Cost Segregation Studies

We work with many of our real estate clients to engage engineering services companies that can perform cost segregation studies of their real estate assets.  These studies look at the components of a property to determine the proper depreciation life of the assets.  A component with a shorter depreciation life is advantageous because it increases the depreciation expense in early years and in so doing, reduces taxable income of the entity.  As your accountants, we can help coordinate and interpret the engineers’ findings and reports.
Cost segregation studies can be performed on new or existing construction as well as at the time of purchase or construction, or even after years of ownership.  If the study is performed after years of ownership, we can assist you in making a “catch up” deductions on your taxes in the year the study is performed, thereby reaping tax benefits for the years in which the depreciation lives may have been longer.

If you would like more information about cost segregation studies, please give us a call.

Estate Planning Services to Real Estate Clients

Under current federal estate and gift tax rules, every taxpayer has the ability to give away over $11,400,000 of property during lifetime or at death.  Anything in excess of the above amounts is subject to tax at a rate of 40%.  In addition, there are annual exclusions and specialized exclusions for medical and educational gifts that provide many opportunities to transfer wealth well in excess of the current overall limits.

For those whose wealth is tied up with significant real estate holdings, the need for estate and gift tax planning becomes critical to avoid having to deal with unintended consequences (such as forced liquidations) of holding illiquid assets.

The ORBA Real Estate Group has helped many real estate clients navigate the complex estate and gift planning issues they may face.  Using sophisticated techniques including, among others, family limited partnerships, intentionally defective grantor trusts, and grantor retained annuity trusts, owners of real estate have transferred significant amounts of wealth both during lifetime and at death far exceeding the limits noted above.  Additionally, through the aggressive use of valuation discounts, we have created numerous opportunities to keep valuable properties within the family through multiple generations.  Although taxpayers occasionally avoid dealing with issues related to their mortality, the tax benefits from this type of planning and conversely, the detriments of not planning can be significant.  We also work closely with estate planning attorneys to help clients accomplish their estate planning objectives.

Evaluating the Economics of Real Estate Deals

Real estate plays a major role in the economy during both good times and bad.  When the economy is strong, there tends to be an ample supply of real estate “deals” from syndicators and developers looking to provide benefits for themselves and to their investors.  These investments are often structured as limited liability companies (LLCs) or limited partnerships and can involve all types of real estate including multifamily housing, industrial, retail, office, self-storage, medical, hospitality and any other types of property (including raw land).  ORBA’s Real Estate Group often assists real estate clients with structuring transactions to attract new investors, as well as investors who look for help in evaluating the quality of potential investments.

Whether looking at the deal from the promoter’s or the investor’s perspective, we tend to focus on the following factors in evaluating the quality of a deal:

• The quality, reputation, track record and personal investment of the syndicator/developer in both up and down markets;
• The demographics of the property, including location, size, competition and financing; and
• The terms of the specific deal including expected returns, preferences, tax consequences and promoter fees.

Real estate deals can be risky, but also very lucrative for both a promoter/syndicator and an investor.  Returns can be very good, and often, the investment has substantial tax advantages.  They also tend to be long-term, illiquid investments that carry varying degrees of risk.  ORBA can help to analyze this risk from either side and help clients understand what they are getting into.

Financing Issues

Most purchases of real estate include mortgage debt so that the owner can leverage their position and can pay the debt service from current and future cash flow from the property.  At ORBA, we routinely work with our real estate-owning clients in the negotiation of new loans, the refinancing of existing loans and in discussing borrowing needs with their bankers or lenders. With the limitations on the deduction of interest created under the Tax Cuts and Jobs Act of 2017, the level of financing becomes critical in maximizing any tax benefits from the ownership of property.

One of the most common measurement ratios that a banker will use to determine the amount they will lend on a property is the Debt Service Coverage Ratio (DSCR).  The DSCR is a ratio, the numerator of which is the net income of the property for a period after adding back the non-cash expenses of depreciation and amortization as well as the interest expense on the mortgage debt, all divided by the mortgage interest and principal of the debt.  A property cannot afford to pay its debt if that ratio is less than 1.00. Lenders generally expect a ratio of 1.15 or greater.

If you are considering a purchase or looking to refinance debt on your real estate, contact your ORBA real estate experts to discuss lending issues. We will also be pleased to  introduce you to lenders with whom we have worked on other deals.

Income Tax Preparation

The taxation of real estate has always been complex and is even more so under the Tax Cuts and Jobs Act of 2017.  At ORBA, our certified public accountants specialize in preparing income tax returns for commercial and residential real estate properties owned by corporations, partnerships, trusts and individuals.  We provide complete and accurate tax returns for any stage of your real estate transaction.   Whether you are conducting business in one state or many, we are on top of current accounting and tax laws and have the expertise to identify federal, state and local tax credits that can help you minimize your overall tax liability.

Real Estate Litigation Support Services

Landlords, tenants, owners, managers, investors, lenders….  As much as we all try to get along, sometimes disputes happen in relation to real estate.  We are often called on to help determine the facts as they relate to agreements in the operation and ownership of real estate.  We represent clients or attorneys in various aspects of disputes related to real estate.  Such disputes might include:

• Calculation of coverage ratios in loan agreements
• Calculation of common area maintenance expenses as determined under a lease
• Calculation of management fees according to an agreement
• Calculation of percentage rents due under a lease
• Valuations of real estate in divorce litigation

Wherever an agreement calls for a calculation, there is bound to be a dispute as to how that calculation is made.  At ORBA, our goal is to gather the facts and determine what is correct.  Sometimes, we tell a client who is upset with a situation that the facts don’t warrant pursuing it in court.  Other times, we may be called on by an attorney to help them uncover the facts.  While we are not professional litigators, we rely on our years of working with real estate clients and our understanding of agreements related to property to help clients and litigators in their pursuit.  Several members of our group have given depositions in relation to real estate and been questioned in court hearings.  When necessary, we call on others in the firm who are experts in fraud examination or other aspects of litigation support.

