AI is going to affect every industry and commercial real estate is ripe to be impacted by this technology. Many are trying to figure out how to leverage it to make their own businesses better and more efficient. Thomas Stephenson does a great job of showing different use cases CRE AI.
Topher Stephenson is head of operations at Aspire CRE, a real estate brokerage in Houston, TX and is someone you should follow if you’re in commercial real estate and want to learn more about AI and how it’s affecting the business. Below is his one of his tweets talking about
THE NEW CHATGPT IMAGE UPDATE IS REAL
“TAKE THIS SITE PLAN AND MAKE IT PRETTY”
Countless brokers have asked me if AI can do this. The answer was “No” until today.
That’s how fast this is changing.
(Yes it got some text wrong but if you know how to use AI you’re not worried… pic.twitter.com/KWKB8GRx8j
I will also recommend you check out the recent tweets from Life Sci RE Guy. He has some excellent images he created with the use of AI.
Commercial real estate seems to be one of the slower industries when it comes to the adoption of AI, but I think this is coming full steam ahead for it.
Those who self-construct their own properties and qualify under the Small Business Rules for 263A might be able to EXPENSE much of their indirect / soft costs to develop, finance and construct the building. This can often be between 10-30% of the cost of the overall project. It’s a game changer. Everyone I know capitalizes these costs because that has been the norm, but it’s been available for expensing since 1/1/2018 due to the Tax Cuts and Jobs Act.
Let’s say you build a new $1,000,000 office warehouse. What if instead of capitalizing those indirect and soft costs across various class lives if you do cost segregation (5, 15, 39 year) you could just expense those and take the deduction right now. It’s has a dramatically different tax impact saving you tens of thousands in income taxes. It also is not subject to recapture tax.
If you meeting the qualifications as a Small Business owner and this is a self-constructed asset, it will be worth it for you to reach out and get an estimate of the costs for the study and the tax savings you’d be looking at if you apply this to your building.
What costs are eligible?
Construction interest
Engineering and achitectural fees
Portions of soft costs and permits
Portions of building permits
Other development costs
Might you qualify?
Property built since 2018
Self-constructed asset (owned during construction)
Small business taxpayer (gross receipts under $30MM/Year)
Not a syndicate (there may be exceptions – let’s discuss)
Most people are not aware of this because it was only instituted with the Tax Cuts and Jobs Act back during Trump’s first term. This applies to buildings constructed since 1-1-18.
BTW, we can do a look-back study on properties you have developed and still own going back to 1-1-18. Our team will take care of drafting the Change of Accounting Form 3115 and do the negative 481(a) calculation. Your tax advisor would then sign off.
For self-constructed assets, it might be that you are operating your business out of the property. It could be that you are an investor having a property built and you’re hanging on to it. The study works on tenant improvements and building expansions as well. If the construction costs are $250,000+, it’s likely the cost benefit will be in your favor. Take a look. Reach out. I’d be happy to talk with you and get you the information you need to talk with your tax advisors.
Constructing buildings is not cheap these days. I know many have a difficult time of making the numbers work. If you could expense 10-30% of the project right away in year 1, I would think your financials on the project would suddenly look a whole lot better.
CSSI will be hosting these webinars once per month in 2025 so if you can’t make this, there will be others. Just let me know if you’d like to be on my mailing list. Also, let me know if you’d like a copy of the presentation slides and video recording. While these tend to be geared toward CPAs as this one will be a continuing education course for CPAs, CRE brokers and commercial property investors are welcome to attend if you’d like to learn more. There is now cost.
CSSI Webinar: Applying 100% Bonus Depreciation Retroactively for Commercial Property and Short-term Rentals (Airbnbs, VRBOs).
Wednesday, February 19, 2025 at 11:30am to 1pm Eastern
Sale-leasebacks have surged in popularity over the past few years, offering building owners a way to maximize their sale price while securing a long-term lease that enhances the property’s value. A well-structured sale-leaseback often results in a desirable cap rate, making the transaction attractive to investors.
