Real Estate Perspectives Fall 2019 - Marks Paneth

Real Estate Perspectives

FALL 2019

Welcome It’s hard to believe, but at this time last year, I was introducing myself to you as the new Co-Partner-in-Charge of Marks Paneth’s Real Estate Group, one of the firm’s oldest and largest practice areas. None of us knew what lay in store—and not even Marks Paneth’s century-long history of serving New York’s real estate market could prepare us for the dramatic changes that took place in 2019. I am especially proud that our round-the-clock efforts to help clients navigate complex issues like the Opportunity Zones program and the new rent regulations have made Marks Paneth a leading voice in the industry-wide conversations around these groundbreaking developments. In this, the last Real Estate Perspectives issue of the year, we’ll look more closely at these issues and what some of NYC real estate’s key influencers had to say about them at the firm’s inaugural New York Real Estate State of the Market Seminar. We’ll also look ahead, towards the future and how technology will disrupt our industry – insights we have in part thanks to Marks Paneth’s new Technology & Digital Services Group . And for those who have year-end tax planning in mind, our professionals are as ready as ever to help you reap the maximum benefits available to you. I welcome your questions and comments on how any of the insights in this newsletter will affect you and your business specifically. On behalf of all our Real Estate partners and professionals, we wish you, your families and your businesses a successful year-end and a prosperous 2020.


2 What Is the New York Real Estate ‘ STATE OF THE MARKET ’? Vibrant & Entrepreneurial Abe Schlisselfeld 5 The FUTURE OF DISRUPTION Alan M. Blecher, Michael Hurwitz and Dean Boyer 10 Considerations for Your 2019 TAX PLANNING Jay Sussman 13 The Importance of HIRING THE RIGHT CFO for Your Business Neil Sonenberg 16 Understanding the SAFE HARBOR RULE FOR RENTAL REAL ESTATE Enterprises Anthony DelValle



What Is the New York Real Estate ‘State of the Market’? Vibrant & Entrepreneurial ABE SCHLISSELFELD, CPA

M arks Paneth’s inaugural New York Real Estate State of the Market Seminar took place this Septem- ber in front of an energetic crowd at the Harvard Club in Manhattan. We were joined by industry leaders from many of the city’s premier real estate development firms and professionals from the financial and invest- ment communities, all of whom were looking forward to listening and learning from some of the brightest achievers and strongest advocates of New York real estate.

The half-day signature event, presented by our Real Estate Group, began with a fireside chat between Joseph Moinian , CEO and Founder of The Moinian Group, and Michael Stoler , President and CEO of New York Real Estate TV. Joseph Moinian’s career has been remarkably successful, and much of it based on his sense of market timing along with the courage to take calculated risks. Moinian founded his firm in 1982, and it has grown to be one of the nation’s largest privately held real estate firms, with a portfolio of real estate assets valued at more than $10 billion and comprising more than 20 million square feet of property.

Michael Stoler, the well-known host of “The Stoler Report: New York’s Business Report,” conducted a

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2. Educational-related services including schools, craft and hobby shops or enterprises that enhance skills development. 3. Ability to attract tech industry employees and entice tech start-ups to lease space as tenants. Moinian ended the chat with some strategic insight into his real estate investment priorities. He is actively working within Opportunity Zones, having raised $1.5 billion from investors in developments across New York, New Jersey, South Florida and California, and remarked how “capital gains put into Opportunity Zones is the best use of funds for tax-savvy investors.” The panel discussion that came next was moderated by Michael Stoler and featured three of the industry’s key influencers: Joseph Farkas , CEO and Founder of Metropolitan Realty Associates; Matthew Iacopetta , Vice President of The Richman Group; and Seth Pinksy , most recently Executive Vice President and Fund Manager at RXR Realty, and now the newly announced Chief Executive of the 92nd Street Y. It was a true tour of the New York real estate horizon - from public-pri- vate partnerships, to tax credit pricing, to the politics of prevailing wages, to industrial conversions, to hospitali- ty, and the fluidity in the retail market; and then onward to the outer boroughs, and finally to the suburbs. The long-term focus for Farkas was to look for develop- ment density, and his advice to value investors was to “repackage, reuse and develop from the ground up.” For Iacopetta, the focus was on opportunities for the fixed-income population and on syndication deals. Pinsky’s focus was on the outer boroughs and suburbs as well as on public-private partnerships. Some specific ideas they cited: • Grand Central Terminal. The enormous transpor- tation improvements underway and nearing completion (including LIRR trains into GCT as early as 2021) mean a revitalization of Midtown East from 42nd Street to 50th Street and from Madison to Lexington Avenues. One sure result: East Side occupancy, both residential and commercial, will go up. • More on Midtown East. The Grand Hyatt is, under that shiny exterior, really just the old Commodore Hotel. This is a tear-down deal that will result in significant new higher-density building coincid- ing with transportation improvements (especially

