Industries: Real Estate

San Francisco Business Times

This article originally appeared in the September 1, 2018 issue of the San Francisco Business Times. To view the original article, click here

James Su is happy to be working in the Bay Area again.

Su, BPM’s new managing director in the firm’s real estate tax practice, where he oversees construction cost segregation and real estate advisory services, grew up in California and studied architecture and civil engineering at UC Berkeley.

After college, his interest in industrial development took him overseas, where he worked for a multinational developer managing the construction of large manufacturing facilities in China.

In 1997, he returned to the U.S. and spent the next 15 years at various multinational accounting firms in their real estate consulting groups, advising Fortune 500 clients across the US and around the globe. Then, after nearly two decades on the road, Su left public accounting to dedicate more time to his wife and young children.

Meanwhile, he started his own consulting practice, advising clients on issues such as construction, valuation and cost segregation. “It was ideal in that I was able to structure my schedule so that I could see my kids every day,” he says.

After six years away, Su says he’s ready to get back to public accounting. “My kids are older and in school, and I’ve realized that public accounting is where I love to be,” he says.

So when BPM approached him about taking on a key role in the firm’s growing real estate practice, Su accepted. “I had first-hand experience with BPM, having worked with the firm as a consultant,” he says. “I got to know the partners in the tax and real estate practices and developed some great relationships.”

In his new role, Su will oversee BPM’s cost segregation services but also advise clients on a variety of real estate and construction matters. In addition to cost segregation and other tax services, BPM’s real estate group assists clients with complex issues related to the formation of real estate funds, acquisitions, development, disposition, investment and management of properties.

5 questions for James Su

Who needs real estate advisory services?

The short answer? Everyone. Most of our clients aren’t real estate companies in the traditional sense. They’re small business owners, large corporations, restaurant owners, gas stations even doctors, manufacturers, and yes, also hotels, REITs, and funds. Regardless of industry, all of these people own real estate and share certain common goals. They want to spend less, make more, manage risk and make sure their family and investors get to keep more. These basic goals are central to what we do as real estate consultants and tax advisors.

What is cost segregation? 

Within public accounting, “cost segregation” specifically refers to an analysis of construction or building acquisition costs that allocates and classifies building components into any number of categories, each with different tax depreciation lives and methods. The objective is typically to maximize tax deductions and in doing so, reduce an owner or investor’s tax liability.

It’s a strategy that large companies and professional investors have used for more than 30 years as a way to reduce their tax burden and enhance after-tax returns. Cost segregation can be applied to any commercial or rental property, whether it was recently built or acquired a dozen years ago. Despite being eligible, smaller family-owned businesses tend to miss out on the benefits of cost segregation studies simply because they aren’t aware of them.

How are the recent tax changes affecting the commercial real estate industry? 

There are a number of provisions of the latest federal income tax reform that directly affect real estate investment, of which I’ll briefly mention a few. First, the increase in Section 179 expensing is directed at small businesses, providing essentially dollar-for-dollar expensing of certain capital investments, whether it’s for equipment or a tenant improvements (TI) buildout. In a similar vein, the enhancement of bonus depreciation is intended to incentivize businesses of all sizes to invest by purchasing hard assets, machinery, equipment and real estate. Lastly, new rules for establishing “Qualified Opportunity Zone Funds” provide investors with a new opportunity to defer capital gains taxation, in some cases permanently, by reinvesting proceeds into qualified fund. A lot of people are still working out the details for how to structure or certify QOZ Funds. BPM has been working with its clients on the tax compliance considerations related to investing in such funds.

That said, I wouldn’t make the observation that any of these tax reform policies individually are driving overall market activity. Rather, collectively they certainly have the ability to move the needle a bit. The market as a whole is still primarily dominated by overarching questions around continued strong demand, low unemployment numbers and the relatively inexpensive, but rising cost of debt.

How are companies responding to rising construction costs?

Space efficiency, flexible work arrangements and even co-working spaces are trends that have accelerated as a direct result of rising construction costs and increased congestion. The growing popularity of modular and prefab construction is also a clear indicator that companies have to think harder now about controlling costs and shrinking project timelines. Real estate was always an industry that rewarded the innovative use of design and materials. The difference now is that it’s simply no longer an option to not look hard at value engineering, alternative construction methods or sustainable design as a means to generate savings. It’s important to note that, at least for now, despite rapidly rising construction and labor costs, many companies still see new construction as a more cost-effective alternative to acquisition. The ability to build quickly and efficiently certainly provides a competitive edge in this regard.

What trends are you seeing in office spaces?

Space efficiency, transit-oriented, collaborative, and flexibility come to mind. These concepts have a direct impact on essential business considerations like overhead cost, talent pool, productivity and scalability. Honestly, I don’t see these as new trends, but rather ideas of the last quarter century finally gaining speed. The days of building bigger or increasingly further away from city centers are a thing of the past. We have to live and work more efficiently and build smarter. Even those who don’t acknowledge their environmental footprint have to deal with the reality of coexisting within a smaller physical footprint. Millennials seems to embrace these concepts, and their demand for highly efficient, conscientious real estate product will only grow and gain momentum.

In today’s specialized tax and advisory world, BPM’s real estate group skillfully provides comprehensive accounting, tax and consulting services to those in the real estate industry. Learn how our expert guidance can help you navigate this changing market, by contacting Jackie Matsumura at [email protected]