But there’s another major financial advantage many overlook—cost segregation.
For buildings involved in a sale-leaseback, a cost segregation study is a must. These are often income-producing properties with long-term owners (typically 3+ years), making them ideal candidates for accelerated depreciation. Instead of keeping the entire asset on a 39-year depreciation schedule, 20-30% (or more) of the building can often be reclassified into shorter depreciation lives, leading to:
✅ Increased cash flow ✅ Higher investment returns ✅ Lower tax liability (even if it’s just a deferral, the time value of money matters!)
In short, cost segregation is a no-brainer for sale-leaseback transactions. Running the numbers costs nothing—and it gives property owners and investors a valuable opportunity to discuss tax-saving strategies with their CPA.
CRE brokers, take note: Getting cost segregation estimates for your clients not only adds tremendous value but also positions you as a well-prepared, knowledgeable advisor. In a competitive market, small insights like these can set you apart.
Want to see what cost segregation can do for your next sale-leaseback deal? Let’s run the numbers—at no cost to you.
Take a listen to Trinity Partners Greenville Managing Broker, Partner, Edward Wilson and Senior Broker, Grayson Burgess and they discuss the market outlook for commercial real estate in South Carolina. Edward and Grayson work across the state and are based in Greenville, SC. I’ve worked with both of these gentlemen and they are tremendous resources for commercial real estate in the Upstate of South Carolina.
It what will go down as an historic week in U.S. history with the inauguration of Donald J. Trump to his second term as President of the United States, he made news at Davos at least for the commercial real estate industry.
Many have speculated that Trump would bring back 100% bonus depreciation in 2025 as he extends his 2017 Tax Cuts and Jobs Act. He confirmed this yesterday during his video presentation to the 3,000 attendess at Davos Switzerland where the WEF and global elites were meeting to plan our futures.
During the Q&A, Brian Moynihan ask President Trump a very broad economic question. As Trump was answering it, he made mention that he will be bringing back 100% deductibility in the first year – i.e. 100% bonus depreciation. You can hear his comments at the 30:35 mark of the video presentation. This will be great news for the commercial real estate industry. Of course he has to negoatiate this with the Democrats but this nearly got extended a year ago when Biden was President. It never made it to his desk for his signature as the Senate killed the bill. It’s different this time though. The Trump Tax Cuts are set to expire in 2025 and no one wants to be on the hook for a big tax increase. Additionally of course you have the leadership of Trump at the helm driving this instead of the much weaker Republican Congressmen and Senators. I’d be shocked if this doesn’t get approved. Not sure of the timing but I think from what I’ve heard it will be April perhaps before they get something done.
If you’re doing cost segregation studies right now for 2025 taxes, there’s no worries. When we do our studies, the results are the results and your tax advisor will apply them appropriately whether it’s 100% bonus depreciation or if it remains at 40% depreciation which is what the 2025 law current states.
It might be just a bit too early to fully assume that this will be the case for 2025 but you might want to start to run 2 scenarios with your pro-formas…one for 40% and the other at 100% bonus depreciation.
My hope is President Trump pushes to make bonus depreciation permanent. He wants America to get back to growth. The 100% bonus depreciation affects a lot more than just owners of commercial real estate. It would seem to me to be a no brainer that if you want to make American the growth engine of the world and have Trillions of dollars of capital investment find their way here, make this incentive permanent. No more 4-5 year shots for it to be renegotiated.
If you’d like to watch President Trump’s address to the attendees at Davos, the recording is below. He mentions 100% deductibilty at the 30:35 mark.
The thing with real estate is that it might be the ultimate entrepreneurial business. I know a number of these folks who have launched the Greenville, SC brokerage for Trinity Partners. Trinity Partners is established in Charlotte, Raleigh, Columbia, Atlanta and now Greenville, SC.
