Episode 4 | Micki Schwartz with Rudd & Company
Transcript
00:00:05 Greg Croft with Resin Architecture
Welcome to Vision Driven with Resin Architecture, the podcast where we dive deep into the world of architecture, development, and construction.
00:00:12 Greg Croft with Resin Architecture
I’m your Host, Greg Croft, and my Co-Host is Jamee Moulton, and we are thrilled to have you join us on this journey of learning, inspiration, and insight.
00:00:19 Micki Schwartz with Rudd & Company
When you talk about real estate, I would always recommend that you go into it with the exit in mind. 00:00:25 David Frew with Bank of Idaho
Advice I'd give somebody that's presenting their case, or pitching their loan to a bank, is just to be really well prepared.
00:00:32 Jamee Moulton with Resin Architecture
Whether you're dreaming of building a space for your business or simply curious about the fascinating world of architecture and development, join us on this exciting adventure as we unlock the secrets to successful projects and empower you to turn your vision into reality.
00:00:51 Greg Croft with Resin Architecture
We're excited to get to know you a little bit, Micki. Micki is with Rudd & Co. Could you give us a quick overview of your experience both with Rudd and Company and your CPA experience? What brought you into the industry?
00:01:07 Micki Schwartz with Rudd & Company
Sure. Well, I actually had a different career before I started public accounting. I actually had years of experience in real estate and property management. Then, I decided to go back and get my degree and go into public accounting. Then with Rudd and Company here in town for 22 years. The thing that is something I really enjoy about being in a town this size is you get to touch a little bit of everything. It's large enough that you get to see a lot of different things. You get to help a lot of different people meet their individual goals.
00:01:44 Micki Schwartz with Rudd & Company
But maybe you can still avoid the rat a little bit from being in the big, big, big city.
00:01:48 Greg Croft with Resin Architecture Not working 90 hours a week.
00:01:51 Greg Croft with Resin Architecture
That's good. With [your] previous experience in property management and real estate, what drew you to that and what kind of pulled you away from it?
00:02:03 Micki Schwartz with Rudd & Company
Well, originally it was opportunity. You know, I had a year in college. So I graduated from high school, did a year of college and decided I wasn't quite ready to make my pathway in life, knowing what I wanted to do. There was an opportunity in property management. I actually loved it and got some great opportunities very young. I worked for some big companies and got to travel with them.
00:02:26 Micki Schwartz with Rudd & Company
And got a lot of great, just overall business experience, learned a lot about real estate, about how to help people through decision making processes and how to lead a team.
00:02:38 Micki Schwartz with Rudd & Company
But the thing that drew me away from that is property management is a 24 hour a day seven day a week proposition. I got tired of getting phone calls in the middle of the night.
00:02:51 Micki Schwartz with Rudd & Company
When I was in Houston, I'd get a phone call, and we had beautiful high-end properties, but things still happen, so you know you get a phone call and explain that somebody had been shot at one of the properties and you say are they alive? Are they dead? And you go from there. And after enough of those phone calls, I thought you know there's probably something else I could be doing.
00:03:14 Greg Croft with Resin Architecture
Yeah, that doesn't sound like a phone call I would ever want to receive. 00:03:17 Micki Schwartz with Rudd & Company
No, I mean a good property management company is a great partner to have when you have real estate, but I wanted a different challenge, and public accounting was it for me.
00:03:27 Greg Croft with Resin Architecture Yeah. OK.
00:03:30 Jamee Moulton with Resin Architecture
Well, tell us why someone who is thinking about building their own building should talk with the certified public accountant?
00:03:38 Micki Schwartz with Rudd & Company
That's actually a great question, and there are both what you would think of as typical accounting reasons (so maybe business deductions, tax impact) but there are some non tax issues that maybe a CPA could help you work through too.
00:03:54 Micki Schwartz with Rudd & Company
When we talk about revenue - because again, when somebody's talking to a CPA, they normally think they're talking about financial matters - so to focus first on financial matters, most people are familiar with hearing about ordinary income. When we talk about taxes and others may have also heard about capital gains income, but there are other types of income.
