CAPSTAN Interview – Guests: Terri Johnson & Ziv Carmel

September 14, 2021 by Maxwell Baker

 

Hello, and welcome to the mobile home park brokers tips and tricks. This is the podcast where we talk about mobile home park investing, because that’s what we’ve been involved in for the last decade. Let’s dive into today’s episode. here’s your host, Maxwell Baker.

Maxwell Baker  00:22

Welcome all, this is Maxwell Baker with the mobile home park broker. Today I am really excited about bringing on Capstan tax strategies that specializes in cost segregation and that I have personally used on my investments in mobile home parks. I really wanted to get them on board to do this podcast with me, I’m really excited, feel blessed that we have them. They’re in our book that we just released the seller’s guide to mobile home park investing. If you email me, I’ll shoot you a free PDF. If you want the physical, some people like the physical copy, you go to Amazon and search for Maxwell Baker. And you’ll be able to buy it there if you want the physical copy. So as always, this episode is brought to you by the Community Price Maximizer. It is a four-step program that we have coined here at The MHP Broker that will guarantee you a higher price when you sell your mobile home park with us. So, without further ado, Terri Johnson, Ziv Carmel, welcome to the show. I’m excited to have you guys on here. If you want to give me a little bit of background on y’all?  Then we’ll jump right into the cost seg, which is a big topic these days. So, take it away.

Terri Johnson 01:32

Okay great. Maxwell. Great to be here. Ziv and I are really excited that you invited us to be on your show today. So Capstan tax strategies is an engineering company that works on doing cost segregation studies for all different kinds of real estates to maximize tax savings and really leveraging your real estate to accelerate depreciation. Ziv, and I have been working together since 2004.

Ziv Carmel

Absolutely. I’ve been in the cost seg business for about 20 years now. I’ve done a few 1000 studies on them and a fair amount on mobile home parks as well. So, I’m very excited to have this form to talk about both.

Maxwell Baker 02:10

Yeah, so like I said earlier, I’ve personally used Terry and Ziv to do my mobile home park here in Atlanta, and we’ll be using them for the rest of my career because they did such a great job. I’d like to jump into kind of when y’all are looking at a mobile home park. What are the things that y’all break out? What are some pitfalls to look out for? And the million-dollar question is, what is the average cost to do one of these?

Ziv Carmel 02:36

Sure, absolutely. From a cost seg perspective, mobile home parks are great. There’s a very simple reason for it. Normally, when you look at commercial property, the default life for a residential property is 27 and a half years, we would go into let’s say, an apartment building, and we try to carve out 15 five-year property and say land improvements or personal property which has a shorter life. With a mobile home park, we have a very, very nice yield. Both parks are special in that there’s not a lot of permanent buildings, if any, on a mobile home park, which means that most of what you’ve spent to acquire one, or to build one has a short life in the form of land improvements, and sometimes even the mobile homes themselves. When we go to a mobile home park, what we’re looking to do is identify all those assets and here’s some kind of justification for the acceleration in the short life. Short life assets can include things like roadways, paving, landscaping, fencing, sanitary and sewer lines, those would all fall into a 15-year category. If a park happens to own some of the mobile homes themselves, and they’re movable, then those mobile homes would be five-year assets.

Maxwell Baker 03:53

Five year assets.

Ziv Carmel 03:54

That is correct because they are inherently non-permanent. And by the way, that’s even if, the mobile home is not on wheels anymore, but rather just on piers, if it can be moved, it would be non-permanent and a five-year asset. Typically, what we’ve seen in our experience is that outside of let’s say maybe a laundry building, which would actually be a permanent structure or a maintenance building where the mobile home has a well water system, you might have a pump house, but outside of those types of things, you’re not going to see a lot of base assets. So, we can really clean house. We go in and we can price up and assign a value to all these other assets, including solid point seven-and-a-half-year property. We get yields up in the 80 to 90% range in terms of acceleration, which there’s no better yielding properties in mobile home park.

Maxwell Baker 04:39

You know, I’ve been told seven years but that’s the first time I’ve actually heard five on an individual mobile home. Do you guys break it down at a global view or are you like breaking it down piece by piece?

