in commercial real estate deals, snapshot of the new york

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Rob Gilman, co-chair of the real estate practice at Anchin Block & Anchin, often gets new commercial and residential real estate clients

seeking his help after they’ve made big tax mistakes.

One common error is neglecting to pay the unincorporated business tax on the sale of condos they have developed. While income from renting out and selling residential rental properties is exempt from the tax, income from selling condos that were developed for sale is not.

After Gilman informs them of the oversight, it’s time to do damage control. In some cases, he’ll advise them to go back to a group of investors who have already received their share of profits from the sale and ask them for money back to pay the tax.

In the highly competitive commercial real estate market of New York City, it is very easy for investors to make costly tax mistakes in their haste to close deals quickly. Accountants like Gilman say that avoiding the do-it-yourself approach and seeking help early in the process can help investors to avoid later frustration.

“The one thing that makes accountants so essential in real estate transactions is there are so many tax implications that can make such a difference in the after-tax return,” said Gilman.

A key area of confusion for many investors are the

new lease accounting standards from the Financial Accounting Standards Board. Corporations that lease office space and equipment, rather than buy it, must account for these leases on their books to ensure that their true indebtedness is clear to average investors who buy stock in these companies. Under the new standards, all leases that exceed 12 months must be reported as assets and liabilities on a firm’s balance sheet. Companies will need to begin providing parallel income statements to illustrate what has changed on their balance sheets starting at the end of 2017.

“The actual changes to the lease accounting model are pretty difficult,” said Chris DeMartini, audit managing director at Grant Thornton. His firm has put together a program to help clients make the transition.

Another big concern is transitioning to the new revenue recognition model published by the International Accounting Standards Board (IASB). The model, which became effective this year, affects the timing of revenue and profit recognition in cases when companies have contracts with customers. This is another area where firms like Grant Thornton are providing extensive advisory services.

“Revenue recognition is always of the utmost importance,” said DeMartini.

In Commercial Real Estate Deals, Accounting Advice Becomes Critical

Snapshot of the New York City Commercial Real Estate Market

In New York City’s fast-paced commercial real estate market, even sophisticated investors can overlook

important tax considerations on the deals they are making quickly. Here are some market conditions that keep them busy.

Office space: With first-quarter leasing hitting 9.2 million square feet—up 25% from the fourth quarter of 2016—New York City’s 6.5% office space vacancy rate in the first quarter of 2017 was the second lowest among the top U.S. 10 markets, according to Colliers. Average asking rates hit an all-time high of $73.92 per square foot across the market and in Midtown South and Downtown.

Retail: Although asking rates declined across Manhattan in 14 of the 17 high-profile corridors that the Real Estate Board of New York City (REBNY) surveys annually, asking rates rose 18% in lower Fifth Avenue in the Flatiron dis-trict (between 14th and 23rd Streets) to $456 per square foot, and 11% in lower Broadway corridor (between Bat-tery Park to Chambers Street) to $362 per square foot.

Multifamily rentals: New luxury apartments have flood-ed the market, forcing landlords to make concessions to renters. New leases in Manhattan with concessions rose to 28.6% in the first quarter, up from 13% the prior year, according to The Elliman Report. In Queens, thanks to an influx of new developments in Long Island City, Astoria, Sunnyside and Woodside, the percentage of new leases with concessions rose to 45.5% from 14.6%. In Brooklyn, the percentage more than doubled to 14.7%.

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Few cranes and backhoes are sitting idly in New York City these days. Construction spending hit a record $43.1 billion in 2016—

up 26% since 2015, according to the New York Building Congress. That figure is expected to grow to $42.1 billion in 2017 and $42.3 billion in 2018.

But with new opportunities come increased demands on construction companies. As contractors go after bigger jobs, they must follow increasingly complex rules and regulations. That puts pressure on them to improve their compliance strategies. They also need to do big-picture financial planning, so their balance sheets are strong enough to help them obtain needed financing and cover their overhead when the payments for big projects are months away.

“Construction is at a historic level,” said CPA Carl Oliveri, partner and construction practice leader in the New York City office of Grassi & Co. “With those levels come a slew of other issues and complications.”

The answer for many contractors is to turn to their accountants for strategic advice. “It’s a different marketplace than it has ever been,” said Oliveri.

Reducing risk With many contractors focused on scaling up, it has become more critical for them to put the right financial systems and controls in place—

and to get their accountants’ help in doing so. “I work with clients on making sure they have good procedures and these procedures make sense in light of what they are trying to accomplish,” said Ed Opall, a director and member of the real estate and construction services group at EisnerAmper.