wide-ranging interview with Moinian that centered mainly around Moinian’s deal-making expertise. Moinian began by addressing the upheaval in the New York real estate market caused by the recent change in the New York State Rent Regulation law. “Be patient,” he counseled the audience. “Things might get worse under the new controls, but New York real estate is always resilient and savvy investors and owners can wait out the disruption.” Moinian and Stoler then proceeded to take on a variety of topics that revolved around where Moinian sees investment and development opportunities, including: • The popularity and availability of co-living arrangements. Moinian commented that co-living “reflected the needs and the dynamics of the market,” and this was yet another example of how real estate in New York evolves. He observed that younger New York professionals have little or no need to own cars and have now decided to avoid other longer-term ownership burdens by opting out of mortgages. The goal of home ownership has lost some of its appeal and, according to Moinian, “the mentality of the young is to rent.” • The boroughs - He was bullish on Brooklyn and Queens largely due to the size of the market and the many options available to renters – especially those that offer amenities, which are now such a normal part of the competitive landscape. He sees good opportunities in Upper Manhattan and the Bronx (including in Opportunity Zones) within “decent walking distance to an MTA station and good schools.” • Retail industry conditions - The decline of retail in New York City (reflected by the reduction in chain store locations) signals to Moinian that retail property is overpriced. He sees the flip side though: “Now is a good time to own well-priced retail space and be willing to wait and watch as the value adjusts upward.” Unfortunately, he felt that there might be an inclination to set excessively high retail rents to drive out retail and allow for redevelopment at higher prices and margins. • Three “must-haves” for residential developers: 1. On-location, or nearby, health care-related services such as gyms, doctors’ offices or clinics.


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Pictured (L) to (R): Michael Stoler , President and CEO of New York Real Estate TV; Joseph Farkas , CEO and Founder of Metropolitan Realty Associates; Matthew Iacopetta , Vice President of The Richman Group; Seth Pinsky , EVP & Fund Manager of RXR Realty; Abe Schlisselfeld , Co-Partner-in-Charge of Real Estate at Marks Paneth.

easing pedestrian flow from track level to the street) being offered to the MTA by developers. • Opportunity Zones around 125th Street and other areas of New York that offer good access to transportation and other attractions – though the lengthy 10-year tie-up of capital that is required is still a hurdle for investors. • Big box store demise. Shuttering stores and redeveloping them into multi-purpose proper- ties with reasonable rents allow them to become destinations and hubs for smaller retail and entertainment ventures. • Industrial conversions into new residential and retail developments are on the rise. Long Island City is a prime example, with an entirely new skyline rising along the East River. • Industrial space itself is still needed (and available), but it needs to be zoned correctly, and

permits to tear down older unsuitable industrial buildings need to be easier to acquire. • Politics as an area of concern. Two examples: The prevailing wage controversy is becoming intractable; and the delay or prohibition of critically needed new infrastructure projects, like gas mains, has reached crisis stage. Few in the public are aware of the emergency and fewer in government are doing anything about it. There was much more, and the scope of the conversa- tion was truly a reflection of the vibrancy and entre- preneurial spirit that infuses the entire real estate industry in New York. Marks Paneth will continue to keep its finger on the pulse of this extraordinary world of opportunity, and I encourage you to speak with your Marks Paneth advisor if you’d like more information on any of the issues raised in this article.

Abe Schlisselfeld, CPA, EA is Co-Partner-in-Charge of the Real Estate Group at Marks Paneth LLP. Abe advises commercial and residential real estate owners, real estate management firms and REITs on all facets of accounting and taxation, including multistate taxation, tax planning for high- net-worth individuals and business-entity structuring. He can be reached at or 212.201.3159.

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C ompanies today are operating in an increasingly complex environment that is more dynamic and a lot less predictable due to several business disrup- tors. According to Clayton Christensen, a professor at Harvard Business School, dis- ruptors displace an existing market, industry or technology and produce something new, more efficient and worthwhile. These disruptors have escalated in recent years – from the recent landmark Supreme Court case South Dakota v. Wayfair, Inc. , which upended established precedent and subjected businesses with interstate sales to

greatly increased exposure to sales and use tax, to President Trump’s Tax Cuts and Jobs Act (TCJA), his 2017 “holiday present” to the country which was passed quickly and without much deliberation. In this article, we focus on disruptors in three broad categories affecting the real estate industry: 1. demographic disruptors with the rise of Millennials and Generation Z; 2. technological disruptors such as geospatial analysis, the Internet of Things (IoT), mobile apps and blockchain; and 3. legislative and regulatory disruptors, specifically Internal Revenue Code (IRC) Section 163(j), and 2019 Federal Form 1065 and Schedule K-1.