00:04:24 Micki Schwartz with Rudd & Company
When we talk about commercial buildings or rentals, there's a whole other category of income that has different attributes and may affect people differently, and they may not be expecting that. So that's part of the conversation that they should enter, but primarily when we're talking about business owners that are considering building or acquiring real estate, one of the other conversations that should be one of the first conversations is how to hold that property.
00:04:49 Micki Schwartz with Rudd & Company
In other words, should it be held inside an entity like a limited liability company, a limited partnership , a corporation, and there are some significant differences and impact financially with all those different options. You know they could also involve an attorney if they have an attorney on board. An attorney would be able to help them decide that too.
00:05:09 Micki Schwartz with Rudd & Company
There is a very big difference from that standpoint, because you have both the financial and in some cases - so for example, a limited liability company if they would hold their ownership in that they get the limited liability which in my experience (and this comes actually from my real estate background) liability related to ownership of real estate is actually pretty high. So if you think of yourself as a business owner, you don't automatically necessarily think of yourself as having financial exposure just by owning the real estate. But, in fact, you do. I don't see it as often here, but I saw it quite a bit in my work in Texas quite a bit in my work in Florida.
00:05:53 Micki Schwartz with Rudd & Company
Let's say you have someone come in and you're helping them, and there's either an injury or some type of issue that happens at that building. Then you can be involved in a lawsuit and some of those were large. So when we talk about limiting liability, the idea of putting that building in a separate entity is hopefully to shelter you from any personal liability or extended financial exposure. So that's one thing. And then I have to be careful about what type of things I say because I don't want it to be to be construed as giving tax advice.
00:06:26 Greg Croft with Resin Architecture Talk to your actual tax advisor.
00:06:28 Micki Schwartz with Rudd & Company
Talk to your actual CPA, your actual attorney. Just to just to throw some things out there, so maybe you know what some of the questions you should be asking are. But again, as far as how you hold the ownership makes a difference. If you're a business owner, the other thing to consider is if you hold that business the building separately. If you choose to hold it in a separate entity for primarily liability purposes in most cases, the regular operations are not going to have a tax impact difference. Just on an operations standpoint, from having it in a different entity, but when it comes to transferring a property back and forth that makes a big difference that you might have a tax impact.
00:07:17 Micki Schwartz with Rudd & Company
I think a business owner that is going to build a commercial building that they use for the operations of their business. So for example, if they're building it, if you're a retailer and you're building a retail store and you're using that particular piece of real estate for that business there are some things that you'll be eligible to take that would not necessarily be the same thing if you were building a commercial building for strictly investment, so to rent it to a third party. So those are questions that may be - depending on what situation they're in - they might want to ask about the differences and how that impacts them.
00:07:52 Jamee Moulton with Resin Architecture
A lot of our clients are owner occupying their buildings. 00:07:58 Greg Croft with Resin Architecture
I do feel like we have a fair amount that also rent out though as well, and I know personally I have a building and on that building the operations side is an LLC, even though it's our LLC and then the other portion is an LLC that the owner of the building is it's separate LLC.
00:08:20 Greg Croft with Resin Architecture
Somebody told me that's what I was supposed to do. So that's what I did. So that's fairly common, I'm assuming.
00:08:28 Micki Schwartz with Rudd & Company
It's quite common. It's quite common now if you had spoken with an attorney or CPA, there may be some subtle differences between holding it in an LLC or a limited liability partnership, but the primary difference with that is basically the debt that you have and how much of that is eligible to be used as basis and it's basically a tax issue.
00:08:49 Greg Croft with Resin Architecture OK.
00:08:52 Micki Schwartz with Rudd & Company That's a good idea.
00:08:53 Greg Croft with Resin Architecture
Yeah, I think there's probably some protections there as well. Again, I would talk to an attorney, but it seems like if one entity got sued, like the building's getting sued, but the operation side should be protected under that, and vice versa if the operation side got sued for something, the building ownership should be still intact.
00:09:13 Micki Schwartz with Rudd & Company
That's exactly right. The idea is to put a wall and separate the ownership so something happens in this box the only thing in theory that could be taken are the things that you hold in this box. Operations separate from the real estate or other investments. So yeah, but I'm just going to say, in talking to quite a few clients and over the years, it's changed a little bit.