Section 1031 Exchanges

As part of ORBA’s commitment to planning with our real estate clients, we always consider whether a Section 1031 or like-kind exchange is the right approach for a transaction. The ORBA team has extensive experience with this tax deferral technique, including assistance with finding and evaluating eligible replacement properties, compliance with strict identification and acquisition time limits and experience with the use of qualified intermediaries. With the advent of Qualified Opportunity Zones, the government has provided a new method of deferring and partially eliminating tax on the sale and exchange of property. ORBA can help you in navigating the complex rules and finding Qualified Opportunity Zones.

Do you want to diversify your real estate portfolio by acquiring different types of properties with the exchange proceeds? ORBA will analyze various types of properties to determine like-kind status.

Could successive like-kind exchanges be a valuable estate planning tool to permanently avoid gain recognition? ORBA has experience in estate and family planning for these transactions.

We also guide clients through multi-party deferred and reverse exchanges when the situation demands a more complex approach.

Our ability to identify the risks and benefits of structuring a Section 1031 exchange can aid clients in making critical business decisions with an eye toward minimizing taxes and maximizing value.

Services to Syndicators

The ORBA real estate team works with real estate syndicators and developers on all aspects of a deal. We provide feasibility studies and tax/cash flow projections, selection of the appropriate entity, evaluation of the economics of the property, debt and equity structuring, tax compliance and financial reporting, and assistance in matching investors with promoters. ORBA has contacts throughout the real estate industry to assist the promoter in the appraisal, management, brokerage, construction, operational efficiency, financing, legal or any other service that might be necessary at any stage of a real estate transaction.

Tax Consulting

The real estate industry presents tax planning issues and opportunities for every investor, developer, property manager, property owner, and real estate professional. ORBA has the skills and expertise to meet all of your real estate tax consulting needs, including issues related to management, rental, brokerage, development, construction and other ancillary services you may provide. Our team of real estate professionals is dedicated to your market, your business and your goals.

The IRS has complex tax rules that are unique to every aspect of real estate activities. Our clients benefit from our experience and resources by seeking our advice on daily business issues, such as the tax impact of owning a passive activity instead of an active trade or business, or looking for our assessment of the tax benefits of various real estate transactions. We offer evaluation and analysis related to valuation issues, the economics of financing transactions, acquisition and restructuring issues, and lease planning.

Tax consulting is very important to clients in order to best manage tax consequences and the timing of income taxation. Many taxpayers still benefit from structuring real estate entities to preserve capital gains and to defer taxes through like-kind exchanges, Starker trades and reverse swaps. In addition, the new 3.8% tax on net investment income that took effect in 2013 and the Qualified Business Income rules and limitations on interest expense deductions that took effect in 2018, make it even more critical that taxpayers take action to properly structure real estate activities. Often times, real estate owners are faced with many tax decisions regarding the grouping and structuring of their real estate holdings, having the benefit of ORBA’s tax consulting expertise can make a substantial difference to their bottom line, especially in the area of minimizing their tax liability.

Vacation Home Tax Benefits

One of the many benefits enjoyed by well-to-do individuals is an ability to own multiple residences.  Often, the second residence is located in a resort location where significant rental income may be possible.  Generally, the owner of the second residence is able to deduct the mortgage interest and the real estate taxes regardless of whether the property is rented.  However, the interest deduction may be limited because the mortgage balance on both properties exceeds the applicable limit and the real estate taxes may be limited by the Tax Cuts and Jobs Act of 2017.

There is a very complex set of tax rules that govern the treatment of second residences that have both personal and rental use.  There are rules regarding the number of allowable days of personal use. With respect to the rental portion of the property, there are very strict ordering rules and limitations on the rental deductions.

At ORBA, we have frequently advised clients on the benefits and risks of owning second residences.  We have helped structure leases, assisted in monitoring the balance between rental and personal days, aided with financing, and made connections with leasing and sales professionals, all with a view toward maximizing the tax benefits associated with second-home ownership and thereby improving the overall performance of the properties.

HUD Audits

Participants in the insured multifamily housing program are required to prepare annual financial reports in accordance with the guidelines of the U.S. Department of Housing and Urban Development (HUD). These financial reports must follow generally accepted accounting principles (GAAP). Additionally, electronic submission of required financial and compliance data to HUD’s Real Estate Assessment Center (REAC) is due within 90 days of the participant’s year-end. This electronic submission is used to assess the financial strength and regulatory compliance of each HUD participant.

HUD audits are complex, specialized, and require certain disclosures of financial and compliance information. ORBA possesses years of experience and knowledge required to address the complexities of HUD programs, as well as the various federal and state requirements for HUD audits. ORBA’s HUD audit team regularly attends conferences and seminars to stay current on new HUD-related standards and regulations.

At ORBA, we work with our clients to comply with HUD requirements so that they can avoid penalties and sanctions from HUD programs.

Service Specialists

Justin J. Mascarenas