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The biggest disruptor in real estate will be the impending change from process- centric to data-centric operations.

Each of them, to varying degrees, has had a profound effect on investors, landlords and practitioners alike and has significantly shaped the market.

media, so powerful Wi-Fi networks included in rental properties will have an immense appeal to them. Landlords should market their rental properties online and have a website and social media accounts for their rental properties. They should also be mindful that many young people prefer emailing or texting to phone calls and expect quick responses to their questions or concerns. Generation Z and Millennials are frugal and environmen- tally conscious, and thus more amenable to living in micro-apartments (i.e., “tiny living”) as a more economi- cal and eco-friendly option. These new tenants also value community, and communal spaces – such as recreation rooms, fitness centers, an outside barbecue or a swimming pool – will appeal to them as well. Because they are interested in minimizing environmental impact, they are attracted to green features of rental properties such as energy-efficient appliances and window panes, water-saving shower heads and solar panels. Commercial landlords, too, need to keep Generation Z and Millennials in mind, as they are changing the way commercial real estate is marketed, leased and sold. An increasing number of landlords are including features in their commercial properties to attract companies with a youth-dominated workforce. Retail developers, for example, are looking to draw Generation Z and Millenni- als into urban mixed-use projects. Young urban professionals prefer to live near shops, restaurants, entertainment, public transportation and their work- places, and want to minimize their commuting time.


The Generation Z and Millennial age groups are having a significant impact on the current urban real estate market, as they enter the market as new tenants and seek more modest and “green” living arrangements. As this trend continues and grows, investors, developers, landlords, and real estate agents and marketers must understand the motivations of these young people to accommodate their needs. So who are these demographic groups and what are they interested in? Generation Z consists of young people born between 1996-2010. With numbers in excess of 90 million, they make up more than a quarter of the U.S. population. Millennials, born between 1981-1996, number about 71 million people and comprise approximately 21% of the U.S. population. These young adults are graduating college, building their careers, getting married and starting families. Because of their numbers, they have an outsized influence on business and market trends. The demands of Generation Z and Millennials regard- ing rental properties and amenities are different from those in older generations. They are first and foremost tech-savvy and rely heavily on the internet and social

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They prefer a smaller space near their job and social outlets rather than a larger apartment but with a longer commute. E-commerce has changed the way they shop, and retailers will need to rethink how they use their physical space to appeal to customers by offering a unique retail experience. A good example of this is Hudson Yards, the newly opened large-scale real estate development in Manhattan that was designed to satisfy the needs of the Millennial demographic. This $20 billion project, developed by Related Hudson Yards, will include condos, apartments, offices, a school, a park, a hotel, a shopping center and a cultural event space when fully completed in 2024. This is an ideal arrangement for Millennials who want to live on one floor and work on another! Generation Z and Millennials have unique wants and needs about where they live and have significantly impacted the real estate market and changed the way business is done. Their impact on the market is likely to continue for years to come, and landlords who can fulfill their needs will have an easier time attracting this significant and burgeoning group as tenants. Rapid technological developments are disrupting traditional business models across many industries, including real estate. These disruptive technologies replace established technologies and have the potential to dramatically alter the face of an industry. In addition to creating inconvenience and frustration, disruptive technology may also provide opportunities for those who use it effectively. Four technologies are having a disruptive impact on the real estate rental market today: 1. geospatial analysis; 2. the Internet of Things (IoT); 3. mobile apps; and 4. blockchain. Each of these may substantially influence the relation- ship between the lessor and the lessee. • Geospatial analysis is an approach to applying statistical analysis and other informational TECHNOLOGICAL DISRUPTORS

techniques to data with a geographical or geospatial aspect; it organizes data in a manner that enables lessors to understand the perfor- mance of each rental unit based on location. • IoT devices are embedded with sensors, soft- ware, network connectivity and electronics that enables them to collect and exchange data; they • Mobile apps can target specific demographics, ensuring that you are reaching optimum markets. • Blockchain (digital information, or the “block,” stored in a public database, or the “chain”) automates the rental process and lowers operational costs by eliminating the need for a middle man (e.g., a real estate agent). It allows users to send and receive cryptocurrency for rental transactions with minimal to no fees, expedites the rental and saves on commissions and fees charged by intermediaries. In each of these examples, the deployment of technolo- gy has prompted a change in the business paradigm. Geospatial analytics is improving unit price perfor- mance based on location; the success of IoT devices is resulting in more smart buildings; mobile apps enable property managers to optimize marketing spend; and blockchain has the potential to lower costs. Although these technologies have all delivered positive results, they may not always have a silver lining. Recent hacks impacting personal information are the result of deployed technologies that lack the controls and safeguards required to secure this information. Because of these violations affecting individuals’ rights, organi- zations are being held accountable for their use and deployment of technologies. New regulations and laws in themselves are disruptors in that they require the deployment of technology that enforces compliance. Going forward, the biggest disruptor in real estate will be the impending change from process-centric to data-centric operations. This paradigm shift is going to force the industry to change how firms operate their businesses. Firms that embrace these changes and invest in a data strategy early on will be the long-term beneficiaries and will minimize the disruptions caused by new technologies and data. assist in controlling the operational cost of managing buildings based on occupancy.