One key challenge for many construction firms is staying compliant with complicated contracts and billing terms. Being disorganized can increasingly land them in legal trouble, noted Oliveri.

If, for instance, a contractor is obligated to pass along savings from a concession in a contract to the building owner and fails to do that, the contractor could be at risk, depending on the perceived intent of the contractor. “Noncompliance with contracts, specifically billing terms, doesn’t only carry financial penalties—it could be construed as a criminal act today,” said Oliveri.

In this tougher environment, Grassi & Co. recommends that larger public works contractors proactively hire an integrity monitor or internal compliance officer. These professionals educate their teams on why they need to follow contract language and arrange ethics training, Oliveri explained.

The firm also helps clients audit their own contract compliance. Recently, Grassi did this for a contractor at the Weill Cornell Medical Center. “Our goal was to review the general contractor’s

requisition to make sure what they were requisitioning was installed and furnished,” Oliveri said. “We went through it line by line.”

Raising capital In a market where growth opportunities are plentiful, many construction firms need financing to go after new projects and still maintain healthy cash flow. Many are turning to their accountants to prepare their balance sheets so they can obtain a loan or attract outside investment partners.

“Generally the banks are very cautious when extending credit to contractors and view the industry as risky,” said CPA John Helkowski, a partner in J.T. Shulman & Company, P.C., a Carle Place, Long Island firm whose clients frequently do projects in New York City.

Some contractors are turning to accountants to help them improve their capacity to secure bonds to guarantee their projects, a requirement of the insurance companies involved. In some cases, they need to bring in outside investors in venture capital or private equity firms to do so—but that means making sure their finances make them an attractive partner.

Although many construction firms are eager for this outside financing, they need to make sure that any deals with outside investors have a strong upside. Given the complexity of these deals, this task often requires input from their accountants. “We’re involved in helping them to structure the terms of the deal,” said CPA David McKelvey, partner at accounting firm Friedman.

With Construction Booming, Contractors Seek Strategic Advice From Accountants



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As Retirement Beckons, Boomers Navigate Complex Private Equity Deals


With about 10,000 baby boomers turning 65 every day, many New York City accountants are hearing from business

owners who are approaching retirement age and looking to sell their firms. Often, the potential buyers aren’t other entrepreneurs.

“Amongst our business, an estimated 50% of transactions are private equity buyers,” said Carlos Ferreira, the Metro New York/New England Advisory practice leader for Grant Thornton, whose firm works mainly with sellers whose annual revenues are above $10 million. The other half are strategic corporate buyers, he said.

Fueled by money invested by pension funds looking for better returns, private equity buyers are eager to acquire thriving firms that will help them deliver on that goal and tend to have very deep pockets. Nationwide, 38% of buyers of businesses with $5 million to $50 million in revenue are private equity funds, according to the 2017 Market Pulse Report published by the International Business Brokers Association, M&A Source and the Pepperdine Private Capital Market Project.

Many business owners are eager to take advantage of today’s market before present conditions change. Currently it is a seller’s market but it won’t remain so forever. As the advisory firm Frankel Loughran Starr & Vallone noted in a recent tax and financial news bulletin, “Many in the field see the private business landscape as picked through; combined

with the cycle timing, it is creating the sense that we are approaching the top of the seller’s market cycle.” Potential changes to the tax code that are now under discussion could also have an effect on how companies are valued and lead financial buyers to offer a lower price for businesses in the future, FLSV pointed out.

But navigating deals with these funds can be tricky even for successful business owners. “The transactions are extremely sophisticated and require the assistance of an experienced team of professionals,” said attorney Sean M. Aylward, vice chair of the Corporate & Securities group at Chiesa Shahinian & Giantomasi PC, which has an office in New York City. Here are five strategies New York accountants recommend to business owners who want to strike a private equity deal that works in their favor.

Plan a gradual exit. Private equity buyers generally want business owners who are managers to continue working at their firm for at least a few years, to ensure a smooth transition; so it’s a good idea to start preparing to sell a couple of years before you want to retire. “In a majority of private equity investments, they are looking for the owner, managers to help grow and execute on the strategy of the business,” said Ferreira. Some private equity funds will consider a deal where the owner wants to retire immediately if there is a strong management team that is already in place, he added.

Seek accounting help early. Even at a well-run company, it may take six to nine months to get a

firm’s books into the shape a private equity firm will want to see—a factor for which owners need to plan. “If they start early in preparing for diligence, the diligence effort won’t be as cumbersome,” said Ferreira.