Ziv Carmel 04:52

We use what they call the engineering approach. The IRS sets forth in their audit techniques guidelines and what that entail is a componentized price up of structures and also land improvements. If we have a permanent building, yes, we will price up the foundation, exterior envelope, the roof structure, as well as electrical and mechanical infrastructure that exists. Like I said, for mobile home parks is not going to be a part of that, to the extent that exists, we will certainly assign value to those components, in terms of the mobile homes themselves, we would not necessarily break down every component of the mobile home but rather assign value on a per mobile home basis to the extent that they’re owned by the home.

Maxwell Baker 05:34

As far as values, when we’re negotiating a contract on mobile home park, some people are more sensitive to making sure that the valuations of the assets for the land, for the mobile homes, for the equipment is put in the PSA, is that going to be an issue after they close on the deal? When they approached you to do a cost seg?

Terri Johnson 05:59

It’s definitely an issue. It’s called a purchase price allocation, when you put in the PSA, that you’ve given a value to the personal property, the land improvements, and the land not so much. But all the other assets, you’re putting a value in, what you put in that bucket, you can’t really come back later and move it out into another bucket. What we like to see as generic as you can get, and if there’s some equipment, you make it very clear in the language in the PSA, that basically every kind of thing is kind of lumped in to the acquisition, with the exception of this addendum that lists some specific equipment, but it’s not inclusive of personal property as maybe a separate value, but you need to be really careful with the language not to be so specific that you box yourself in and not really be able to do a cost segregation study.

Maxwell Baker  06:52

Yeah. That’s been something that I have seen a little bit more lately in our PSA’s, is that people will agree on a price. Then we’ll say we want to put as much value on these mobile homes, so we can appreciate more of our purchase price versus on the land, and also the inventory. Sometimes that’s a sticking point with the seller because of I’m assuming on their end, I don’t know that benefits them. That’s a question I have for y’all like, does it matter to the seller? If they’re doing a cost segue in the PSA? Or does it affect their taxable basis? I guess I wouldn’t.

Terri Johnson 07:29

So, what you’re really looking at, though, Maxwell, at the real estate property transfer taxes. In some states, if you have certain allocation of personal property, then you’re paying less in the transfer taxes. So that’s a lot of times a big motivation. But I think one of the things that I would caution to is that the land allocation, I mean, it really, I wouldn’t assume it would matter that much to the seller as it does to the buyer. The land allocation should be looking either at the appraisal, or the tax records, the local taxing authority, and what they’re using as a ratio for land to improvements. What we do with the cost seg is with let’s say, you pay a million dollars for a mobile home park, one of the first questions even I would ask is, what are you allocating the land, and let’s say you said, we’re allocating 20%, because that’s what’s in the tax assessor card, the ratio. You would pull out that $200,000 and end up with a basis of $800,000. That’s really where you start to work from. So as much in our world that you can leave the just one purchase price and not break it down further, you can actually end up taking this bonus depreciation that we can get into in a minute and really have a benefit. I’m not sure a lot of people understand how that bonus depreciation works and what it can do for you and how powerful that is.

Maxwell Baker 08:53

Yeah. One last question before we jump into bonus depreciation. What happens if they’re buying the entity and it’s already been depreciated?

Terri Johnson 09:02

You’re only buying the entity. You’re stepping in the shoes, but you’re not buying the real estate, you’re buying the entity, and you’re going to continue with the depreciation.

Maxwell Baker 09:12

I mean, I guess if you are buying the entity, and they’ve already depreciated it all out, you can’t re-depreciate it, right? It’s already been dying.

Ziv Carmel 09:23

But you’re assuming they’re depreciation schedule at that point. So, we wouldn’t be able to reset the clock.

Terri Johnson 09:26

But I would always check with the attorneys and the CPAs. We work very closely with the CPAs on our side, because some of the nuances, the way the transaction is structured, we would actually rely on the CPA or the attorney to make that call as to whether or not you’re resetting the appreciation. In most cases, from the day you close, it’s kind of like whatever you paid, you’re stepping in at that point and you’re eligible for all that. It will be rare that you see a transaction where it happens but that you’re picking up and just continuing to depreciate the asset.

