How CRE Owners Can Reduce Their Largest Expense

For many commercial real estate owners, navigating tax nuances while closing a deal can be a daunting process. When owners don’t have the necessary information during underwriting, they could wind up paying excessive taxes, especially on intangible assets. Not "taxable" by statute in most states, intangibles are often inappropriately taxed.

While tangible assets consist of physical characteristics such as the building, its contents and the land on which they sit, intangible assets consist of abstract elements such as copyrights and trademarks as well as software and other components associated with the business.

“Only real estate and tangible assets are taxable at the state and local levels in 45 states,” said Todd Jones, principal of Tampa-based tax advisory firm RealAdvice. “Consequently, when intangible assets are not identified and quantified before closing, taxes are based on the entire purchase price. This happens when the parties don’t have adequate information. The term ‘commercial real estate’ indicates there is more than just the land and building.”

Jones said that before closing on transactions, buyers and sellers must plan to include an irrefutable allocation appraisal that separates nontaxable values from the taxable real estate value to accompany closing statements. This extra step ensures that all state and local taxes are appropriate and that the parties don’t inadvertently commit state tax fraud.

In a conversation with Bisnow, Jones discussed RealAdvice’s method to reduce obstacles and uncertainties in the underwriting process prior to closing a deal.

Bisnow: How does RealAdvice’s methodology impact tax liability?

Jones: Taxes are reduced and their impact on margins is significant. Every transaction is unique, and results vary, but some asset types possess a larger business component than others. For example, hospitality properties require more services than storage warehouses, but both are operating businesses. Our clients typically experience a 15% increase in year-one net operating income. That margin frees up cash flow to cover other expenses, like rising insurance premiums and the cost of capital. 

After acquiring new assets, our clients aren’t forced to raise rents to meet the same obligations other owners face, which helps mitigate the affordable housing crisis. Our clients have a choice. 

Our process helps deals pencil that wouldn’t otherwise. And for those that do pass due diligence, we turn good deals into great deals.

Bisnow: What sets RealAdvice apart from other consultants and advisory services? 

Jones: We don’t compete with traditional property tax service providers. In fact, many refer their clients to us because we have invented the “better mousetrap” for optimal state and local tax minimization at the earliest stage of the cycle. As such, we have no direct competitors.

The RealAdvice methodology is nearly 20 years in the making, and produces sophisticated appraisals focused on accuracy and client protection. No other firm has the pedigree and real-world experience in this niche subject matter that our team possesses.

Our proprietary technology platform benchmarks each value component against hundreds of similar properties. With each new appraisal, our software becomes more precise. No one else can say that. 

Other providers will be pressured to rush a comparable service to market, but without having the time for testing and development, they risk years of client service failures resulting from inferior, incomplete and inadequate methodologies. For now, we have a leg up on the industry by combining the most qualified people with the most sophisticated technology.  

For potential transactions valued at $10M or more, we provide a complimentary benefits summary report indicating the potential impact our involvement will render versus traditional underwriting. 

Bisnow: Might some investors perceive this strategy to be too good to be true and question the legalities?

Jones: That’s a normal reaction. Our methodology has been legally ratified in multiple court cases, most notably, our involvement with Disney’s circuit court ruling in 2018 and affirmed by the 2020 appellate ruling. That decision resonated internationally as a major paradigm shift, consistent with other decisions from California, Minnesota and Kansas. We have since become a necessary piece of many prominent institutional players’ acquisition or disposition processes nationwide. 

We have enough data points to demonstrate that we are improving the industry for all participants. However, we respect the learning curve and how innovation is often perceived. We address investors’ initial concerns on our website. 

Bisnow: How does RealAdvice impact CRE through its mission?

Jones: RealAdvice wants to transform how CRE transactions are undertaken and help more owners optimize profitability. Given the current state of capital markets, increasing insurance premiums and other costs, we’re one of the few tools available helping to narrow the bid/ask spread. While we recommend underwriting traditionally, our involvement increases the chances of deals closing. 

Everybody wins. Local governments get increased tax revenue when deals close. We help keep people employed; about 60 jobs are required to effectuate a CRE transaction. Plus, our clients are not forced to raise rents when acquiring new properties. Improved profitability also shortens the typical hold period, leading to increased transaction frequency. 

More activity invigorates communities, stimulates economies, sustains jobs, boosts municipal revenue and profoundly impacts lives. We're not just facilitating deals; we're driving meaningful change and expect that someday our methodology will become a standard in collegiate and professional education, practiced by investors across the U.S.

Prospective clients who want to get in touch with us can visit our website and submit their information on our form at RealAdvice.com or request an analysis before signing their next purchase and sale agreement of $10M or more. They can also send a direct message to info@realadvice.com. 

Prospective clients can also connect with us at Bisnow's Palm Beach State of the Market on Dec. 5.

This article was produced in collaboration between RealAdvice and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.