Cost segregation increases debt-service coverage every time it’s applied.
By applying cost segregation to any method of financing there will always be an increase in debt-service coverage…sometimes by 3:1 or more. In today’s shaky economy, when bank loans are nearly impossible to negotiate even for the best of credit risks, cost segregation provides the needed additional cash flow to make an otherwise “DECLINED” become an “APPROVED!”
The answer is simple. Cost segregation accelerates depreciation on all qualifying Sec. 1245 assets as well as qualifying Sec. 1250 assets. Sec. 1245 assets fall into three classes: 5-year, 7-year and 15-year. There are some 15-year assets that actually fall into the Sec. 1250 class. Tangible personal property are Sec. 1245 assets and land improvements are both Sec. 1245 and 1250.
Cost segregation not only accelerates depreciation but also reduces the income tax burden while correspondingly increasing cash flow. Cost segregation also reduces real estate taxes because personal property is assessed at a lower rate than real property.
This combination of expense reductions again, correspondingly, increases cash flow substantially which gives the “banker” additional debt-service coverage to meet federal requirements for lender financing. This extra cash flow can turn a decline into an approval very easily. The extra cash flow can take a solid loan package and give the borrower the ability to negotiate a lower interest rate. Or, if the borrower is so inclined, due to the increased cash flow, negotiate for a reduced or perhaps eliminated down payment.
Cost segregation is a tremendous tax strategy that every commercial real estate owner should employ. Whether it is done prior to purchase or construction, or after, both choices will increase available cash flow significantly.
Take a look at a recent cost segregation study on an apartment community where the buyer negotiated 100 basis points off the bank financing.
For more information, or to find out how to apply cost segregation to your commercial property, click on FREE ASSESSMENT to open a client profile form. It takes 2 minutes to complete…find out today how much you can save!