Maxwell Baker 10:03

We all love to hear about bonus depreciation. Can you kind of give us the background on why that’s so good, why it benefits people to do it? What are some good things about it? And obviously, we like to know what the bad things are about it?

Terri Johnson 10:18

Sure. I kind of thought I would give you a little bit of history, just a couple minutes on bonus depreciation, how it works, and then see if you can kind of pick up and talk specific to how it works in a mobile home park. The concept of bonus depreciation, it’s been around since 2001, after 911, because the government was trying to stimulate the economy. At that time, they said, if you can take bonus deprecation on assets that you’re moving into the shorter lives anything under 20 years. So, as Ziv had said, you depreciate a mobile home park over 27 and a half years. But anything that you move out of that 27-and-a-half-year bucket to a shorter life, you could take bonus depreciation, but the catch was, it was only on new construction or renovations. For a mobile home park, back in the day, if you were buying a mobile home park, there probably wasn’t a big play for bonus depreciation unless you were building a new facility. What we saw over a period of many, many years, as the government uses as an incentive, when the economy needed a little tweaking, and fast forward to the new tax law that came out, the big change was they allow the bonus depreciation on an acquisition. If I acquire a mobile home park, and instead of depreciating everything as a 27, I go into land and 27 and a half years, if I can carve out those assets that are personal property, land improvements under 20 years, I can take 100% bonus, meaning I can write off those assets in the current year. If I can’t use all that depreciation, I am basically offsetting income. I’m creating losses that offset income. So, if I can’t use all those losses, I can carry them forward up to 20 years. Imagine what that impact that has on making money, I’m bringing in revenue, I’m offsetting with these losses. The whole thing is it’s time value of money you’re paying, you’re not changing the depreciation, you’re just pulling it forward. So, it’s all about the time value of money. Ziv, why don’t you speak a little bit more specific to mobile home parks,

Ziv Carmel 12:21

Here’s where I think it becomes very relevant for buying and selling mobile home parks. As Terry mentioned, the new tax law TCPA, signed 2017, allow for bonus depreciation on acquiring properties, which means that if you were to acquire a mobile home park and do cost seg, you’re going to have all this 50- and five-year property that we’ve separated, that the old days, you could write those off over 5 and 15 years. Now you’ve got the option, should you choose to do 100% bonus, which means taking the entire value of the 15- and 5-year property and write it off in the first year, if you choose to do so. It obviously gives you a huge shot in the arm right up front, you only have to wait for the shorter life of the accelerated depreciation to kick in at all once. That’s really where the bank comes in. I’d say that that actually, for a mobile home park or perhaps has a lower basis that really incentivizes or make it worthwhile to do a cost seg because you’re going to get all of that extra depreciation all at once. Obviously, for a larger basis part that would be great, too. It just magnifies the benefits.

Terri Johnson 13:32

And this is not forever. So the tax window when we were back in 2017, and really towards the end of the year. From 2018 through the end of 2022, we’re at 100% bonus on anything we move on to these shorter lives. After 2022 starting in 2023, it steps down by 20% a year and then when you end up in 2026, that’ll be at 20%. There’s a huge incentive right now in the next couple of years to be buying real estate or renovating or building because you can take advantage of, I mean, we’ve never had a window in time where we could plan out that far. It’s just done amazing things for the economy as far as there’s money out on the street, and people are like, “Wow, this is great”. I mean, really looking for property types that are good benefits. I think it’s really energized the real estate market within what could have been probably a pretty tough market.

Maxwell Baker  14:30

As far as mobile home parks, sometimes there’s public roads and public water and sewer and things like that, that the park gets to benefit from just to clarify, those are not things you can depreciate because you don’t own them, right? Those are owned by the city, the only thing you can depreciate is the things that the park owns versus what is public.

Ziv Carmel 14:54

That is correct. And just to clarify the point that when I talk about utility infrastructure, I’m talking about park owned. For example, typically, when talking about sewer lines or water lines, if it is a public system, and you’ve got mains running through the park, the mains themselves would not necessarily be within the scope of our cost seg. However, the laterals that run from the mains to the individual pad site would be. There are different ways to different methodology through which to assign value to those hookups.

