1. COMMERCIAL
AFFILIATES
Capital
Recovery
Specialists
commercialaffiliate.com info@commercialaffiliate.com
205 SE Spokane Street, Suite 370 • Portland, OR 97202 • Phone: 503.731.6000 • Fax: 503.208.8053
2. Welcome to our
Cost Segregation Training
This training will provide you with
an understanding of the
fundamentals of cost segregation.
In addition, we will be discussing
your status as an independent
contractor, and the facts you need
to understand to pursue a career
as a Commercial Affiliate.
3. Introduction to the
Cost Segregation Industry
• What is Cost Segregation?
• Cost segregation is a service that helps clients
reduce their federal and state income tax
liabilities through accelerated depreciation of
their investment property.
• Market is very large and under-served.
• There is a clear need for simple, focused training
in this area. The clear and present question
could be classified as: What is Cost Seg, anyway?
4. The Cost Segregation
Definition
• Cost Segregation is the process of identifying and
reclassifying discrete components of investment
property as either personal property, or land
improvements instead of real property under the
Tax Code.
• Real property is depreciated over 39 years.
• Personal property is depreciated over 5 or 7
years.
• Land improvements are depreciated over 15 years.
• Reclassification is accomplished through an
engineering based study that combines a working
knowledge of tax law and construction accounting.
5. The Benefits of Cost
Segregation
• On average, cost segregation results in the
reclassification of 20% to 40% of a property’s
value. For some properties, the reclassification
can go as high as 60% to 80%.
• These reclassified components are subject to
an accelerated rate of depreciation of 5 years
and 7 years for personal property and 15
years for land improvements vs. 39 years for
real property (or, 27.5 years for residential
income property.
• By accelerating the rate of depreciation,
property owners increase their depreciation
deduction, and thereby reduce their federal tax
liability.
6. History of Cost
Segregation
• Concept has been around for decades and used to
be referred to as component depreciation.
• Investment Tax Credit, (ITC) focused on separate
assets with cost segregation.
• The Tax Reform Act was repealed in 1986 and many
believed cost segregation was repealed as well.
• 1997 landmark decision, Hospital Corp. of
America, Tax Court ruled cost segregation was
alive and well.
• 2002 IRS allows automatic consent to change
method of accounting using Form 3115 and allows
“catch up” on prior years.
• 2002 IRS eliminates 4 year waiting period to
change method of accounting.
7. Property Classes
Defined
• 39 Year Property: refers to the building structure and its
integral components. This includes the foundation, the
load-bearing walls, roofs, ceilings, general electrical,
plumbing and mechanical systems.
• 5 Year Property: refers to specialized equipment that
serves the primary function of the business. Examples
include specialized mechanical, electrical and plumbing
systems such as those found in a restaurant kitchen, or in
manufacturing facility.
• 7 Year Property: refers to those items that dress out the
interior such as furniture, decorative lighting, drapes,
flooring, cabinetry, non-bearing walls, telephone equipment
and office equipment.
• 15 Year Property: refers to exterior land improvements
separate from the building structure. It includes such
items as irrigation systems, site utilities, trash enclosures,
paving, grading, storm drains, parking lots, retaining walls
and landscape lighting.
8. Accelerated
Depreciation
• 5 and 7 Year Property is subject to a double
declining method of calculation. Can claim 40%
of value as depreciation in first year alone.
• 15 Year Property is subject to 150% declining
balance method of calculation. Can claim 10%
of value as depreciation in first year, as well.
• These concepts help to front load the benefit
to be achieved from cost segregation.
9. Catch Up on Prior
Years
• Property owner can go back and recapture
past depreciation for the years preceding the
timeframe of the study as long as the
property was placed in service after 1987.
• For example, if Property owner purchases a
building in 2002 and completes a study in
2009, he/she can claim benefit of all five
years of accelerated depreciation in this tax
year.
• End result is substantial cash flow benefit
to client.
• Client files IRC §481(a) adjustment with tax
return.
10. An Accelerated Rate
of Depreciation
The chart below illustrates the relative
annual depreciation deduction for a $100,000
asset in each of the four property classes.
$20,000.00
$15,000.00
$10,000.00
$5,000.00
39 Year
15 Year
7 Year $0
5 Year
11. An Increased Tax
Benefit
The chart below illustrates the net tax
benefit to the owner for the same $100,000
asset in each of the four property classes.
$7,000.00
$5,250.00
$3,500.00
$1,750.00
39 Year
15 Year
7 Year $0
5 Year
12. The Bottom Line
Let’s assume a property is valued at $2,500,000
and compare a straight-line depreciation with a
30% reclassification through cost segregation.
$300,000.00
$250,000.00
$200,000.00
$150,000.00
$100,000.00
Year 7 Year 6 $50,000.00
Year 5
Year 4 $0
Year 3
Year 2
Year 1
Cost Seg 39 Year
13. Improved Cash Flow
In the preceding example, our owner liberated
$615,383 in accelerated depreciation and obtained a
net tax benefit of $215,384 through cost
segregation.