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limitation for claiming small taxpayer status. There is an “aggregation rule” in which the gross receipts of certain “related” (by ownership) entities are combined in determining whether this threshold has been met. And if it is, none of the constituent entities is treated as a small taxpayer, even if one or more would otherwise qualify standing alone. The aggregation rules under Section 163(j) – which are not to be confused with the aggregation rules for other Code sections – have brought even the most experienced practitioners to their knees. Treasury did tie up some loose ends here, although not until July, by providing clarification as to what rules apply when aggregating a group of entities that does not wholly consist of corporations, but also partnerships and sole proprietorships. PROPOSED CHANGES IN DRAFT VERSIONS OF THE 2019 FEDERAL FORM 1065 AND SCHEDULE K-1 The IRS recently issued draft versions of the 2019 Federal Form 1065 (U.S. Return of Partnership Income) and the Schedule K-1 (Partner’s Share of Income Deduction Credit, etc.). There are several significant changes aimed to enhance the quality, transparency and availability of the information reported by partnerships to the IRS and the partners of such business entities. The intent of the new information being requested and many of the revisions is to assist the IRS in assessing compliance risk and identifying potential noncompliant filings. The changes also reflect updates that are consistent with the new tax provisions set forth in the TCJA. Among the proposed changes are several new questions requesting details for IRC Section 704(c) gain/loss property, guaranteed payments (for services or capital), whether a decrease in a partner’s share of profit, loss or capital was due to a sale or an exchange, whether partnership liabilities include liabilities from a lower-tier entity and other questions asking if there is more than one activity for at-risk purposes (IRC Section 465) as well as for passive activity purposes (IRC Section 469). In addition, a checkbox is added that allows a taxpayer to indicate if certain groupings or aggregation elections have been made. One of the more significant proposed changes is the requirement for partnerships to report tax basis capital account roll-forward to its partners (in Section L of

What have we learned about the IRC Section 163(j) limitation on the deductibility of business interest expense, now that the 2018 filing season is over? That question is best answered with another question – what haven’t we learned? Early in the year, the Treasury Department issued a voluminous and complex set of proposed regulations which, despite their length, left several key questions unanswered. For example, many real estate partnership structures are “tiered.” The property is held in one partnership, which is owned by another partnership, with perhaps other partnerships in the tier, before we get to the “ultimate” partners. Yet the entire issue of how to apply these byzantine rules in the tiered partnership context was left open. The proposed regulations contemplate only one-tier structures, in which the property is held in a partnership that is not owned by any other partnerships. Another example: IRC Section 163(j) provides that a real estate business subject to the limitation can elect out (at the cost of a less favorable depreciation regime). The proposed regulations imply that a “small taxpayer” - not subject to the limitation - is not eligible to elect out, since it is not subject to these rules to begin with. But now assume that a partner in this small taxpayer partnership is itself subject to the limitation. Can the small taxpayer elect out? Can the upper tier partner do so, even if it doesn’t hold the property directly? – open issues. During the winter of 2019, Treasury dropped some hints that such regulations would be issued by late summer. Therefore, the filing of many partnership tax returns – due September 15 – was delayed as long as possible, as well as individual tax returns due October 15. However, not only were these regulations not issued prior to those deadlines, but as we approach the holiday season, they have still not ap- peared. This lack of clear guidance forced many practi- tioners to make ad hoc decisions at the buzzer, regard- ing one of the most complex provisions of the Code. Many practitioners believe (read: pray) that the next round of regulations will address these – and many other

Perhaps the only clarification that practitioners received in this area has to do with the $25 million gross receipts

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Schedule K-1). You may recall for 2018 the tax basis cap- ital account reporting disclosure was only required for those partners having a deficit balance at the beginning or end of the year. The forms and related schedules are near completion, and we understand updated final versions will be released before the new year. In the meantime, partnerships should review their partnership agree- ments to ensure a partnership representative’s name is stated (to handle potential entity level audits) and further evaluate additional information and/or time

needed to comply with these proposed new tax compliance reporting requirements.


As you can see, demographics, technology, legislation and regulation are causing disruption in the real estate marketplace with profound consequences. Investors, landlords and practitioners will ignore these develop- ments at their peril. Let’s keep the discussion going.