Maxwell Baker 15:24

Awesome. What if I’m a park owner, and I already own a park? Can I hire you guys to do cost seg study or review what I’ve depreciated already and see if I’m in the safety area of not getting audited?

Terri Johnson 15:38

Right. Let’s say you bought the park three years ago, and you didn’t know about this. So, everything’s just kind of depreciating at 27 and a half years, we call that a look back site. So, you can go back in time to the cost segregation study now, just like you would on a new car, and you say, okay, looking back, if I had bought it from day one and done the accelerated method, this is what the percentages would be. You catch up the difference from when you bought it to now as if you had done that from day one and you catch that up in the current year. Then the accountant files a special forum called a form 3115. That basically catches that up into the end and puts that in the current tax year. Let’s say three years ago, you catch that up in the year 2020 or 2021 return, you’re going to get a bang, right? Because it’s really over several years.

Ziv Carmel 16:35

It’s one roll up, retroactive if you haven’t, you would have done the cost seg to acquire the property a few years ago. So, this tax year, you’ll be getting a roll up of all three years.

Maxwell Baker  16:49

It could the opposite way. If you did too much, you could probably tone it back a little bit, right?

Ziv Carmel 16:53

Right, and you can carry forward, if it’s more depreciating what you need, you carry forward for several years, until it gets used up.

Maxwell Baker  17:02

So, the last question I’ll ask you is the million-dollar question is what is the cost seg study run like on a mobile home park?

Terri Johnson 17:09

Obviously, it depends on the size and the complexity. We see everything from fairly small where there’s no, everything’s just kind of land improvements. But let’s say that it’s a really large mobile home park that maybe has a lot of amenities that you don’t typically see. I would give you a range of I would say 4000, probably about 6500 would be the sweet spot. If you look at like you have a million-dollar basis, or a couple million-dollar basis, and you’re just conservatively you’re accelerating 80% of those times your effective tax rate would be your tax savings and the ability to carry forward 4000 to 6500, as you had separately or taxable. It’s like a drop in the bucket. I mean, you don’t even think about it.

Ziv Carmel 17:55

A small, small fraction of your benefits, right?

Terri Johnson 17:58

So, we’re an engineering firm. So, we charge based on the project, the time that will take us and we don’t charge based on the benefit to the client. That’s just kind of how it works.

Maxwell Baker  18:08

Why is it more beneficial to go through y’all versus cowboy and shooting it from the hip?

Terri Johnson 18:16

I’m going to let Ziv answer that.

Ziv Carmel 18:20

Once again, our industry is subject to oversight from the IRS. They put out many years ago, the audit guidance document, what they expect to see in our cost seg study and how it’s expected to be done, in terms of methodology. One of those things, is to hire a third party to do it, to get around any kind of conflicts of interest that might exist as you can I’m sure you can imagine, by the owner doing it, by themselves.

Terri Johnson 18:40

That’s the back of the envelope.

Ziv Carmel 18:41

Right. Secondly, these reports, even taxpayer going through an audit, these reports will be looked at as well. So if that happens, they’re going to want to see a justification for their classifications that you have for the different cost categories. If you can’t produce one, then what would likely happen is that the IRS would disallow whatever benefits a taxpayer is given themselves. They want to see your backup; they want to understand how these numbers have been arrived at and that’s where the engineering approach that we mentioned earlier comes in. Really, it’s a way for a taxpayer to have defensibility, that’s the number one reason to do this.

Maxwell Baker  19:19

Is it federal and state taxes that you get the benefit from? If it’s a half a million dollars that you figure out, and we BD half a million dollar? What is that I can write it off on? Is it my personal is it my business like what is it?

Terri Johnson 19:34

First of all, let’s start with this for the federal and state question because your big bang is really on the federal level and the state level advanced income tax. It applies to that, but I want to make a caveat we talked a lot about the wonders bonus depreciation. Many states have decoupled from the 100% bonus, they didn’t like that at all because it really affects them

Ziv Carmel 19:55

A lot of states won’t accept bonus at all right?