00:09:35 Micki Schwartz with Rudd & Company
I actually have quite a few clients that are building new buildings to run operations in. And it's interesting to get their feedback. Almost all of them have really sworn. - they said when we built that new building, we saw a jump in revenues.
00:09:56 Micki Schwartz with Rudd & Company
It was interesting to me to kind of do a little research on that and look into it. And actually there are a lot of studies that show that. There are a few IT and digital consulting companies that have put information out there, and they've done some studies where they interviewed business leaders in multiple countries. And so one of them that I looked at was actually a study that was done by McKenzie Digital Marketing. They had surveyed 1,000 business owners.
00:10:28 Micki Schwartz with Rudd & Company
And of those respondents, they said, more than half - for the respondents that prioritized building new real estate for the operations of their building - more than half of those indicated that they had a 10% or more increase over average market growth, which I thought was fairly significant.
00:10:44 Micki Schwartz with Rudd & Company
So it's not a bad idea to take a closer look at that. If you had considered it, maybe you can consider it more closely, more seriously.
00:10:57 Greg Croft with Resin Architecture
I want to go into that, but I won't. I do feel like there's probably... there's studies around light and things like that and the atmosphere of a building can make a huge difference. There's this quote that goes around in architecture that we create our buildings and thereafter they create us or, you know, there's a lot of different versions of that.
00:11:17 Greg Croft with Resin Architecture
I've never heard that study, but that's really interesting. 00:11:26 Greg Croft with Resin Architecture
The next question that we have is if or when a building owner decides, hey, I want to build a new facility. If they're working with a CPA, what can you advise them? And then what kind of skills [are helpful]? I've worked with a lot of different CPAs over the years, and some of them are really good at giving advice and some of them aren't. What kinds of skills do you feel like the CPA really needs to have in those situations?
00:11:57 Micki Schwartz with Rudd & Company
As far as skills that I think are important for a CPA to have in helping a client really meet their goals is first to be able to listen so that I understand what you're trying to accomplish and what your goals are . Then, really to make sure that we share as much information as possible about what types of decisions impact them and how they impact them. So for example, when we talk about type of entity to hold it in. That's one of the things that I would share and just give some broad information so that they have the information to make a decision on which fits best for them.
00:12:34 Micki Schwartz with Rudd & Company
You know, understanding that it's not a one-size-fits-all type of situation. I think a CPA that asks questions. You coming in and telling me that you want to build a building, it's probably not going to be a great result for you if I say great, just tell me what you pay for it, and we'll go from there. I mean there are other things that if I'm going to serve you best, I probably better be asking you.
00:13:01 Micki Schwartz with Rudd & Company
What are your goals for doing that? Are you expanding the business? How are you going to finance that? Let's talk about how that affects your bottom line. How best to approach it.
00:13:11 Micki Schwartz with Rudd & Company
What type of building are you building? Is it a building that is going to have certain features that might be eligible for some of the energy efficiency tax credits?
00:13:22 Micki Schwartz with Rudd & Company
Let's talk about what are your expectations on how your business is going to be doing over the next few years. Are you expecting that you're going to be growing, so you're going to have large cash outlays, so we might need to look at some cash control measures to help with that? Or is life great and you're printing money now? So if that's the case we need to accelerate some of the write offs up front maybe . There are some ways to do that, but to effectively do that the CPA will probably want to do that towards the beginning of the process. There are things like a cost segregation study that's available for business owners that are building a building, but that requires that they have whoever's doing that normally it requires some specialization for within the CPA field.
00:14:10 Micki Schwartz with Rudd & Company
For example, if I have a client that comes in, and I have had a few that are building some fairly large commercial buildings.
00:14:18 Micki Schwartz with Rudd & Company
I will work with that client and pull in a third-party firm that specializes in cost segregation studies because it does require reading engineering plans and a few other things that help break down kind of the systems of that building and allow us to pull out some that can be depreciated or accelerated early so we can recognize some of that cost upfront because most businesses are putting some decent cash upfront.
00:14:43 Micki Schwartz with Rudd & Company
With a large asset like a commercial building, as far as writeoffs for depreciation, that doesn't happen over five years or 10 years, that's over a long period of time. For a lot of people, it's difficult to, you know, they struggle with saying I just put forward maybe $500,000 of personal cash and then financed or leverage the rest.
