Confirming your real estate finance plan works for you.

In major cities in general, and in New York in particular, financing commercial real estate projects is almost a science. Clearly, there are many elements and variables that impact the terms on which a deal can be made.

How the stock market is performing is a major influencer on developer confidence. The speed at which new office buildings are rented is another factor and so is the cost of building sites. Other considerations may include the availability of financing at advantageous rates, the changing city or state property tax picture and, of course, the ongoing supply and demand for prime locations. And, just today, I read about people in parts of the city being rankled about losing a zip code from which much status was derived; a business address can be worth money.

Against this backdrop, CPAs working in commercial real estate must do considerable spadework to ensure that real estate developers get deals that will still look good throughout the period of a mortgage, regardless of fluctuating interest rates.

Right now, for instance, with interest rates around seven percent developers, with the support of their CPAs, must weigh the merits of committing to long term loans or shorter term ones. At the same time, developers must decide whether they are going to use their own capital, refinance an existing property or borrow from a bank or pension fund.

Pension funds are becoming increasingly big players in financing commercial property. Or it may be that a developer will want to explore mortgage consolidation as an instrument to finance a new project. Whatever decisions are taken will have significant tax implications.

Very important, too, is how to deal with the appreciation/depreciation equation. Historically, well-maintained buildings have increased in value. But that doesn't preclude the opportunity to write-off significant depreciation on old systems, in a building's infrastructure, that are still proving efficient service. For instance certain property in a building may be depreciated quicker and therefore generate larger after tax cash flow in order to service the property's debt.

As I see it, the single most difficult tax problem that occurs in the financing of commercial real estate is negotiating the mortgage amortization so that it is equal to or less than the depreciation on the building.

If there's any way for the CPA to develop a failsafe formula to minimize taxation in real estate financing it's to model out the projected mortgage amortization over the term of the mortgage and compare that to the projected depreciation over the same term.

But even some of the most successful developers occasionally make costly decisions in their financial planning that could be avoided.

One developer, for instance, negotiated a reduced interest rate, but the mortgage required that it be amortized over a 20 year schedule. He could have saved considerable money by efficient tax planning that would have increased the interest rate on the mortgage, but had no amortization.