! The accelerated depreciation and net tax benefits,
over and above the 39 year method of depreciation,
were also front-loaded as illustrated below.
$250,000.00
$200,000.00
$150,000.00
$100,000.00
$50,000.00
Year 7 Year 6
Year 5
Year 4 $0
Year 3
Depreciation Year 2
Year 1
Net Tax Benefit
14. Cost Segregation &
1031 Exchanges
• These two concepts can be applied
simultaneously.
• There are two key concerns:
• Replacement property must have “like kind”
personal property component.
• Failure to address above can result in
depreciation recapture taxed at ordinary
income levels.
• Vehicle for repeat business as replacement
property will also need to have cost
segregation study performed to substantiate
“like kind” claim.
15. What Type of
Property Qualifies?
• Commercial Property and Residential Income
Property with a tax basis of $1,000,000 or more.
• Property owner must operate as a “For Profit”
entity and pay Federal taxes.
• Capital improvements and lease improvements with
a basis of $500,000 or more are also candidates.
• 1031 Exchanges are also good candidates for
cost segregation.
• New construction and projects under
construction.
• Property should have been purchased within last
10 years.
16. What Are The Steps?
• A completed Request for Proposal (RFP), with the
minimum following information needed:
• Address of the Property
• The date the Property was put into service
• The type of facility
• The Tax Basis (or cost basis)
• Upon receiving this information, a preliminary analysis
can be developed.
• Obtain and review all available construction
documentation and perform an onsite inspection to
verify the information.
• Engineering Group analysis leads to a review and
determination which components can be reclassified in
accordance with the Tax Code.
• Findings, with all back up documentation, are presented
to the client and to their accountant for review.
17. Your Marketing Strategy
as a Commercial Affiliate
• Key to your success will be identifying users.
Property owners can be identified in a variety of
ways:
• Prospect Now
• Loopnet
• Propertyline
• County Recorder Sites
• It’s critical that you plan for building your
referral network
• Use targeted direct mail and E-mail campaigns
• Often, finding owners for studies can be
classified as simply “who you know”
18. Suggested Marketing
Materials
• Sample letters that identify you and what you do
for clients
• Personalized flyers which can be distributed at
meetings and in investment forums
• Development or copying of articles on Cost
Segregation
• Access to this and other PowerPoint
presentations on Cost Segregation
• Development of a personal website highlighting
your position as a Commercial Affiliate Analyst
• Targeted explanatory pieces for initial
“exposure” to Cost Segregation
19. During Your Client
Presentation
• Plan to educate the client:
• Using PowerPoint
• Using Articles
• Plan to show an example of a preliminary
analysis
• Explain the purpose
• Explain the limitations
• Plan to offer an example of a final report
• Explain the contents
• Explain how it is to be used
20. The Timeline and Sales Cycle
for Cost Segregation
Services
• Initial letters, contact, marketing materials
! ! 15 days
• First face-to-face meeting
! ! 15-30 days
• Collection of Materials required
! ! 7-10 days
• Preliminary Analysis and Fee Schedule Presentation
! ! 14-21 days
• Commitment from Client
! ! 5 days
• Executed Agreement
! ! 7-14 days
• Engineering review and Study Completion
! ! 45-60 days
21. 10 Key Steps
Identify your potential clients.
Forward the appropriate marketing material to the client.
Set up a conference call with the client. Discuss the various
aspects of the potential work to be accomplished.
Discuss the process and the alternatives that can arise.
Visit with the client and secure a preliminary review commitment.
Report the specific information garnered from the preliminary
review to the client.
Write up and execute a written, formal Agreement with the Client.
Work with the Engineering Group to secure all needed
information from the site visit. Keep in contact with the client.
Plan on visiting with the client during the Engineering Group
meeting. Stay in contact for future business opportunities.
Create goodwill with the client and ask for networking
opportunities.
22. Your Continued and
Ongoing Responsibilities
• Assist with the completion of a study and
ensuring client satisfaction.
• Continue filling your pipeline.
• Remain in contact and follow up with previous
contacts.
• Network, network, network.
• Maintain the highest degree of ethics in your
dealings with your clients.
23. Your Legal Considerations
as a Commercial Affiliate
• Your Status as an Independent Contractor.
Maintenance of this is paramount.
• Always use an IRS disclaimer in e-mail
signature.
• Use of Your Own Collateral. Have
statements vetted by a competent Attorney
prior to submission to clients.
• Maintain personal and professional integrity
at all times.
24. COMMERCIAL
AFFILIATES
Thank You
commercialaffiliate.com info@commercialaffiliate.com
205 SE Spokane Street, Suite 370 • Portland, OR 97202 • Phone: 503.731.6000 • Fax: 503.208.8053
