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The Nuances of Working with Real-Estate Clients

Aug 4th 2015
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With 1.3 million building permits issued in June alone and total housing starts hovering around 1.1 million, the real-estate market is finally beginning to see real improvement since the economic downturn.

However, it is important for accounting professionals to understand the dealmakers behind all of this data and the issues they face, particularly related to their accounting needs.

Real-estate professionals are entrepreneurial-minded, optimistic, aggressive, and not afraid of taking risks. This is why many see incredible success over their lifetimes. They are also creative thinkers, and as such, they appreciate working with business advisors who think outside of the box. However, as smart and successful as they may be, they, too, run into problems.

When it comes to their finances, real-estate professionals are routinely faced with two main hurdles: liquidity and tax planning.

Understandably so, many dealmakers in real estate do not like harboring cash. Instead of collecting a meager interest rate at the bank, they’d much rather invest into another property. However, before striking another deal, real-estate professionals must have healthy cash reserves.

If there are not cash reserves in place, it is important for dealmakers to assess their liquidity positions and determine whether certain properties should be sold or refinanced in order to inject more liquidity into their portfolios.

At the height of the real-estate meltdown in 2008, liquidity presented itself as a real issue. Owners were forced to provide additional equity when their property was worth less than its mortgages. There were few opportunities for acquisitions, most of which were left untouched due to scant cash supplies. Even worse, buyers were nonexistent. At this time more than ever, the old adage, “cash is king,” rang true.

Economic meltdowns aren’t the only times, however, when liquidity is essential. Clients need to set aside cash reserves for unexpected tax costs that could occur in the future. These could include taxes on capital gains, state withholding taxes, and estate taxes, among others. Because of the nature of these assessments, it is often difficult to come up with an exact payment due ahead of time, which underscores the importance of planning using a conservative mindset.

Cash reserves are also required from a lender’s perspective and will ease the financing process for future deals.

Tax Planning
Real-estate professionals also face issues surrounding short- and long-term tax planning. When considering the short-term, it is important for clients to step back and analyze what their taxes will look like in the next year or two. To start, a series of questions needs to be addressed: What are the client’s taxes projected to be? Are there rate increases in place? Is there pending legislation that might affect the projections? And, most importantly, where will the funding come from to satisfy these liabilities, and what can be done now to minimize these taxes?

The long-term is about the bigger picture. At this juncture, it is important for clients to look at their pool of investments while considering their future goals. For instance, how old are you? What do you want to be doing in the next 10 to 20 years? Is there family involved in the business? What is the end game?

Long-term planning addresses the exit strategy in order to minimize future tax liabilities. Real-estate clients must be focused on the future of the business and whether it will be transferred to the next generation. If so, the tax professional needs to decide whether trusts, gifts, or discounting mechanisms should be put into place – or if a new legal entity should be created.

Clients in the real-estate business are always looking toward the next deal. For this reason, it is easy for matters like liquidity and tax planning to fall by the wayside. However, as accounting professionals, it is our duty to keep these issues on the radar so we can help protect and grow the assets of our clients.

About the author:
Shari Albert is managing director at CBIZ MHM LLC, based in the firm’s Chicago office. Shari specializes in providing services to entrepreneurial closely-held companies. Her clients include real-estate owners and developers, homebuilders, hotels, and construction companies. She guides them in all aspects of financial planning to maximize tax efficiency and reduce risk, including acquisitions, sales, development, and entity structuring. Shari joined the organization in September 1983.


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