Alan M. Blecher, JD , is a Tax Principal in the Real Estate Group at Marks Paneth LLP. Mr. Blecher has extensive experience serving high-net-worth individuals and their closely held businesses, with a particular focus on partnerships, limited liability companies and S corporations. He can be reached at or 212.201.3197.

Michael W. Hurwitz, CPA, MST , is a Partner and REIT Group Leader at Marks Paneth LLP. Mr. Hurwitz brings more than 30 years of experience and a ver- satile set of skills acquired through working for both public and private companies in the real estate sector. He can be reached at or 212.201.2230.

Dean Boyer is a Director in the Technology and Digital Services Group at Marks Paneth LLP with more than 30 years of experience in information technolo- gy and data management. Dean’s focus on data science and business intelligence enable him to advise organizations on how to harness data to increase operation- al effectiveness and improve organizational performance. He can be reached at or 267.768.3839.


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Considerations for Your 2019 Tax Planning JAY SUSSMAN, CPA

T hough the end of each year marks the time to begin tax planning, recently many clients have come to me expressing uncertainty over where to begin. They have noticed that the “tradi- tional” strategies that they relied on prior to the Tax Cuts and Jobs Act (TCJA) are no longer effective. And while it’s true that many popular deductions were either reduced or eliminated by the TCJA, there are new strategies that can be used to maximize the benefits you receive for your

itemized deductions and other deductions and losses. Below are some of the consider- ations I am sharing with my clients as they prepare for year end. PLAN CHARITABLE CONTRIBUTIONS CAREFULLY The deduction category of charitable contributions was somewhat improved by the TCJA, with the deductible limit for cash contributions increasing from 50% to 60% of adjusted gross income. However, the increased limit will not result in a larger deduction for every taxpayer— in order to deduct charitable contributions, you must


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itemize , and your total itemized deductions must exceed the standard deduction. With the 2019 standard deduction set at $12,200 for single filers and $24,400 for those filing married-joint returns, there is a higher hurdle to clear before you receive a benefit for your charitable contributions. Proper planning and timing of your charitable giving can maximize the tax savings from those charitable contributions. If you took the standard deduction in 2018, you may want to consider bunching your charitable contributions into alternating years. This strategy may help you get over the standard deduc- tion amount, allowing you to itemize in that year. Another option is donating appreciated, publicly traded stock instead of cash. If you donate publicly traded stock held for longer than one year, you can deduct the fair market value and avoid the capital gains tax you would have paid if the stock was sold. Even if you are taking the standard deduction, you can still benefit from the tax savings by not paying tax on the capital gains. (Note that you should not donate depreciated stock. In this scenario, you would want to sell the stock, benefit from the loss and donate the proceeds.) For those taxpayers who are taking required minimum distributions from their Individual Retirement Ac- counts (IRAs), an additional option is available to maximize the benefit of your charitable giving. Qualified Charitable Distributions (QCDs) are not a new thing—in fact, they have been around since 2006—but prior to TCJA, this option was often overlooked by clients who received the full benefit of their itemized deductions. Although not a deduction, for 2019, you can exclude up to $100,000 from gross income for a QCD. A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70 1 ⁄ 2 or over that is paid directly from the IRA to a qualified charity. In addition, your charitable distribu- tion can satisfy all or part of your 2019 required minimum distribution.

investments in mutual funds. Taxpayers should beware of purchasing mutual fund shares at the end of the year, as funds often throw off large capital gain distributions at year end. If you own the shares on the distribution’s record date, you will be taxed on the full amount of the distribution, even if you did not own the fund for the entire year . With the recent market volatility, it may be a good idea to evaluate your stock portfolio to see if there are unrealized losses you can take to offset any gains you have. Both long- and short-term gains and losses can offset one another. If you want to realize those losses without changing your portfolio’s asset allocation, be mindful of the wash sale rules. They prevent you from taking a loss on a security if you buy a substantially identical security (or option to buy that security) within 30 days before or 30 days after selling the security that generated the loss. You will only be able to take the loss for tax purposes after the replacement security is disposed of. The wash sale rules will also apply if you purchase the same or a substantially similar security in your IRA. The TCJA expanded the use of Section 529 plans, and under the new law, up to $10,000 annually per student can be used from a Section 529 plan to pay tuition for kindergarten through grade 12. There are some states that do not conform to the federal law change related to Section 529 plans. Speak with your tax advisor before making any distributions from a Section 529 plan for K-12 tuition expenses—while contributions to a 529 plan are not deductible for federal tax purposes, some states including New York offer a deduction for some of your contributions. A special rule for 529 plans allows you to front load five years’ worth of annual gift tax exclusions and make up to a $75,000 contribution ($150,000 if you split gifts with your spouse) per recipient in 2019. SECTION 529 PLANS



The TCJA added the Section 199A deduction for an individual’s income from passthrough entities such as partnerships, S corporations and LLCs that are taxed as sole proprietorships, partnerships or S corpora- tions for tax purposes. The deduction is generally limited to 20% of qualified business income (QBI).

