMPEL COMPLIANCE WITH CERTAIN PROCEDURAL REQUIREMENTS RELATED TO PROTESTS. (a) A property owner who has filed a notice of protest under Chapter 41 may file a request for limited binding arbitration under this section to compel the appraisal review board or chief appraiser, as appropriate, to:
(1) rescind procedural rules adopted by the appraisal review board that are not in compliance with the model hearing procedures prepared by the comptroller under Section 5.103;
(2) schedule a hearing on a protest as required by Section 41.45;
(3) deliver information to the property owner in the manner required by Section 41.461;
(4) allow the property owner to offer evidence, examine or cross-examine witnesses or other parties, and present arguments as required by Section 41.66(b);
(5) set a hearing for a time and date certain and postpone a hearing that does not begin within two hours of the scheduled time as required by Section 41.66(i);
(6) schedule hearings on protests concerning multiple properties identified in the same notice of protest on the same day at the request of the property owner or the property owner’s designated agent as required by Section 41.66(j); or
(7) refrain from using or offering as evidence information requested by the property owner under Section 41.461 that was not delivered to the property owner at least 14 days before the hearing as required by Section 41.67(d).
(b) A property owner may not file a request for limited binding arbitration under this section unless:
(1) the property owner has delivered written notice to the chairman of the appraisal review board, the chief appraiser, and the taxpayer liaison officer for the applicable appraisal district by certified mail, return receipt requested, of the procedural requirement with which the property owner alleges the appraisal review board or chief appraiser failed to comply on or before the fifth business day after the date the appraisal review board or chief appraiser was required to comply with the requirement; and
(2) the chairman of the appraisal review board or chief appraiser, as applicable, fails to deliver to the property owner on or before the 10th day after the date the notice is delivered a written statement confirming that the appraisal review board or chief appraiser, as applicable, will comply with the requirement or cure a failure to comply with the requirement.
(c) Except as otherwise provided by this subtitle, the failure to comply with a procedural requirement listed under Subsection (a) is not a ground for postponement of a hearing on a protest. An appraisal review board may cure an alleged failure to comply with a procedural requirement that occurred during a hearing by rescinding the order determining the protest for which the hearing was held and scheduling a new hearing on the protest.
(d) A property owner must request limited binding arbitration under this section by filing a request with the comptroller. The property owner may not file the request earlier than the 11th day or later than the 30th day after the date the property owner delivers the notice required by Subsection (b)(1) to the chairman of the appraisal review board, the chief appraiser, and the taxpayer liaison officer for the applicable appraisal district.
(e) A request for limited binding arbitration under this section must be in a form prescribed by the comptroller and be accompanied by an arbitration deposit payable to the comptroller in the amount of:
(1) $450, if the property that is the subject of the protest to which the arbitration relates qualifies as the property owner’s residence homestead under Section 11.13 and the appraised or market value, as applicable, of the property is $500,000 or less, as determined by the appraisal district for the most recent tax year; or
(2) $550, for property other than property described by Subdivision (1).
(f) The comptroller shall prescribe the form to be used for submitting a request for limited binding arbitration under this section. The form must require the property owner to provide:
(1) a statement that the property owner has provided the written notice required by Subsection (b);
(2) a statement that the property owner has made the arbitration deposit required by this section;
(3) a brief statement identifying the procedural requirement with which the property owner alleges the appraisal review board or chief appraiser, as applicable, has failed to comply;
(4) a description of the action taken or not taken by the appraisal review board or chief appraiser regarding the procedural requirement identified under Subdivision (3);
(5) a description of the property to which the award will apply; and
(6) any other information reasonably necessary for the comptroller to appoint an arbitrator.
(g) On receipt of the request and deposit under this section, the comptroller shall appoint an arbitrator from the registry maintained under Section 41A.06 who is eligible to serve as an arbitrator under Subsection (p) of this section. Section 41A.07(h) does not apply to the appointment of an arbitrator under this section.
Read more: https://www.poconnor.com/what-happens-if-the-appraisal-district-and-arb-ignore-law-during-hearings/
Real estate investors have two options to expense their real estate costs. One is the traditional straight-line method and the other one is the cost segregation method. The second method renders a lot of benefits to real estate investors. This includes accelerated depreciation, decreased taxable income, and an increase in cash flow.
After the CARES Act, the value of a cost segregation study has increased.
The value of bonus depreciation has shown a spike to 100% through 2022.
The Tax Cut and Jobs Act have also expanded, it has started to include acquired properties as well.
Other than this the CARES Act came up with a new law that says qualified improved property after 01.01.2018 is assigned a 15-year class life which makes it eligible for a hundred percent bonus depreciation. It also allows real estate investors to deduct 100% of a 5,7 or 15 year property in the first year itself.
A cost segregation study helps real estate owners to accelerate depreciation and also increase the deductions with the help of bonus depreciation.
