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Net Lease Group

BRC Advisors, Net Lease Group has been funded as the next phase of James Huang’s vision for BRC Advisors to provide exceptional real estate services which achieve the long term investment objectives of our client base. Many of our clients are Southern California-based multi-family investors who are diversifying and transitioning to NNN leased assets as part of a programmed strategy for their real estate holdings.

These net leased assets are generally single-tenant properties which may be located throughout the country. They may be leased to investment grade tenants, known as bond deals, or non-investment grade transactions whose tenants simply lack the “investment grade rating” from a rating agency like Standard & Poor’s or Moody’s. This connotes perceived risk of an event of default on corporate bonds over the lease term of these valuable properties. These properties require little or no operational management or expenses for an investor or landlord. They serve as risk-averse solutions for a range of investment objectives. Whether you are an investor who wishes to preserve wealth by deferring significant capital gain through an IRC 1031 or 1033 Exchange, an accountant working on behalf of a client to acquire additional basis for a better tax profile for an existing property, or a legal professional devising foreclosure strategies as clients face an uncertain future in a different interest rate environment, our Net Lease Group can craft a client specific solution in collaboration with client legal and accounting professionals.

Cost Segregation Studies

Purchasers of real estate can gain tremendous tax benefits by using a popular asset depreciation technique called Cost Segregation. IRC Section 1245 provides for a reallocation of the cost basis of a building to be depreciated over 5 or 7 year basis based on an engineering study often performed under the supervision of an accounting firm. Using this method, buyers view a real estate acquisition as consisting not only of land and buildings; but, also, tangible personal property and land improvements. The tax savings come from accelerated depreciation deductions and possible easier property write-offs. A taxpayer can use cost segregation when constructing a building, buying an existing one, or, in certain circumstances, years after disposing of one so long as the year of disposition still is open under the statute of limitations (see Revenue Procedure 2004-11).

Under prior law taxpayers would separate a building’s parts into its various components-doors, walls and floors. Once these components were isolated, taxpayers would depreciate them using a short cost-recovery period. CPAs referred to this practice as component depreciation.

The introduction of the accelerated cost recovery system (ACRS) and the modified accelerated cost recovery system (MACRS) eliminated the use of component depreciation, but not the use of cost segregation. Hospital Corporation of America [HCA] v. Commissioner, 109 TC 21 (1997), is the seminal cost segregation case. In it the Tax Court permitted HCA to use cost segregation with respect to a multitude of improvements. Critical to the Tax Court’s analysis was that in formulating accelerated depreciation methods, Congress intended to distinguish between components that constitute IRC section 1250 class property (real property) and property items that constitute section 1245 class property (tangible personal property). This distinction opened the doors to cost segregation.

Armed with this victory, taxpayers have increasingly begun to use cost segregation to their advantage. The IRS reluctantly agreed that cost segregation does not constitute component depreciation (action on decision (AOD) 1999-008). Moreover, cost segregation recently was featured in temporary regulations issued by the Treasury Department (regulations section 1.446-1T). In a chief counsel advisory (CCA), however, the IRS warned taxpayers that an “accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data or taxpayers’ estimates or assumptions that have no supporting records” (CCA 199921045).

Legal Practitioners

BRC Advisors, Net Lease Group presents its credentials to the legal community, many of whom we have completed transactions on behalf of mutual clients to meet client’s objectives. The real estate market has evolved and matured with the assistance of legal practitioners and real estate advisors often collaborating for the client’s benefit. We often coordinate and strategize with attorneys to craft a successful transaction which combines our market intelligence, and negotiating skills with cogent legal input that serves as a seamless process that often secures the result for a client in a competitive market environment and without such “legal choreography” the property would have been acquired by another skillful group of real estate/legal practitioners who had the ability to execute a client’s deal -making strategy more effectively.

Luckily we learn from experiences and do our collective best not to repeat them. I trust that we have all had such events in our careers…learning these profound lessons is the key for future success in our experience. Learning to work with other professionals to effectuate optimum results for clients allows us to out-perform the markets… but, not without he help and guidance of a seasoned legal team. We welcome the opportunity to produce such results for your real estate and tax clients.

This net lease niche of the real estate investment industry presents a risk-averse alternative for investors, many of whom are transitioning from management-intensive investments, like apartment buildings to a relative ‘coupon clipping’ option with predictable income streams and no management operations like their other real estate assets.

  • IRC 1031 provisions allow a taxpayer/investor to defer their gain and preserve their wealth. In choosing a net leased asset as a sound and conservative investment, a taxpayer/investor has a predictable income stream from tenants are effectively financed on their creditworthiness; as well as, the real estate intrinsic of more speculative investments. This is an important consideration in our changing real estate landscape.

Financial Planners

Financial planners determine how their clients can meet lifelong financial goals through management of resources. They examine the financial history-past and current-of their client’s assets and suggest exactly what steps the client needs to take in the future to meet her goals. Although other professional financial advisors usually focus on one area of a client’s financial life, the broad-based approach to financial advice that financial planners offer distinguishes them from the rest of the profession. In this sense, financial planners are jacks of all trades, but they do not work alone. Financial planners will inevitably meet with their client’s other advisors-attorneys, accountants, trust officers, investment bankers – in order to fully understand their client’s financial goals.

At BRC Advisors, Net Lease Group, much like the relationships that we have cultivated with the accounting and legal communities, we, as we define our role, “are not here just to sell your real estate”. We readily admit that we are, in fact, licensed real estate practitioners in a number of states; but, the BRC Advisors Net Lease Group recognizes that NNN properties, particularly the Credit Tenant Assets, as “fungible commodities” which can serve as risk-averse investment vehicles to accomplish the goals that you set out for your clients. Whether retirement planning, education trusts, estate planning, we can provide the investment product to accomplish your client-specific solution as you deem it.

Accounting Professionals

BRC Advisors, Net Lease Group, essentially views its role as playing an ancillary role to the accounting community of professional who provide services to your own client bases whether a IRC Section 1031 Exchange process, reviewing their tax profile to determine disposition strategies or whether to acquire additional basis with a highly leveraged credit tenant net leased property for a better tax profile or even some estate planning. Accounting professionals also play a central role in the cost segregation process, referenced above. Acquisition candidates must be reviewed in the context of all of the implications of ownership from a tax-motivated perspective as one of the many data points when considering an acquisition on behalf of a client. They are the most likely people to recommend use of the technique to their clients or employers. An accountant also will review and implement the findings in the required engineering report.

The benefits of cost segregation overwhelmingly outweigh the drawbacks. When it comes to real estate acquisitions, the jewel of cost segregation is that it yields enhanced depreciation deductions. As evidenced by the above example, there can be astounding differences in outcomes between using and not using it. The major advantage of cost segregation is not necessarily that it will produce more depreciation deductions (except, of course, to the extent depreciable basis has been allocated away from the land element of the purchase). Instead, due to the time value of money, the advantage of these front-loaded deductions will be quantifiably greater than had the deductions been spread over longer periods of time using slower depreciation methods.

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