Time has come to focus on numbers.

The past decade provided a fertile environment for the flurry of deals that drove the real estate market to dizzying heights. In the nearly two years since 9/11, however, the industry has been hammered with additional costs. Added security costs, skyrocketing insurance costs, increased property taxes, and fuel price increases related to the war in Iraq, coupled with inclement weather, have made the real estate market a complex maze to navigate.

A company must now take the time to identify how the above factors have affected their business and use this information to formulate or fine-tune their business plan for the future. The current market malaise has forced companies to justify their transactions -- or not do them at all. Due diligence is more important than ever before to a company's success.

As an accountant, I have worked closely with many real estate clients over the past two decades. As the economy continues to struggle and times remain uncertain, I am advising clients to focus on their numbers as a way to prepare effectively for the future. In addition, there has been no better time to focus on tax savings opportunities in order to increase the after tax return on real estate investments. Three key areas to take into consideration are cost segregation, tax law changes, and interest rates.

"Cost segregation" studies are one of the best tax savings tools available to real estate businesses today. Over the past 5 years, these studies have become an increasingly popular tool in this industry. These studies can show businesses how to save on income taxes on commercial and residential real estate transactions and improve their rate of return.

A cost-segregation study will identify a property's components and re-categorize the assets for tax purposes, as well as providing for accelerated write-offs on the selected assets (i.e. from a 39 year asset to 5, 7, or 15 year asset).

As an example, a building normally depreciates over 39 years. If you re-categorize parts of the property into shorter life assets you are able to increase tax deductions. The entire adjustment (even for assets acquired in prior years) is deductible in one tax year and can generate significantly increased cash flow. This additional cash flow could be a deciding factor in completing a transaction in today's environment.

In the aftermath of 9/11, several pieces of legislation have created excellent opportunities for this industry. The Job Creation Act of 2002 and most recently the Jobs and Growth Tax Relief Act of 2003 (signed May 27) have produced interesting incentives such as:

1. Increasing the additional bonus depreciation from 30% to 50% on qualified leasehold improvements.

2. Increasing the first year Section 179 depreciation from $25,000 to $100,000.

3. Reduction of capital gain rate from 20% to 15%. (However, the 25% capital gain rate on unrecaptured Section 1250 depreciation remains unchanged).

Federal, state, and local sources have also offered significant and enticing incentives for companies to relocate into the Liberty Zone, the area most affected by 9/11. These businesses may take enhanced depreciation deductions and write off lease-hold improvements over five years instead of 39 years. In the case of a $1 million lease holding spread out over 39 years, a business can typically deduct just $26,000 a year. With a five-year timeframe, the business can now deduct $200,000 a year - a substantial difference. In addition, businesses that employ individuals may get tax credits of up to $2,400 per employee merely by having a business and employing people in the Liberty Zone (a dollar for dollar reduction in taxes).

Combining the tax effects of the 2002 act with the recent passage of the 2003 Tax Act it becomes much more competitive for landlords to work with potential new tenants because enhanced cash flows from tax reduction will allow landlords to be more flexible with tenants.

Despite many naysayers who expect rates to shoot back up, the ongoing decrease in interest rates offers residential and commercial real estate investors the ability to buy more property than ever before. Industry insiders need to keep an eye out for any rate changes so that they can make proactive decisions before their businesses suffer in any way.

As long as real estate businesses take the present time to focus on cost-savings, tax law changes and interest rate changes, they will prepare themselves well for the future.