UNDERSTANDING HOW COST SEGREGATION WORKSA cost segregation study identifies depreciable assets, like a building. A cost segregation study takes around thirty to sixty days, depending on the cost segregation expert you choose. In a cost segregation study, the personal property assets and real assets are identified and separated. This is usually done for the purpose of the IRS report. By reclassifying the personal property assets, a cost segregation study(CSS) reduces the depreciation time to optimize and organize tax reports.
THE CALCULATION AND PROCESS INVOLVED IN A COST SEGREGATION STUDYUsually, when a commercial property is in use, the generic method of depreciation used will be the straight-line method and this would be over a period of 39.5 years. However, in the case of a cost segregation study, it is quite different. The building is considered a whole and the components of a building are broken into four different categories. This includes land, building, land improvements, and personal property. The last two also qualify for shorter useful lives under the accelerated methods of depreciation. Tangible properties usually fall below the 5 or 7 years useful life whereas land improvements come under 15 years of useful life.
One important aspect to remember is, to get rid of being challenged in an audit, the IRS has provided training to its agents along with guidance. Auditors ask for written cost segregation reports prepared with expertise and experience. A CSS report usually includes a description of the property, a detailed analysis of which asset falls under which category, and images of the property.
BENEFITS OF THE STUDYShorter depreciation timeThe straight-line method takes usually 27.5 years or 39 years depending upon the type of property i.e. residential or commercial. A cost segregation study reduces the depreciation period to 5,7 or 15 years.
Easy depreciation recapturingAnnual reports with updated information can help in decreasing future costs and reduce the tax burden.
Tax relief and other benefitsIn cases of developing a new building’s structure, or in cases of renovating or remodeling, as the owner of the property, you are responsible for the cost of the construction materials. A CSS will assign the value of the unused properties that are classified as tax deductions for charitable contributions.
IS A COST SEGREGATION STUDY WORTH YOUR EFFORT?A CSS is one of the best tax strategies. Accelerated depreciation helps in lowering the taxable income. This in turn increases the cash flow. Take up your free analysis and get a price quote.
Are you thinking about the taxes you need to pay for this year are quite high when compared to the previous year? Then you need to check whether your property is assessed properly. Here is a brief idea of property tax assessment and how to appeal it properly.
What is a property tax assessment?Since property taxes are the main source of income for the government, The cost of services provided by the government is primarily acquired from the property taxes paid by homeowners. Every year many homeowners get a bill but they are not aware of how the calculation is done. Here is a simple example to help you understand the assessment value.
House A has a value of $250,000. The cost of services for that year is $1000. The government calculates the tax rate by assessing all the properties in the town. In this case, we can consider the tax rate as 0.15%. The tax rate for house A is given as
250,000 * 0.15 = 375.00
The property tax bill for house A is $375.
The property tax value is based on the location of the property, square feet, property type, year built and includes the exemptions that you are qualified for. The assessment also analyzes the purpose of your property such as commercial or residential. If you think your taxes are quite high, then you can formally request your local tax authority for reassessment.
How to formally appeal for property tax assessment?
There are three important steps you need to consider when you are planning for a property tax assessment. They are to
File all your evidenceThe evidence will help you build a stronger case so make sure you have all the necessary documents to justify your property tax assessment is quite high. Some of the evidence you need is the purchase price of the property, comparables of property value, square feet calculation, etc. Sometimes there are chances for the value to be mathematically wrong, so you can point out such miscalculated values too.
Submit your appealFor submitting your appeal, you might need to write a formal letter to the assessor’s office. You can also submit your appeal by filling the necessary form.
Follow up regularlyPatience is the key! You might have already seen how busy an assessor’s office is. So, it might take some time for your assessment to be noticed. Keep on checking your mailbox for replies or any letters from the assessor’s office.
If you feel this process is taking your time, then there is a positive option for you to rely on! That’s connecting with O’Connor! We help you in all these processes. If you own multiple properties then you might definitely need professional assistance to collect evidence and submit your appeal which O’Connor who is expertised for more than 20+ years. Don’t wait any longer, visit www.poconnor.com to know more!
Commercial Property Owners May Use Bonus Depreciation To Significantly Reduce Income Taxes.
Cost Segregation is not a new concept, but provisions contained within the Tax Cuts and Jobs Act of 2017 have ignited interest and turbo-charged the positive impact significantly. The point source for these changes?
Bonus Depreciation!Let’s take this a step at a time and start with a basic question. What is depreciation?
Simply put, depreciation is an accounting tool which allows a portion of your asset value to be deducted each year from your generated income, thereby reducing your net income and resulting federal tax burden.
This provides an acknowledgement of the decrease in value of personal property and/or some real property due to wear and tear, aging, functional obsolescence and other factors.