00:15:04 Micki Schwartz with Rudd & Company
They're like, what do I get for that $500,000 and you say well over the whole thing you're getting that over 30 or 39 years, whatever, whatever the case may be. There can be a big advantage of using some of these techniques to accelerate the cost upfront to offset some of the other income , and they get some of that benefit up front.
00:15:27 Greg Croft with Resin Architecture
With the cost segregation studies, I've heard numbers like 20 ish percent is usually what you can almost offset at the beginning, which is also pretty close to what your bank might be required as a down payment. In some ways you could say that cash doesn't really necessarily come back, but you get to offset that so it helps over the next few years as you get to utilize that 20% that you've maybe saved.
00:16:00 Micki Schwartz with Rudd & Company
Yeah, it does. And you know the way that that helps is you get the deductions sooner that offset other income you would have had to report.
00:16:10 Greg Croft with Resin Architecture
Have you ever helped with other things such as like on historic buildings? There's also...
00:16:18 Micki Schwartz with Rudd & Company
Funding available and assistance.
00:16:19 Greg Croft with Resin Architecture
Funding there. Opportunity zones, Idaho Falls doesn't have one, but Pocatello has an opportunity zone in its downtown core. Have you ever assisted on any of those types?
00:16:32 Micki Schwartz with Rudd & Company
I've not. I'm aware of them, but I've not ever helped anybody with those, no. 00:16:34 Greg Croft with Resin Architecture
OK. And that would probably be similar where it's like, hey, I haven't helped on it, but I can probably pull the right person, similar to the cost segregation.
00:16:45 Micki Schwartz with Rudd & Company
I think the key to knowing if you're in the right hands is if somebody's asking you the right questions. Even if someone hasn't had the experience or worked with it, if they at least know about it enough to bring that information together, you can find that information now.
00:17:01 Micki Schwartz with Rudd & Company
But find someone that's interested in helping you meet your goals. I guess that's the real answer to that question.
00:17:11 Jamee Moulton with Resin Architecture
What are some of the thresholds that a business needs to meet before they can consider building their own facility? I would assume that somebody who's just starting out a business on day one shouldn't go and start contacting architects to get plans drawn up? What type of security are you looking for or cash set aside. What would you recommend for those type of business owner?
00:17:43 Micki Schwartz with Rudd & Company
For a business owner, I kind of go back to it's not a one-size-fits-all. For some for some organizations that are starting a company, it really depends. This may be a conglomeration of people that come in with a lot of cash and the ability to invest big upfront.
00:18:04 Micki Schwartz with Rudd & Company
Depending on what type of operation, the facility itself may be key to its success, so there are a lot of other questions we'd want to answer first. If we're talking about like a mom and pop start up, you know a lot of times it's going to be difficult for them to stretch that initially because a lot of times people are coming in with maybe not a large capital to start off and that may be something they need to build up. So it depends on the actual business and what their cash situation is.
00:18:33 Greg Croft with Resin Architecture
And are there any red flags where somebody would come in and you'd say, hey, you know what, this really isn't what we really advise, that at this point you kind of hold off a little bit, try to build that business? What are those red flags that you would call out?
00:18:52 Micki Schwartz with Rudd & Company
Generally, a red flag for me would be someone that I'm talking to as a business owner that and they could even be growing and they may think because I'm growing I need a new building. But the real question of that is what type of cash outlay they need for operations in the short term - short and midterm and what they believe the benefits they're going to receive from that facility are.
00:19:21 Micki Schwartz with Rudd & Company
Only because growth for a lot of companies, if it's rapid growth, is often one of the most risky times for a company. Companies can get overextended. They can get huge orders, not be able to fill them or overextend on spending while trying to facilitate that growth.
00:19:41 Micki Schwartz with Rudd & Company
So really helping a business work through and understand what their required cash outlays are going to be versus what debt service (or the payment on any financing or loan) will be on a new building. That would be part of the conversation that would – if a business doesn't have cash reserves to cover operations or a shortfall, then that would be something I'd probably recommend they maybe hold off on a little bit further until they have those reserves because just like anything else with business there are peaks and valleys. And as long as you're set for some of those valleys then great. to consider holding.