It’s hard to go wrong with brokers here in the Upstate of South Carolina. There are many of them. The folks who started this brokerage under the umbrella of Trinity Partners were successful young brokers at a couple of other brokerages here in the Upstate. They now offer a full service brokerage firm including property management services.
I wish them all well as they launch out on their own to build their own opportunity in commercial real estate brokerage. The Upstate Business Journal has a good article about Trinity Partners Greenville and how they continue to grow this real estate brokerage.
**Maximizing Your Tax Savings on Building Improvements**
Let’s talk briefly about the tax benefits you might be missing out on with your building when spending money for tenant or capital improvements. If you did a $375,000 tenant improvement or capital improvement to your commercial building in 2024 and are not doing cost segregation, you’re likely overpaying your income taxes by $10,000 to $15,000 over the next five years.
Today, most of these improvements go unstudied, leaving building owners with significant, unclaimed tax savings. Typically, CPAs will record improvements as “qualified improvement property” (QIP) with a 15-year class life, which allows for 60% bonus depreciation. While that’s within the tax code, this approach often overlooks substantial five-year property within the improvements, which could yield faster and more significant tax deductions.
**Why a Study Makes Sense**
When improvements are carefully studied, a sizable portion (15–50%) can often qualify as five-year property. For example, a $375,000 improvement could yield 30-40% in five-year property. Without a study, you miss the opportunity to accelerate your deductions and enhance your cash flow.
Consider this example:
– If a study costs around $3,500, your net tax savings start showing by year two. By year five, you could be ahead by $10,000 or more.
– Even with a conservative outcome of 25% five-year property, your savings could be around $6,000 over five years; at 50%, you might save $15,000.
These are potential savings you’re leaving behind if you simply default to the QIP classification without a study.
**Optimize Your Investments**
This isn’t just about tax savings; it’s about making the most of every dollar you invest in your property. Those savings could fund more improvements, support business growth, or even personal goals.
**Let’s Get Started**
I’m John Murphy with CSSI. I’ve developed a custom calculator to help building owners and CPAs understand the real potential of cost segregation on improvements. I work nationwide, and with our network, I can handle projects in all 50 states efficiently, without incurring travel costs. So while I’m in the Southeast, I can study buildings across the rest of the country and it does not cost you more money. If you did improvements in 2024 that were more than $200,000, call me for a conversation. There’s no cost or obligation. I can run the numbers for you and you can see how this might help you.
Let me ask you this…and I don’t care how much money you have…if you knew that there was $10,000 that could be in your bank account over the next few years but instead is sitting there in the government’s IRS accounts, wouldn’t you want your money?
Learn more on my blog at www.costsegbuilding.com, and connect with me on LinkedIn or social @costsegbuilding. Let’s discuss how a study could benefit your next project and help you maximize your building’s tax efficiency.
John Murphy, CSSI / 864-276-1448 / john.murphy@cssiservices.com
This is a fantastic explanation of Cap Rates by Ron Oxtal, MAI, Tropical Valuation Advisory, Tampa, FL. There are many variables and just because the Federal Reserve lowered interest rates by 50 basis points last week, don’t expect Cap Rates to move for commercial real estate.
Here’s the link to the Globest article referenced in the LinkedIn post above.
Sources: Roddy’s Foreclosure Listing Service and The Real Deal
We’ve been hearing a lot about the financial stress and loan failures in the commercial real estate world for the past couple of years. It does seem to be accelerating and spreading. Now there are signs that the much vaunted multi-family asset class is showing signs of increasing distress.
Multi-family distress reached 5.71% reaching a nearly 9 year high according to GlobeSt. This is still better than the 11.91% distress in Office according to CRE Daily on multi-family distress.
We’re likely at the start of a three-year cycle of increasing multifamily distress,” Silverman told GlobeSt.com, explaining that many property owners who took advantage of favorable lending conditions between 2013 and 2017 are now struggling.
Mark Silverman, partner at Locke Lord, CRE Daily Article
