Hello.
Thanks for joining us today.
My name is David Moore, here with Equity Advantage
today, and we just finished up our monthly
CCIM program.
It was very interesting, on shared office
space.
But I'm blessed to have my good friend, Jonathan,
here with me.
We're going to talk about cost segregation
today, and I think we've got to start off
by talking about what cost seg is, but real
quickly, Jonathan, you are now with a new
firm, CBRE.
You want to tell us a little bit about how
you got into cost seg and how you got to CBRE?
You bet, David.
I've been in the cost seg industry now since
September of '06, coming up on my 13th year.
CBRE would try to recruit me four or five
years ago, and I didn't know it.
There was an opportunity last fall, and I
decided to take it.
But it's a great team of engineers, and they
do wonderful work, and the level of execution
delivering the studies is perfect.
Well, that's great.
Good.
That's good to hear.
And just in the audience, you don't know where
Jonathan is, but tell them all where you're
based.
And obviously we're in Portland today, but
that's not home for you.
I'm based in the Seattle area.
I'm a third generation native of Seattle.
I live in the Olympic Peninsula across the
water, but I do properties in all 50 states
in our republic.
In fact, I'm finishing up a multi-family in
South Carolina right now.
But mostly my properties are down on the West
Coast, but ... Actually, I take that back.
I just picked up another one in Chicago, so
I'm all over the country.
So you got ahead.
I was going to segue, and my next question
was going to be are you geographically limited,
but you already took care of that piece, so
I don't have to ask it.
That's right.
That's a good thing.
So, Jonathan, people ask me all the time that
you just walked into my office and one of
the people in the office said, "Well, what
does Jonathan do?"
And I guess, on the most basic sense in my
simple mind, I look at cost seg, the most
basic description I gave her was, "You buy
a rental house, and the most basic example
of cost seg is the delineation between dirt
and improvements on that."
Right?
And what happens, let's say, with a rental
house, if you're talking about a 27 and a
half year depreciation schedule, what happens
with the return on that investment if you
increase or decrease the allocation of the
improvements.
If you increase the improvements, your ROI
obviously increases dramatically, and vice
versa.
But the thing I always get a kick out of,
and I talk to people, ask them all the time,
I say, "Well, you bought that rental house,"
and I understand in our 1031 business, peoples'
first investment property, a lot of time,
was their home, and then they maybe outgrow
it.
Or they start off with a rental house and
slowly grow it.
And they get out of residential property,
multi-family, hey, it's just a house.
Everybody's feeling comfortable with it, and
then ultimately, they end up branching off
into some other more industrial type property,
or retail, or something else there.
But if we look at a rental house, who makes
that allocation for dirt and improvements,
typically?
You deal with this every day, it's your business,
you're talking to tax people, legal people
all the time.
Right.
In that most basic example, Jonathan, who
makes those allocations?
And then, give us just a quick, broad scope
of what cost seg is.
Well, cost segregation is nothing more than
acceleration of depreciation, which increases
one cash flow.
By re-classifying those buildings into shorter
depreciable lives, from 27 and a half on multi-family,
and 39-year on commercial, we're going to
give them smaller lives of five and seven
year, which is personal property.
Fifteen-
So if we look at a rental house for example,
we're just talking dirt.
Sure.
Which you're not going to depreciate, and
the improvements which you're going to.
That's right.
A rental house is typically 27 and a half.
27 and a half.
Yeah, and those single family rentals, in
fact I've done a ton of them.
We have a model for that as well.
We don't even have to do a full blown cost
seg study, we can still get a study done,
a report done for it that the IRS will approve.
Did a ton of those last summer.
It's important to note that the owner and
the tax professional will allocate what the
building land cost base is.
IRS frowns on us doing that.
They want it to be an arms length transaction.
And whether it's a 1031 or not, once we get
that net building access basis, and the land
cost basis with a physical address, I can
run the analysis for them at no cost to them.
So, you made a comment earlier, cost seg,
it's not creating more depreciation, you're
just accelerating it.
That's right.
That's right.
We're accelerating the depreciation.
So, if you have a million dollar basis, I
know with certainty regardless of product
type, I know with certainty I'm going to accelerate
anywhere from 25 to up to 50 percent of that
cost basis.
So, you're looking at significantly 250 thousand
to 500 thousand of that million dollar basis.
If we look at ... What's a typical property
look like to you?
If I said, "Jonathan, is there a single property
group that makes up, let's say 25 percent
of your business or something."
What would that be?
What's the most common asset that you do a
study on?
That's a great question.
Or a value maybe too?
I guess my question is sort of a leading question
because I think historically people look at
it and apply it to these big office building
we're in.
Sure.
But, if we just crank it back to it's most
basic sense to that rental house, we talked
about dirt and improvements.
But, in a rental house, what would you bust
it up into?
How many components maybe?
Oh god.
Even then you're still going to break it down
into it's hundred components, even in a little
single family.