The timing of deductions is not the only strategy one can employ at the end of the year to minimize their tax liability. Many clients are often surprised at year end by the capital gain distributions generated by their


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taxable income exceeds your capital gains. If your taxable income is over the threshold amount, there are some things you can do to maximize your deduction. Consider accelerating deductible expenses into the current year. Bonus depreciation and the Section 179 expense election allow you to get a larger upfront deduction for big purchases such as equip- ment and furniture. While these expenses will reduce your QBI, they will also help you get below the taxable income threshold. You can also look to accelerate itemized deductions such as charitable contributions or realize losses such as capital losses if you have gains to bring your taxable income below the threshold amount. If you expect to be in a higher tax bracket next year, you may want to delay larger purchases or deductions until the following year. A two-year analysis should be performed to maximize your potential tax savings. Taxpayers are right to start planning at year end, and utilizing the proper tax-planning strategies can have a significant impact come April 15. These are just some of the strategies I’m sharing with my clients as they prepare for the 2020 tax season, and depending on your specific tax situation, there may also be other options available. Speaking with your tax advisor will help you determine the most effective and beneficial ways to prepare. LOOKING AHEAD

Additional limitations to the deduction begin to apply if your taxable income in 2019 exceeds the threshold amount of $160,700 for single taxpayers or $321,400 for married taxpayers filing a joint return. If your taxable income is over these amounts, the W-2 wages and Unadjusted Basis (UBIA) limitations begin to phase in. The limits fully apply once your taxable income exceeds $210,700 for single taxpayers and $421,400 for married couples filing a joint return. If your income is over the threshold amount, your deduction is limited to the lesser of: 1. 20% of the QBI for that trade or business 2. The greater of a. 50% of W-2 wages with respect to that qualified business or b. The sum of 25% of W-2 wages plus 2.5% of UBIA with respect to that qualified business. In addition, if your income is over the threshold amount, the deduction is not available for income earned for any “Specified Trade or Business.” Specified trades or businesses include services provided in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial ser- vices, brokerage services, investing or investment management, trading and dealing in securities. If your taxable income is below the threshold amount, the W2 wages, UBIA and specified service limitations will not apply to you. In this case, your deduction will be 20% of the lesser of your QBI or the amount your

Jay Sussman, CPA , Partner in the Private Client Services Group at Marks Paneth LLP., provides tax planning, consultation and preparation services for high-net-worth individuals, trusts and estates, partnerships and corporations. Mr. Sussman has developed additional expertise in tax plan- ning and preparation for non-resident alien individuals, controlled foreign corporations and passive foreign investment companies, as well as trea- ty-based returns and foreign reporting for U.S. resident taxpayers. He can be reached at or 212.201.2285.

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The Importance of Hiring the Right CFO for Your Business NEIL SONENBERG, CPA

T he role of Chief Financial Officer (CFO) at a company is very critical, influential and prestigious. As the CFO has the important responsibility of managing a company’s finances, the se- lection of such a senior executive requires careful consideration. This article provides guidance in selecting a CFO and other key financial officers for an entrepreneurial family-operated business at different stages in the business lifecycle. WHICH ROLE IS MOST APPROPRIATE?

entrepreneurial family-operated business is whether a strong bookkeeper, a Controller or a CFO is required to manage the company’s finances. When deciding which role is most appropriate, the following issues should be considered: • the size of the company in terms of sales and number of employees; • whether larger financing transactions are required; • whether mergers and/or acquisitions are being contemplated; • whether large capital projections or budgeting are being contemplated; and • the sophistication of the financial statement.

As the complexities of the business world continue to compound daily, the question that arises for an

Generally, new businesses will be able to adopt simple financial systems to meet their goals in financial


