Cost Segregation
A tax strategy that accelerates depreciation deductions by identifying and reclassifying building components into shorter depreciation categories. Standard commercial real estate depreciates over 39 years (27.5 for residential), but a cost segregation study can reclassify 15-40% of building costs into 5, 7, or 15-year categories. This front-loads tax deductions, improves after-tax cash flow, and increases investor returns. Cost segregation is particularly valuable for new construction, major renovations, and acquisitions.
Related Terms
Ground-Up Development
New construction of a commercial property from raw or improved land. Ground-up development involves significant execution risk, including entitlement, construction, and lease-up phases. It typically requires construction financing with recourse guarantees, followed by bridge or permanent financing upon stabilization.
Value-Add
An investment strategy focused on acquiring underperforming properties and increasing their value through renovation, re-tenanting, operational improvements, or repositioning. Value-add deals typically require bridge financing and target returns of 13-18% IRR. The strategy involves more risk than core investments but offers higher potential returns.
IRR (Internal Rate of Return)
A metric used to evaluate the profitability of an investment over its entire holding period, accounting for the time value of money. IRR represents the discount rate at which the net present value of all cash flows equals zero. Investors typically target IRRs of 15-25% depending on risk profile and investment strategy.
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