And you're looking at the wiring in the house,
you've go the flooring, if there's any base
at all on the walls, wall coverings, go in
and take a look at the bathroom, even the
driveway's going to be 15 year.
We'll look at the landscape, which is 15 year.
The good news about cost segregation, regardless
of product type, is you can also use as an
asset management tool.
Where then, you're going to know ... Our studies
here at the cost seg group of CBRE, we give
expanded detail, not only on the 1245 the
personal side, we're going to break down
the roof, the HVAC, fire suppression.
So, therefore when the client, or the owner,
has to replace that unit of property, that
component, they'll be able to know what the
value of that, and then get it off the books
and have another write down condition going
forward.
That's very important to note.
So, back, I sort of interfered with your response
to my question on if we look at a common.
What's most common asset that you do?
Multi-family has been the darling.
Still the darling product performing the last
nine, 10 years.
So, to answer your question, on multi-family,
depends if it's surface parking or not.
If it's surface parking, you're looking at
anywhere from 15 to 21, 22 percent at a five
year.
And then surface park anywhere from seven
to as high as 26, 25 percent at 15 year.
Again, it ranges.
25 to 45 percent.
It's important that light industrial as well
as distribution buildings, and flex buildings,
they might not be as sexy as a dental office,
or a fancy medical office.
Dental offices are really sexy.
They really are.
My dad had one.
In my perspective they're very sexy because
there's a lot of five year in that.
I love dental offices.
The bottom line is that-
By the way, just for the sake of the audience,
when Jonathan's talking years, it's all that
life of that asset.
Depreciable life.
Depreciable life.
That's correct.
That's right.
And so, even self storage, heated self storage,
there's an important note, the HVAC systems
for the self storage, usually HVAC is sucking
39 or 27 and a half year lives.
While on self storage, that heating, or that
heated storage, that HVAC is specific to the
business activity that that IRS talks about.
And so that becomes personal property when
you have a flown blown comprehensive cost
seg study done.
So there's a lot of ways to skin the cat,
but some of my biggest yields, yields meaning
wonderful acceleration of depreciation has
been on like FedEx distribution centers.
And they're not as sexy and pleasing to the
eye as maybe a fancy office, or a dental office,
or a medical office, but where's the lot of
yields on those.
Marinas is another one.
Really?
Marinas, I love doing marinas.
Give me an example of what you do with a marina.
You've got all the clutches.
I love marinas too.
I love sitting in them.
Especially down south.
Yes.
Give me some sunshine.
You've got those electrical hookups and the-
Plumbing.
The cabling, the water sewer.
You've got those 20, 30, 50 amp switches specific
to each slip.
You've got those wonderful, all different
sizes of clutches.
Sometimes pump valves.
And those are all personal property in nature.
The marina itself ... You know marinas and
gas stations, at the end of the day when we
get done with them, they all end up in five
and 15 year, and there's nothing left over.
There's no 39 year.
So there's a lot of yield on those particular
types.
But you name any kind of building, and I've
delivered it.
So I'm pretty excited about any kind of product
type.
That's great.
As far as your first exposure to it, how were
you made aware of cost seg?
What happened?
Well that's ... it happened.
Where were you, and what all said, "Hey, cost
seg."...
I had a childhood friend of mine lived in
the back neighborhood.
He lives in Santa Ana Heights.
David, and he asked me if I had heard of cost segregation, this was in the late summer of
'06.
He knew me in the wholesale lending background
and the hospitality industry and knew I was
very customer service driven as well as numbers
driven.
And he thought it was something for me to
take a look at.
And so I took a look at it for about 30 days.
And that's when it all started.
Literally the second, third week of September
of '06.
Wow.
Yeah.
Wow.
It's been an interesting ride let me tell
you.
So when I met you, Jonathan's real active
with the CCIM organization, both in Seattle
and in Oregon, correct me if I'm wrong.
Yeah, both chapters.
In Oregon, I know you are.
Every month.
I see you every month.
Ten years.
And Seattle, I've bumped into you there in
the meetings up there too.
At least once or twice probably.
I've been a sustaining member for probably
'08 in the Washington chapter, and '09 on
the Oregon chapter.
I've been a sponsor like you for many, many
years.
And it's been a privilege to do so.
So I met, just shortly after you got started.
Because it's been ...
About two or three years, three years.
Yeah.
Three years.
My first big deal was in '08, but my book
of business finally really started taking
off in 2010.
I haven't looked back since.
Nothing but hard work and being diligent.
That's great.
Well thank you for being here with us today.
Once again David Moore with Equity Advantage
and IRA Advantage, and Jonathan Frizzell with
CBRE Cost Seg.
Once again, Jonathan works out of Seattle
but he can do things coast to coast for ya.
I guess the one thing I should say, since
we're definitely delving into heavy tax today,
the conversation is, and Jonathan's mentioned
a couple times before you take action on anything
that's presented today, make sure you're consulting
your tax and legal council.
And Jonathan would be happy to work with you,
answer any questions you've got.
We'll be right back.
Thank you.
Thanks David.