00:20:17 Micki Schwartz with Rudd & Company
If not, you might want to hold off just a little longer.
00:20:18 Greg Croft with Resin Architecture
Getting bigger reserves. Is there... I mean like a bank would require a pro forma that shows my business plan and proforma - current performance is this, but if I have this building then this is that something that you assist with or is that something that you could assist with?
00:20:39 Micki Schwartz with Rudd & Company
With a lot of our clients - and it's different from bank to bank - I see this more with developers or businesses that are doing big expansions we’ll help them do reviewed financial statements or compiled financial statements depending on what the bank is asking for. So we do that fairly regularly, frequently,
00:21:05 Micki Schwartz with Rudd & Company
If their personal assets are enough, sometimes the bank only wants basically them to fill out what is essentially an application that lists all their assets, and sometimes they have enough assets to show that collateral. But to go back and answer your question about can we help clients do that? Yes, we do regularly do that.
00:21:23 Jamee Moulton with Resin Architecture
When does it make sense for a business to lease space instead of building their own space? Is it some of the same times that you just mentioned when their cash reserves aren't extensive?
00:21:34 Micki Schwartz with Rudd & Company
Yes, some of the same, yes. Speaking notnecessarily from a CPA standpoint, but from my experience in real estate standpoint, one of the things that would maybe encourage me to recommend a client might want to hold off a little bit on buying is if depending on what the actual market conditions are.
00:22:01 Micki Schwartz with Rudd & Company
So for example, when we go back to 2008-2009, most of the people in the financial sector were quite aware that real estate was overextended, so we knew that there had been a lot of loans out at 120%. We knew that people had been buying at the top of the market. That would be a time generally unless there were strong mitigating factors [when] I would probably recommend the client hold off.
00:22:23 Micki Schwartz with Rudd & Company
Maybe rent a little while. Or again, if we go back to what we spoke about before is if they had cash flow considerations.
00:22:36 Micki Schwartz with Rudd & Company
Now there are some other situations where the opposite is true, where with the client, if they're ren ting space, I would recommend they strongly consider looking at buying and that would be if they could build a facility that hopefully worked better for them, provided opportunity for growth if with the debt service or the cost of that, if it were equal to or lower than what they're paying for rental space, then for me that's an absolute no brainer. Because what you've got is an investment.
00:23:07 Micki Schwartz with Rudd & Company
And although I know we just, I just mentioned 2008 and 2009 where real estate really dropped. That's fairly rare. In most cases, real estate is going to be an investment that will never go to absolute 0.
00:23:22 Micki Schwartz with Rudd & Company
As far as investments in general go, I think it's not a bad idea.
00:23:29 Greg Croft with Resin Architecture
So if you had a client that came in at - let's just kind of brainstorm. We're going to create a fake client for just a moment. And they've got an office and they've been growing into that office and it's like, hey, you know what? The space doesn't work for us anymore.
00:23:45 Greg Croft with Resin Architecture
And we've been growing say at 10% a year in terms of like what our office needs are. You know, at some point it's like, well, that could continue to happen and you can afford a building that is maybe 20% larger than what you need today. Is that the recommendation that they build larger so they can continue to grow? Sometimes we'll have clients where it's like, hey, we'll create this lease space so that we can grow into it at some point. Sometimes we have clients that don't really create that, and they just try to over build as much as they can. But that also kind of extends them.
00:24:28 Greg Croft with Resin Architecture
What kinds of... I mean I know that that's a kind of a dynamic [question] and it's probably on a per basis sort of situation, but generally what would you assume your response would be to a client that's like that?
00:24:43 Micki Schwartz with Rudd & Company
That's hard because some of that really depends on the individual client. One of my pieces of advice would be to the extent you can always remove emotion out of that decision.
00:24:54 Micki Schwartz with Rudd & Company
Sometimes that overbuilding for growth is sometimes driven by emotion. Sometimes it's truly driven by, like you said, looking at what their growth had been over the last few years and expecting that it's going to be that within a certain set amount of time, but to the extent possible, I'd recommend that they look at strictly the numbers. If it's going to overextend them, I don't think that's a good idea to begin with.
