The 10 Commandments: Unbreakable Accounting Rules for Real Estate Pros
Tobias Salinger Nov. 20, 2014, 10:43 a.m.
Real estate accounting manifests itself at the intersection of business, politics, family and, perhaps, everything else. With millions of dollars, square feet and jobs hanging in the balance, Commercial Observer asked a group of big-time accountants, insurance executives, lawyers and real estate professionals for their best guidance on all things financial.
The spiritual talks bestowed CO with a list of commandments ranging from the macro advice we expect and need from financial advisors, to Elijah-like warnings about keeping federal aid for terrorism insurance and tax-deferred savings from like-kind property exchanges intact. And perhaps likening fees on secondary homes, extra sales taxes and surcharges on foreigners who sell property to the 10 plagues would represent something of a hyperbole, but we are willing to take that risk. If not enlightenment, we hope you gain some insight from our somewhat (O.K. definitely) sacrilegious list.
I. Review thy final documents.
Chris Dubrowski, the director of Deloitte & Touche’s real estate practice, keeps “Review the final documents” or “RTFD” for short as his mantra, he says. “I tell people there’s another f-word that could help them”—as in, review the effin documents.
II. Thou shalt conduct business free of emotions.
“I strongly recommend that you think like an investor; an investor is going to say, ‘I’m going to pay this much,’ and if not, you walk away,” said Neil Garfinkel, partner-in-charge of real estate and banking services at Abrams Garfinkel Margolis Bergson and residential counsel at the Real Estate Board of New York. “Most people get emotional about the situation.” Falling in love with a deal leads to heartbreak.
III. Honor thy father and mother and pass down the business with care.
“When families transfer their businesses, they tend to transfer the operating business to the family members who are in the business,” said Matt Bonney, a partner at Citrin Cooperman, who noted a different custom for one particular industry known for family dynasties. “In real estate, it goes to the entire family, and that creates issues.”
IV. Thou shalt not make foreign investments without calling thine accountant first.
“Not calling us costs more money when we find out what we should have done differently,” said Maury Golbert, chairman of Berdon’s real estate services group. One foreign client of his owns a U.S. home that has accumulated a lot of value, but, since the investor bought the property without consulting an accountant, the owner can’t transfer or sell the property without facing a significant U.S. tax hit, he noted. “Had they spoken to us first, we could have suggested ways that would have avoided some of the exact issues they face today.”
V. Remember the 1031 exchange and keep it holy.
This is the part of the IRS code allowing capital gains to be deferred when selling one property to buy a comparable one. According to Robert Gilman of Anchin Block and Anchin, “1031 exchanges are a great tool for deferral of taxes; however, taxpayers should make sure that the replacement property is an asset they want to hold.” And like an inviting golden ox in the desert, there is the temptation of tax reform. “It’s possible that this whole area could go away in the not-too-distant future,” said Mr. Bonney of the looming federal tax reform
negotiations. “That would be a big change.”
VI. Thou shalt not covet Europe’s value-added tax.
Toying with the idea of a graduated sales tax could leave top-line Manhattan retailers alone in the wilderness. European travelers support local retailers because of the value-added sales tax they face at home, said Richard Hodos, a retail broker and executive vice president at CBRE. “It behooves European travelers when they come over here to load up their suitcases with merchandise from here,” he said.
VII. Thou shalt not burden thy neighbor with a pied-à-terre tax.
“It sends a terrible message to wealthy people that we’re going to treat them unfairly in this city,” said Robert Knakal, chairman of Massey Knakal Realty Services. “I think it’s ridiculous.”
VIII. Thou shalt document thine gut decisions.
“There are a lot of accounting decisions in real estate that involve a significant amount of judgment,” said Mr. Dubrowski of his work with clients in the business. “I tell them, ‘When you’ve got these kinds of judgments, it’s very, very important that you document that.’ ”
IX. Thou shalt loosen the Foreign Investment in Real Property Tax Act requirements.
“The big issue is FIRPTA,” said John Cahill, a partner in the real estate department at the Paul Hastings law firm, on barriers to foreign investment in American real estate assets. “You can hear the screaming all over the world about our FIRPTA laws.”
X. Thou shalt ask thine member of Congress to renew the Terrorism Risk Insurance Act.
“We’ve got a major, major problem here,” said Robert Morris, president of the Rampart Group insurance brokerage of the act, which provides extra protection to insurers after acts of terrorism, and which is set to expire on Dec. 31. “If it’s not approved in the lame-duck session and it sunsets, then you will see a real
slowdown in the economy, no question about it.”