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• regularly inform the Chief Executive Officer of what is occurring from a financial perspective, including how the company is performing financially, whether the company is meeting its budgetary forecasts, and whether there is an erosion of gross profit or improvement and why; • determine whether financial ratios are being met; • ensure that a proper accounting system is in place that safeguards assets, determines whether a manufacturer is recapturing overhead to inventories, and ascertains that inventories are processed properly and products not thriving are removed from inventories, reducing overhead costs of storage; • interface with an outside audit committee to address their specific concerns; • help raise cash for investments; • lead a team in a potential merger or acquisition; and • manage human resources and technology. Essentially, a true CFO brings a completely different level of skill to the company, having deep accounting and finance knowledge and great managerial skills to help implement and meet financial goals. The CFO should also be unflappable and comfortable connect- ing with all levels within an organization. The company should formulate a suitable job description for a CFO who can assist in growing the company’s bottom line. The following is a typical position request for a CFO of an entrepreneurial family-operated business: Position Requires: A seasoned professional with at least 10 years of experience in all aspects of real estate. Skills and relevant experience include: • CPA and MBA in Finance – Having these creden- tials usually indicates a more seasoned, thought- ful and creative individual. • Ability to analyze data using abstract thinking to assess a problem and propose a viable solution – The CFO should be able to examine critical areas of business in a multi-dimensional approach, looking at all facets of a particular issue and producing solutions. CFO JOB DESCRIPTION

reporting. They will usually have a bookkeeper for their financial needs and use a simple computer system.

The requirements for financial leadership evolve as companies expand, and a Controller or a CFO may be needed at a certain point in the business lifecycle. What are the differences between the two positions, and when does a company perhaps need to fill both positions? Filling both positions concomitantly is somewhat of a rare occurrence, as companies usually grow into different “need” levels once “events” occur during business cycles. When economic/financial data is not complex and decisions are not riding on every financial breakpoint, then the hiring of a Controller would be a more appropriate choice. As the company becomes more sophisticated and relies more heavily on data for financial decisions, the dual combination of Controller and CFO may be needed. A Controller’s responsibilities usually include: • managing the accounts payable and accounts receivable cycle; • making sure bank reconciliations are done properly and timely; • reviewing books and records and ensuring all adjusting journal entries have been appropriately made and recorded timely; • working with an accounting firm to prepare the financial statement and corresponding tax returns by getting trial balances in the appropri- ate form along with a variety of other items required for the tax return; • interfacing with a financial institution or attend- ing formal meetings; and • assisting management in financial decision-making, including where to allocate financial resources. RESPONSIBILITIES OF A CFO RESPONSIBILITIES OF A CONTROLLER

The CFO will normally: • negotiate formal covenants with a bank;

• direct corporate staff (under his or her supervi- sion) to prepare the financial statement for the outside accounting team to do the attest work;

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Real Estate Perspectives

Selecting the right professional to handle financial affairs is one of the most important decisions a company can make.

• Ability to interact effectively with all levels of personnel – A CFO needs to have a congenial personality so he or she can interact well with all key individuals within an organization and help to create a team environment. • Expertise in leading a Mergers and Acquisitions team – A CFO needs to be able to review financial data and determine whether it makes sense to allocate resources to pursue a business or a segment of a particular business to enhance the profitability of the corporation. • Ability to raise funds for a merger or expansion – After determining it is sensible for a corporation to pursue a certain acquisition, the CFO needs to develop a plan to fund such an expansion. This will require a further refinement of budgeting or forecasts and perhaps the development of an innovative “road show” to seek out funds from outside sources. Accordingly, CFOs must have a certain sense of salesmanship within their arsenal of attributes.


By engaging in a sophisticated hiring process, guided by trusted advisors who can develop an appropriate analysis, an entrepreneurial family-operated business can evaluate a potential candidate within an appropri- ate scope, measuring everyone equally against such criteria. It is essentially developing a business plan for a human being. This process could save thousands of dollars in headhunting fees from recruiting agencies that are not as attuned to the inner workings of the company. In many instances, firms delegate the hiring of a CFO or Controller to their accounting firm as the firm is more experienced in these hiring processes. Every company, no matter how large or small, needs someone to handle its financial affairs, and selecting the right professional to do this is one of the most important decisions the company can make.

Neil Sonenberg, CPA is a Partner in the Real Estate Group at Marks Paneth LLP. With more than 35 years of experience in the real estate industry, Mr. Sonenberg specializes in tax and advisory services for individuals, corporations and partnerships, including commercial building owners, operators and develop- ers, co-op and condominium boards, residential rentals and apartment building operators. He can be reached at or 212.324.7070.


Real Estate Perspectives

FALL 2019

Understanding the Safe Harbor Rule for Rental Real Estate Enterprises ANTHONY DELVALLE, CPA

BACKGROUND I n 2017, the Tax Cuts and Jobs Act (TCJA) introduced a new 20% tax deduction (the 199A deduction) for qualifying business income from partnerships, S corporations and sole proprietors. Proposed regulations issued in the summer of 2018 created some

concern as to which rental real estate activ- ities would qualify as a “trade or business” under these provisions, allowing the rental income to be eligible for this tax break. Much of this concern arose from the fact that while the Internal Revenue Code (IRC) uses the phrase “trade or business,” it is not defined there. Courts have long adopted a “facts and circumstances”