Be prepared. A common mistake is underestimating the level of due diligence required by private equity firms. “I oftentimes tell my clients it’s hard to ask a private equity firm to give you $50 million and then not allow them to come in and do a basic home inspection,” said Ferreira. “The more prepared you are for that, the easier it will be for the organization and the less distraction it will cause in the business.”

Turn to a specialist. Business owners often benefit from bringing in an accounting team that specializes in private equity transactions, even if they have a staff accountant. “Typically the in-house accountant doesn’t see as many transactions as the outside CPAs see,” said CPA Nicholas Tsafos, an audit partner at EisnerAmper. “They are not as familiar with all of the nuances.”

Get realistic. Owners who have built their businesses over many years often have an inflated sense of what their firms are worth, because of emotional attachment, say accountants. Working with an outside accounting firm can provide a needed reality check. “We can help them realize the highest value and understand what market value really is,” said Ferreira. “With that information, they can get the best deal they can get.


Carolyn Mazzenga hears from many affluent clients who are wondering how President Trump’s yet unrealized plans for individual

and corporate tax cuts will affect their finances.

“As always, uncertainty is what rattles people, rattles the markets and rattles business,” said Mazzenga, partner-in-charge of Marcum’s Family Wealth Services group. “If you don’t know what is happening with tax law, tax reform and estate taxes, it makes it difficult to plan—and it makes it difficult to strategize what you want to do with your wealth, [such as] transfer wealth and make new investments.”

Like most accountants, Mazzenga is advising clients to make decisions based on the tax laws that are in place at the moment, while keeping an eye on the latest developments. “We can only go by what we know is for certain: the law as it exists right now,” she said.

Here are some of the top concerns of high-net-worth New Yorkers and a look at how accountants are advising clients to address them.

The alternative minimum tax (AMT). This hard-to-avoid tax, designed to prevent high earners from maneuvering their way out of paying taxes, is the bane of many affluent New Yorkers. These taxpayers must calculate their taxes twice, once with certain deductions removed, and pay the higher amount.

Many such tax payers thought some relief was in sight when Trump’s tax plan proposed elimination of this tax. “Repealing the AMT would be exciting news for many high-net-worth individuals,” said Clarence Kehoe, chair of Anchin Block & Anchin’s tax department, co-practice leader of the firm’s Compensation and Benefits Services Group and a member of its Private Client Group and executive committee. However, with no clarity on whether the AMT will actually be repealed yet, Kehoe and many other accountants have continued advising clients on how to reduce or avoid it, using strategies such as accelerated deductions.

The property tax deduction. According to Treasury Secretary Steven Mnuchin, Trump does not plan to get rid of the tax break for mortgage interest. However, he plans to raise the standard deduction for a married couple filing jointly to $24,000—up from $12,700. This could reduce the number of people for whom it makes sense to itemize to seek the mortgage interest tax deduction; the standard deduction might be greater for them unless they have other substantial deductions.

According to recent analysis by real estate site Trulia, the biggest impact would be on homeowners with home-loan balances of $358,000 and $676,000 and who take out a mortgage between $322,200 and $608,400. The New York City metro area was one where the

advantage of buying a home over renting would erode the most, Trulia found.

Trump’s plan would also eliminate the ability of filers to deduct property taxes and other state and local taxes. Many New York City home owners or potential home buyers are paying attention, because losing the property tax deduction could mean there is less upside to buying certain properties. But accountants are advising them to operate as if nothing has changed for the moment. “Right now, mortgage interest is still deductible,” said Kehoe.

Residency audits. Many high-net-worth individuals who claim a change of residency are concerned about residency audits by the state tax authorities. Favorite targets are individuals who claim a change of residency, often to low-tax or no-tax states, shortly before a large income-recognition event, such as a large capital gain on the sale of a business, said Jack Trachtenberg, a principal at Deloitte. “New York State and City have very aggressive residency audit programs,” said Trachtenberg. This is a perennial issue, and one for which many seek advice from their accountants. “The issue of residency may not be a black and white one,” said Trachtenberg.

Tax risks. Anthony Parent, a lawyer and founding partner of the attorney and CPA firm Parent and Parent, which has expertise in international tax law, finds many affluent New Yorkers worry about getting tripped up in the complexities of doing business overseas. Some have come to his firm after tax generalists have given them advice that cost them money. “We find huge errors, with significant consequences,” he said.

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Rattled By Tax Uncertainty, High-Net-Worth Clients Seek Accountants’ Advice


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