Case Study: Cost Segregation Study for a Mixed-Use Luxury Apartment Complex in Long Beach, CA

Client Overview

Our client is a seasoned real estate investor and home builder, focused on large-scale residential and mixed-use projects. With a portfolio that includes a diverse range of developments, they operate in a competitive space and continually seek opportunities to maximize the value of their investments. In this case, we were tasked with optimizing the tax efficiency of a recently constructed luxury apartment complex located in Long Beach, California.

Project Overview

The subject property is a 300-unit mixed-use luxury apartment complex, completed in 2023, and valued at nearly $90 million. The complex spans 4 acres of land, with approximately 2.75 acres dedicated to the building and 1.25 acres for land improvements. Situated just 10 miles from the ocean, the property offers a wide array of amenities, including:

• A spacious pool and courtyard
• A 2-level gym and work areas
• Common areas for relaxation and socializing
• A state-of-the-art golf simulator
• A rooftop deck with BBQ
• A 5-level private parking garage

The development provides an exceptional living experience for its tenants, and our client sought a way to maximize the financial returns of the project, leveraging the tax benefits associated with accelerated depreciation.

The Need for a Cost Segregation Study

Their primary goal was to ensure they received the highest possible depreciable value from their new complex. With their busy schedule managing ongoing developments, they needed a seamless, efficient process that would provide a substantial financial benefit. At Acena Consulting, we understand that real estate investors require strategies to improve cash flow and optimize returns. A cost segregation study was the perfect solution.

Cost segregation allows real estate owners to identify and segregate personal property and land improvements from the building's structural components, accelerating depreciation deductions. Residential and commercial properties typically depreciate over 27.5 years (for residential rental property) or 39 years (for commercial property), but many components of the property, such as appliances, fixtures, landscaping, and certain land improvements, can be depreciated over much shorter periods (5, 7, or 15 years). This can result in significant upfront tax deductions and improved cash flow.

Our Approach

The team at Acena Consulting conducted a thorough analysis of the property, including its various components, to identify and allocate assets with shorter depreciable lives. By reclassifying certain elements of the property as 5-year, 7-year, and 15-year property, we were able to provide substantial tax savings for our client. Our findings included:

• $9,200,000 classified as 5-year property: This included items such as interior finishes (appliances, trim, carpet), personal property, and certain interior elements within the apartment units.
• $12,900,000 classified as 7-year property: These were additional interior elements and equipment in common areas such as gym equipment, furnishings, and other components that typically fall under this class life.
• $4,000,000 classified as 15-year property: This included exterior land improvements such as pavement, landscaping, fences, gates, and the pool area.
• $62,300,000 remained classified as 27.5-year property: The remaining portion of the property, the building structure itself, was classified under the 27.5-year depreciation schedule.

Results and Tax Savings

With our findings, we were able to generate an estimated $15,000,000 in additional depreciation deductions for the client in 2023. This, in turn, provided an estimated $6,000,000 in tax savings. The final report yielded a total of $24,000,000 worth of accumulated depreciation that could be used for their 2023 taxes. Of this total, $21,000,000 represented additional depreciation that would not have been accessible without the cost segregation study.

This significant tax benefit will improve the client’s cash flow and provide them with the resources needed to fund future development projects.

Client Testimonial

The client’s feedback was overwhelmingly positive, reflecting the smooth and collaborative experience. As they put it:

“The team focused on collaboration across the whole process. Acena was a pleasure to work with from start to finish. The entire team was both responsive and knowledgeable as we navigated the cost segregation process for the first time. I cannot recommend Acena enough for this service.”

Conclusion

By leveraging the power of cost segregation, our client was able to accelerate depreciation and realize substantial tax savings for their newly constructed luxury apartment complex. The study improved their financial position in the short term and allowed them to reinvest those savings into future projects, enhancing their overall investment strategy. At Acena Consulting, we are committed to delivering high-quality, personalized service that meets the unique needs of our clients, ensuring they can focus on growing their businesses while we handle the details.

Key Takeaways

• A detailed cost segregation study can provide significant tax benefits by accelerating depreciation.
• Reclassifying components of a property into shorter class lives (5, 7, 15 years) boosts cash flow and offers immediate financial advantages.
• A seamless, collaborative process is key to delivering value for busy real estate investors like our client in Long Beach, CA.

If you’re interested in exploring how a cost segregation study can benefit your real estate investment, contact Acena today. Let us help you unlock tax savings and drive greater financial success for your next project.

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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of J Etzel on Flickr.