00:25:21 Greg Croft with Resin Architecture Right.
00:25:21 Micki Schwartz with Rudd & Company
But I mean there are some other considerations too. I mean, part of that is resale. I mean, when you talk about real estate I would always recommend that you go into it with the exit in mind. Location is going to be important. How easy would that particular building be to resale? You know, does it have a more broad appeal? Now some things are industrial specific like manufacturing and a few other things, but to the extent you can when you're designing it you want to design it and look at that with the exit in mind, so that would probably be the advice I would give to the client.
00:26:09 Jamee Moulton with Resin Architecture
You spoke about a few of the ways that business owners who own their own space can take advantage of tax strategies. Are there others that you'd like to mention? Tax strategies, tax strategies for business owners who actually own their own building?
00:26:30 Micki Schwartz with Rudd & Company
Again, without getting into too much detail or saying anything that could be construed as giving tax advice, you know there are different methods that that can be approached. You know, especially if we're talking about maybe business owner that invests in multiple real estate holdings or buildings.
00:26:49 Micki Schwartz with Rudd & Company
Things you know when I mentioned previously, we talked about different types of income from the IRS’s standpoint not all revenue is treated equally. Rental real estate for the most part falls in, I call it, a different bucket and that is generally considered passive income. So when you're talking about revenue from rentals, it's in a class all its own. In general if you have passive losses, which sometimes on paper, even if you have a rental, the cash flow on paper, it may be reporting a loss. A lot of that lies with maybe the acceleration of depreciation and things like that. Sometimes when we have more than one rental, there's the ability to do a type of grouping that will allow you to maximize being able to offset other income, but there you'd have to kind of look at the whole picture of all their holdings and see how they benefit them. But there are other strategies that, yes, they could take advantage of.
00:27:54 Micki Schwartz with Rudd & Company
One of the additional, or I'll call it bonus taxes (it's really not a bonus - you don't want this this little bonus), but for some property owners, if they have revenues over a certain amount, they may be subject to this new tax that came out about I want to say it was 2018.
00:28:13 Micki Schwartz with Rudd & Company
It's called the net investment income tax. Normally, rental income is subject to that additional tax. However, if you are a business owner that you operate an active business and the real estate is used to
operate that business in then you are not subject to that tax. So it's knowing that and understanding that you have those types of things that you can make sure treated correctly.
00:28:41 Jamee Moulton with Resin Architecture
Is that a percentage of the building or if you use any part of that building then the building is not taxed? 00:28:49 Micki Schwartz with Rudd & Company
On the net investment income tax, it would have to be a majority of the building. I don't recall the percentage. I want to say probably if 80% or more is used, but yeah, it's a 3.8% savings on the income, so it's kind of nice. Every little bit helps.
00:29:09 Greg Croft with Resin Architecture
A question that we like to ask all our guests is based on your experience what's the one piece of advice that you would give somebody that's considering building a building for their business?
00:29:25 Micki Schwartz with Rudd & Company
I would say just do your research. Look around. Look at the market. And kind of going along the lines of what I'd mentioned before is go in with the exit in mind is understand maybe cap rates. So for similar types of buildings or industries and the cap rate is just going to be a measure of relative cost or value. So it's kind of the way to compare apples to apples when you're talking about commercial real estate and selling.
00:29:57 Micki Schwartz with Rudd & Company
Kind of get a feel for buildings of that age and size, what they're selling for and know that before you invest in it, because if you do the calculations and find out your capitalization rate is significantly lower than that, you may want to reconsider.
00:30:18 Jamee Moulton with Resin Architecture
Thank you so much for joining us. We really appreciate you sharing your expertise. 00:30:21 Micki Schwartz with Rudd & Company
You're most welcome. Thank you for inviting me. 00:30:24 Greg Croft with Resin Architecture Thank you.
00:30:25 Greg Croft with Resin Architecture
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00:30:38 Jamee Moulton with Resin Architecture
Remember, at Resin Architecture we are dedicated to teaching and learning and are committed to helping business owners like you navigate the exciting journey of building. Stay tuned for more episodes where we'll continue to bring you engaging conversations, expert insights , and actionable advice to fuel your real estate aspirations.
