News & Events

As reported by the Birmingham Business Journal earlier this year, the incidence of commercial and industrial loan defaults is “soaring.” Alabama’s largest branch system reported defaulted commercial and industrial loans in excess of $100 million.

As lending standards in the credit markets continue to tighten, the issue of debt service coverage is becoming even more crucial to real estate investors and the banks that lend to them. In times like these, it is imperative that both investors and banks explore all sources of cash flow in the underwriting process, as both parties are equally vested in its successful outcome. For banks, the issue is the risk/return profile on the loan. For investors, it is access to the cash they need to successfully finance and close real estate deals.

The good news is that a solution exists. It is Cost Segregation.

Cost Segregation is the use of engineering due diligence on real estate to identify and value short-life tax assets. These short life assets afford the investor near-term (Typically 5, 7, or 15 year) tax depreciation deductions that would otherwise be spread over 39 years. This acceleration of deductions dramatically increases near term cash flow.

Cost Segregation produces extra cash flow exactly when both lenders and investors want to see it – during the payback period of the loan. As such, Cost Segregation is a powerful tool to help investors service debt. 

Additionally, the 2008 Economic Stimulus Act signed into law by President Bush, contains special provisions that enhance the ability of a Cost Segregation study to accelerate depreciation deductions. According to iParametrics employee and cost segregation expert, John Shepardson, Cost Segregation’s power to diminish the risk of commercial Real Estate loans has never been greater than right now.

In discussing Cost Segregation’s role in the 2008 commercial real estate market, Shepardson notes: “Cost Segregation is a formidable foe of risk that might otherwise derail real estate deals in 2008. As it improves debt service coverage for real estate investors and reduces risk for lenders, it represents the classic ‘win-win’ proposition. In a tightening credit market, it is a tool that all lenders and real estate investors should be considering.”

John Shepardson is a Civil Engineer and an IRS Enrolled Agent. He serves as the director of the Cost Segregation practice for iParametrics, LLC, a consulting firm based in Alpharetta, GA.

John.shepardson@iparametrics.com