Maxwell Baker 19:59

I did not know.

Terri Johnson 20:00

Yeah, so let’s say that Ziv was talking about the five- and 15-year buckets. In the old days before you acquired, you didn’t take the bonus you just did it over five years, or 15 and 27 and a half year, which everyone was happy about. At the state level, you would take more of that strategy versus taking the bonus. The CPAs they know all this. Let’s say you’re in Georgia, the CPAs going to know whether or not the state of Georgia is decoupled from the bonus. That’s one of the reasons we like working with a CPA is because there’s certain collaboration,

Ziv Carmel 20:32

We’re not experts on individual state tax.

Maxwell Baker  20:34

Yeah, I was going to ask, where could people go to figure out whether or not their states like to play ball with bonus deprecation.

Terry Johnson 20:42

I would definitely talk to your CPA about that. They are practicing in that state, they’re well versed in that.

Maxwell Baker  20:49

Okay. Y’all are firing off a lot of good data. So, the exit when you go to sell your mobile home community or asset, there is that recapture rate that we kind of brushed on before we started the podcast. You know, it’s great to talk about the good stuff. But I also want to talk about just the other side of the coin here.

Terry Johnson 21:06

I mean, there’s a couple things Maxwell. One, is that when you mentioned the recapture. If I buy a mobile home park, and I see an opportunity to upgrade the park, and have some opportunity to improve it quickly, and flip it. I’m not going to want to do a classification study because of the recapture issue. I would look at how long am I planning? What is my exit strategy? How long am I going to own that for? If I’m going to own it for at least several years, you want to model what that recapture potentially might look like. I would pull the CPA in on that discussion as well. You want to make sure that it makes sense. If you’re going to just be in and out pretty quick, probably not the best idea wouldn’t you say Ziv?

Ziv Carmel 21:50

Correct. You’ve got to at least have a plan to hold the property for at a couple years.

Terry Johnson 21:54

Right. The other thing is, let’s just say that you buy the property and you’re a passive investor, that means you have passive income, and you have these passive losses that offset the income. If I know I’m not going to have enough passive income, that losses will eat up that income for a really, really long time. I’ve got a lot of losses, and I just don’t need more losses than I would say it’s probably not a sensible thing to do. I mean, most of the people that we work with, they’re always buying and selling real estate. If they are active real estate professionals, they might not be making a lot of money on this one property, but they can take those losses and offset income in other areas. I would just say to be careful if you’re a passive investor, again, talk to your CPA and make sure that it makes sense that you can take advantage of it.

Maxwell Baker  22:45

Okay, awesome. Well, that pretty much wraps it up. How do we get in touch with y’all? Where’s the website? What’s the phone number, email, all that jazz?

Terry Johnson 22:52

Well, we would love to hear from everyone that’s listening here, t your podcast Maxwell and you can call either Ziv Carmel, or Terry Johnson at Cap Stan and our phone number is 215-885-7510. Our website is capstantax.com. Get all our information there as well and we welcome the opportunity to talk to you about your projects.

Maxwell Baker  23:24

Awesome. Well, very grateful for y’all being here. Grateful for meeting Terry at Strategic Coach. That’s how we met. I’m just overall just grateful that we could do the podcast together. As always, this episode is brought to you by the Community Price Maximizer. It is our proprietary system here at the mobile home park broker. There are parts of the Community Price Maximizer that is about bonus appreciation and how to leverage Cap Stan so feel free to reach out to them. They are the best in the business, and I’ve personally used them I had nothing but good thing. So, thanks for watching and we’ll catch you all later.

Maxwell Baker

Maxwell R. Baker founded The MHP Broker in 2009 as a commercial real estate broker specializing in helping Investors buy and sell mobile home communities throughout the Southeast. His family got started with mobile home parks in 2000 where Max gained experience in management, rehabilitation, and selling mobile home parks. Today, The MHP Broker has grown to a team of several agents with expanded services focused on owner and investor brokerage services, mobile home park audits, and in-depth market research, resulting in the sale of over $500 million worth of mobile home communities.