Underused tax tactic touted

January 9, 2009
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In today's slumping economy that has landlords giving tenants more lease incentives than ever and getting more cold shoulders from bankers than in years past, commercial property owners may think that having their tax bill reduced would be the equivalent of an Olympic feat.

The fact that Vantage Point Advisors LLC was launched the day the Olympic torch was lit on 8/8/08 is probably just a coincidence. But Greg Richardson and Tom Avolio did start the firm that day to help commercial property owners reduce their tax liability and increase their cash flow to give them more capital to invest in their businesses.

"That is kind of what we aim to do. The idea behind the service is to provide an additional tax shelter with regards to the type of classifications that can be made within a building," said Avolio, who is leaving the firm he started with Richardson to revive the consultancy business the two had before Vantage Point opened.

Let's set the scenario for how this works.

Someone who buys a commercial building can't deduct the total purchase price in the same year it is bought. According to the Internal Revenue Service, that expense has to be depreciated over 39 years — unless a buyer segregates the building's assets.

"There are things in that building and infrastructure within that building that you can reclassify so you can actually take more off your tax bill sooner and actually have that cash to reinvest in your business, or in your people, or in other things — whatever the case may be," said Avolio.

Avolio is referring to something called cost segregation. It's something the U.S. Treasury Department said was a "lucrative tax strategy that should be used on almost every major purchase of commercial real estate." There are two types of cost segregation: residual and engineering.

Engineering is the better of the two because it meets all 13 "Elements of Quality" the IRS endorses, while residual doesn't. More importantly, engineering cost segregation normally lowers an owner's tax liability faster and further than the residual method.

"What we're doing is taking some of that infrastructure at 39 years and we're moving it into shorter lives — say five, seven or 15 years. The way that we're able to do that is from a true engineering perspective and seeing how that infrastructure is being used," said Richardson.

As an example, Richardson said every computer and landline telephone has an electrical outlet and a communications port. Computers and phones are five-year assets. So are the outlets and ports the devices are connected to and the wiring that makes the connections. So are the portions of the electrical panels and communications racks that receive the phone and computer connections. All are five-year assets and can be depreciated 34 years earlier than the building that houses this infrastructure.

"So it's really about how the infrastructure is being used to support the work that is being done inside the building. We get all the residual stuff, like the carpeting and ceiling tiles, but now we take it to the mechanical, electrical and plumbing systems," said Richardson, who is a certified public accountant.

"Take a toilet: It's a seven-year asset," he added. "It's those kinds of things that residual doesn't get at. But when you get construction engineers and accountants working together on it, you can identify a lot more of that mechanical, electrical and plumbing infrastructure to move into a shorter life."

Vantage Point recently performed an engineering cost segregation study for Third Coast Development Partners on the new Hart & Cooley headquarters and research center at 5030 Corporate Exchange Blvd. SE in Cascade Township.

Third Coast built the 60,000-square-foot structure in 2007 for $5.5 million. The study reclassified about 25 percent of the building's total value into shorter-life assets, meaning a goodly amount of the infrastructure can be legally depreciated at a much faster pace than the building can decrease in value. The current value in savings to Third Coast's tax liability from the study came to multiple six figures.

"I think the first year we saved 10 or 12 times their fee. The other thing that is cool about it is, you don't have to use a new building. If a building is a couple of years old, it's fine. You get sort of a catch-up entry on your taxes," said Dave Levitt, a principal with Brad Rosely in Third Coast, who added that his firm has used Vantage Point twice so far.

"Who does this apply to? About everybody who has a for-profit company. If you look at anything that people have bought or built or renovated in the last five years, it's a lot (of savings)," said Levitt.

Richardson said Vantage Point conducts a segregation study with an engineering firm in Atlanta that has an impeccable record with the IRS. The price varies by a building's size and use. But Richardson said the savings that come from a study has reached as high as 45 times the client's cost of doing one.

"We look for what we call a return on investment, in general, from 10 to 25 (times a study's price). Basically, the bigger the building, the higher we can get on a return," he said.

Richardson and Avolio named their firm Vantage Point to signify that they've learned to look at other people's buildings in a way that most owners don't.

"It's an office — I've always looked at it this way," said Richardson of how most buildings are seen. "But if I look at it this way, I can get a lot more money out of that than I thought, just by taking a little bit of a different vantage point. So that's how the name came about."

Statistics show that fewer than 5 percent of commercial property owners have had an engineering cost segregation study done on their buildings. To qualify, an owner must either have built or bought a building in the last 10 years, and the structure's value has to be at least $1 million.

"It's an interesting thing that has been around for 22 years. It's been in the tax code since 1986. I mean, you can do this. It replaced something called the investment tax credits. So it's been around for 20 years and still people haven't taken it to the level we're talking about. And I don't have any good answer for why that is the case," said Richardson.

"The reason why Tom and I got into it is, there is tremendous value for building owners to do these things."

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