Guide to Comparing Cost Segregation Providers
Methodology of the Cost Segregation Provider
Is the study engineering based?
Accountants performing studies without an engineer do not have the knowledge to determine eligible value for items such as electrical conduit, or eligible amounts of soft costs such as architectural fees and real estate agent fees. They miss tremendous value – in our experience, as much as 60% of the total value can be lost.
Does the provider read your engineering plans (when available)?
Engineering knowledge is required to obtain the greatest benefit.
Does the provider create their working drawings when none are available to them?
The ability to create drawings is an indicator of engineering ability, and of a detailed approach, which we find leads to better results for clients and is the IRS preferred methodology.
Does the provider sell you other services (such as investing) based on cost seg savings, or charge a percentage based fee?
Though not explicitly illegal, the IRS is clear that providers are disallowed from having any interest in the study results, and that compensation should not be based on study results. Selling any other service based on cost seg findings is a gray area, as the provider has an interest in inflating results in order to create additional fees for their firm. Percentage based fees are discouraged for the same reason.
Does the provider complete a site tour?
Some accountants attempt to perform studies by using percentage based estimating of costs; these studies are not approved by the IRS and would not stand up to examination. Estimating misses tremendous value, but also typically finds value where there is none, and all in all, is not an approved methodology.
Does a tour typically require 3-6 hours to complete?
A quality tour requires counting of all items in building and on property; measuring of elements such as baseboards, plumbing pipes and carpeting; photography resulting in typically 100-500 photos. We find this generally requires 3-6 hours for most buildings.
How are the tours documented?
We create tour books; each room in a property has a page (or more) to document all items in that space. We tie costs back to the total purchase or build spend. We use approved engineering estimating practices such as R.S. Means, creating RCN (replacement cost new) schedules when no cost data is available.
How many people attend the tour?
Accounting and engineering professionals bring different skills and knowledge to each building they evaluate. For this reason, our tours use a minimum of 1 accounting and 1 engineering professional. They work closely together to discover the greatest benefit.
What is the experience of the professionals completing the tour?
Our CEO approves all studies we perform. He has been performing studies since before the term existed – in the late 70s and early 80s he performed component depreciation studies – the predecessor to cost segregation. No one is more knowledgeable than David in the field. Our President, Christie Ellis has been working in the field of cost segregation for 10+ years, having previously worked as a management consultant at a McKinsey spin-off. Our engineering director has worked with our firm for 12+ years performing engineering for cost segregation studies; all engineers have degrees in different areas of engineering so that we can assign an engineer to a building which best serves the needs of the project for a particular property.
Do the professionals have experience in cost segregation of your building type?
Understanding a shopping center isn’t the same as understanding a medical building. We believe it is important to work with a professional who has experience in the field of cost segregation, but also in your industry. We have experience in all property types except heavy manufacturing. We always want to provide clients and prospects with the best result, even if that means not working with us. We refer heavy manufacturing clients to other providers who have expertise in this area.
Degree of Detail Provided in Cost Segregation Value Determination
Does your provider determine individual value for all items including unseen elements and soft costs?
Accountants performing studies without an engineer do not have the knowledge to determine eligible value for items such as electrical conduit, or eligible amounts of soft costs such as architectural fees and real estate agent fees miss tremendous value – in our experience, as much as 60% of the total value can be lost. Without engineering knowledge, the IRS approved methodology, Detailed Engineering Approach, can not be utilized.
Does your provider calculate value for all building items, no matter how small, such as floor mounted door stops?
Small items such as these are easy to overlook, and require dedication and time to add them all up. These small items added up across a whole building provide thousands of dollars of value to you, and show the detail orientation of your provider, and commitment to providing the highest amount of savings to you.
Does your provider complete separate federal and state tax schedules?
Because the eligible items for savings changes from state to state, if you are not receiving separate schedules, you are not receiving accurate, full value.
Study Materials Provided
Do you receive a 25-40 page written report, including an itemized account for all items in the building, with assigned total value and accelerated depreciation life, which serves as a way to ‘tour’ the building, and which also ties all costs back to the total spend of the building?
Our cost detail sheets are a market differentiator. Not only do they serve the client well for the study, but their detail allows for other future uses such as full write offs for property elements in the future, in case of replacement.
Does your provider use IRS accepted engineering cost estimating data to determine value for all items with no receipt, or purchase value data?
The value of your study is only as good as the provider. For a deep, niche area of the tax code, you want someone who understands all the complexities. Engineering cost estimating is one more indicator of depth of understanding.
How is the after-tax value determined?
We have seen many firms determine value using an 8% Discount Rate. We feel this inflates the value of a study. It means your provider believes that you will invest your savings in some way and be able to receive an 8% return on the money. We are extremely conservative when determining a Discount Rate and use the interest rate for your loan on the property, (generally between 4-5%) to determine this value. This means that if the only thing you do is use the savings to pay down your loan, you will absolutely receive this benefit. No investing skills required!
What are the fees for services?
We work on a gain share. We ONLY charge a fee if we find savings. If we do not find savings, we charge you nothing – we are 100% confident in our services. We also charge a flat rate, not a percentage of the savings found. We want no incentive to find you additional savings because it puts you at a disadvantage with the IRS. We believe it is best for our clients to charge a flat rate that makes it clear our study findings are not influenced by our own interests.
What is the relationship between your CPA firm and their suggested cost segregation firm? A recent trend in regional sized accounting firms is to join network-referral organizations, meaning the cost segregation firm they send to you may not be great, but it is required by their network.
We suggest you get clarity on why a CPA prefers a particular firm. We are thrilled to be the cost seg provider of choice for many CPA firms, of all sizes. We do not participate in any such arrangement. Firms who recommend us do so because of the quality of our work.
Why didn’t your CPA previously recommend a cost segregation study?
Occasionally, clients are concerned their CPA is not doing a good job if they did not recommend a study, or if they previously referred a provider who did a bad job. The reality is, cost segregation is not understood in depth by most CPAs. This is not because they are doing a poor job, rather, it is not an area of required education to obtain your CPA.
We work as an advisor to not only you, but to your CPA as well. Our firm spends a significant amount of time on both CPA and client education, all provided for free. We are dedicated to deep, mutually beneficial relationships and do not compete with your CPA in any way. Our only focus is on creating educated clients and CPA allies. Informed clients, make informed buying choices. And we know we produce top quality studies, at inexpensive prices. That is the benefit of our boutique firm.