For a long time, straight-line depreciation was practiced, and still is in many instances. This allows you to depreciate your asset over 39 years for standard commercial assets, or over 27.5 years for apartments. Here is an example using rounded numbers for a small office building:
Purchase Price $2,000,000
Land Value $400,000
Depreciable Basis of Improvements $1,600,000
Annual Depreciation $41,025 ($1.6M / 39 years)
So, in the example above, when filing your income taxes for the ownership entity of the asset, you would be able to deduct $41,025 in depreciation from generated income. Since this in essence comes right off your bottom line, you would effectively save over $15,000 in taxes (based on a 37% tax bracket) by utilizing straight-line depreciation. Not bad at all!
Enter Cost Segregation!Cost Segregation has been around for decades in various forms and iterations, as far back as the late 1950s (Shainberg vs. Commissioner), then on through the 1970s (Revenue Ruling 73-410; Whiteco Industries vs. Commissioner); the 1980’s with the enactment of ACRS and subsequently with MACRS (Modified Accelerated Cost Recovery System) in 1986, impacting assets placed in service after January 1, 1987. It has been continually refined and tweaked by various court cases (notably Hospital Corporation of America vs. Commissioner in 1997).
Cost Segregation provides a way for a knowledgeable individual to break out the components of an asset into the appropriate depreciation life span, allowing for shorter recovery periods and accelerated depreciation. In most instances, this involves parsing the asset into 5, 7, and 15 year depreciation periods, with the remaining long life assets being broken out into the requisite Units of Property as provided for in the 2014 Tangible Asset and Repair Regulation dictates.
Let’s get back to our original example to show the positive effect of Cost Segregation on your bottom line.
Purchase Price $2,000,000
Land Value $400,000
Depreciable Basis of Improvements:
That’s roughly DOUBLE the depreciation you can expect from straight-line depreciation, and could lead to bottom line tax savings of almost $30,000 in the same 37% tax bracket.
And finally, BONUS DEPRECIATION!
Sorry for the delay, but we are finally at the main point! The Tax Cuts and Jobs Act of 2017 contained a provision allowing for 100% Bonus Depreciation for any commercial, for-profit asset placed in service or purchased after September 27, 2017!
This means that for any portion of the asset with a depreciation-life of 20 years or less, 100% of the value can be depreciated in the first year of ownership! Read what the IRS is saying about bonus depreciation here.
For most commercial properties, we typically find assets with a depreciation life of 5 years, 7 years and 15 years, along with the 39 year depreciation life, during the course of our cost segregation studies. Given the new laws, any assets found in those shorter depreciation life categories can be depreciated 100% in the first year of your ownership of the asset.
This can amount to between 25% and 45% of the total asset value, depending upon our findings during the site inspection!
Let’s look at our previous example through the lens of 100% Bonus Depreciation:
Purchase Price $2,000,000
Land Value $400,000
Depreciable Basis of Improvements:
I’ve purposefully kept these figures on the low side of our findings continuum, with the 100% bonus depreciation representing roughly 25% of the depreciable basis. We often find much more!
The new tax law allows the use of bonus depreciation for only a few years. If you are interested in taking advantage of the new tax laws, protecting your bottom line, and maximizing your cash flow, act now. You may contact here us and request a free preliminary evaluation.
Check out our quick and free tax savings calculator to see how much you can save with a Cost Segregation study using bonus depreciation.
If you have plans to sell your property and buy another property from the money gained from your recent sale then you must definitely know about the 1031 exchange. This 1031 exchange is basically helpful for investment property owners who are constantly buying and reselling in real estate markets.
WHAT IS 1031 EXCHANGE?The exchange helps you to avoid paying capital tax gains after reselling your investment property. It helps you to reinvest more in similar types of property or any property that has more gain than the previous one.
WHO NEEDS TO UTILIZE THE 1031 EXCHANGE?Any investor who is looking to get more return prospects by selling their investment property.
Anybody who wants to own a managed property
For investors who want to segregate one single property into multiple assets.
Any property owner who is willing to recapture depreciation
GUIDE TO THE REPLACEMENT PROPERTYWhen you are opting for a 1031 exchange, your next type of investment is defined according to the property location and not with the grade of the property. For instance, you can exchange your commercial building for a warehouse and a residential building can be exchanged for vacant land. Any like-kind properties can be replaced and they are applicable for 1031 exchange.
Investors who applied for the 1031 exchange have a timeline of 180 days. Within 45 days of the sold date, you must have found your replacement property. Within 180 days the total purchase needs to be completed. There are three sets of rules for applying 1031 exchange in your new property purchase. You must meet at least one of the rules to apply for a 1031 exchange. The three rules are given below
3 property rule
3 property rule – It allows you to find the three best properties that do have good potential market value.
200% rule – You can go for unlimited replacement options if your cumulative value does not exceed 200% of the previously sold property.
95% rule – It can help to get multiple properties within the 95% value of acquired properties.
1031 is highly effective in deferring the capital gain taxes. When your capital taxes are less, you have more capital to invest in your new property. But 1031 exchange transactions are highly complex and that’s why you need tax consultants or professionals to help with it.
Know more @ https://www.cutmytaxes.com/