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Real Estate Perspectives

approach in determining whether a particular endeavor indeed constituted a trade or business. Generally, courts have supported trade or business treatment when the activity is conducted for profit and is engaged in (even if not by the taxpayer itself) with regularity and continuity. In interpreting these requirements in the rental real estate area, case law has supported trade or business treatment when additional services are provided to tenants. On September 24, 2019, the Internal Revenue Service (IRS) issued Revenue Procedure 2019-38, finalizing a “safe harbor” rule initially proposed in January to allow an investor’s real estate rental enterprise to be considered a trade or business and qualify for the 199A deduction. A rental real estate enterprise is defined, for purposes of the safe harbor, as an interest in real property held for the production of rents owned by an individual or relevant passthrough entity (RPE) which may consist of an interest in multiple properties. An RPE is defined as a partnership or an S corporation that is owned, directly or indirectly, by at least one individual, estate or trust. In order to qualify for the safe harbor test, the rental real estate interest must be owned directly by the individual, RPE or through a disregarded entity (i.e., a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner). Taxpayers either must treat each rental activity as a separate enterprise or treat all similar properties as a single enterprise. The two types of rental real estate categories for the purpose of combining properties into a single rental real estate enterprise are residen- tial and commercial. Thus, commercial and residen- tial rental real estate cannot be combined in the same enterprise.

rental enterprise. Rental services include advertising for rent or lease, negotiating and executing leases, verifying tenant applications, rent collection, daily operation, maintenance and repair of property; managing the real estate; purchase of materials; and supervision of employees and independent contractors. It’s also important to note that for rental real estate enterprises that have been in existence for at least four years, the 250 or more hours requirement can be satisfied in three of the previous five years. • Beginning in 2020, real estate enterprises must maintain contemporaneous records, including time reports, logs or similar documents, to support the hours, dates, description and provider of the services performed. If services with respect to the rental real estate enterprise are performed by employees or independent contractors, the taxpayer may take into account the amount of time the employee or contractor spends on rental services, rather than provide detailed time, wage and payment records, as long as the taxpayer has these records available for inspection at the request of the IRS. • Each year, the taxpayer or RPE must attach a statement to the tax return filed for the tax year(s) the safe harbor is relied upon. The statement must include a description of all properties included in the rental real estate enterprise, properties acquired and disposed of during the taxable year and a representation that the requirements of this revenue proce- dure have been satisfied. The following types of property are not eligible for the safe harbor test: 1. Real estate used by the taxpayer as a residence for more than 14 days during the year. 2. Real estate rented or leased on a triple net basis. A triple net lease is any lease where the landlord passes on the responsibility for paying real estate taxes, insurance and other maintenance costs to the tenant. The IRS views the ownership of real EXCLUSIONS FROM THE SAFE HARBOR TEST


To be eligible for the 199A deduction under the safe harbor, the rental real estate enterprise will be treated as a trade or business if the following criteria are met: • Maintain separate books and records for each rental real estate enterprise. • 250 or more hours of rental services are performed during the year with respect to the


Real Estate Perspectives

FALL 2019

Taxpayers who do not meet the safe harbor requirements still have the opportunity to prove that their rental real estate qualifies as a trade or business for purposes of the 199A deduction.


estate rented on a triple net basis as an invest- ment rather than a Section 162 trade or business. 3. Real estate rented to a trade or business with common ownership. 4. Real estate, if any portion is treated as a specified service trade or business, under special rules where property is provided to a specified service trade or business.

Taxpayers who do not meet the safe harbor require- ments still have the opportunity to prove that their rental real estate qualifies as a trade or business for purposes of the 199A deduction. This will be determined based on the traditional facts and circumstances analysis of the taxpayer’s rental activities. Records should still be kept for all rental services performed for the rental real estate enterprise, as the taxpayer will be required to back up this claim if challenged by the IRS.

Anthony Delvalle, CPA , is a Senior Manager in the Real Estate Group at Marks Paneth LLP, where he provides tax and consulting services to the firm’s real estate clients with a focus on advising high-net-worth individuals in real estate. He can be reached at or 212.710.1718.

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Real Estate Perspectives


Our team of Real Estate tax professionals is proud to represent Marks Paneth at these industry events. Click on the event name to learn more:

Global Institutional Real Estate Investor Forum DEC 11-12, 2019 FEATURED SPEAKER: ABE SCHLISSELFELD

IMN Winter Forum on Real Estate Opportunity & Private Fund Investing JAN 22-24, 2020 FEATURED SPEAKER: ABE SCHLISSELFELD

Leverage Our Expertise Marks Paneth has served the real estate industry for more than 100 years and has built a solid track record advising many of the industry’s premier commercial and residential real estate owners, developers, builders, REITs, property managers and prominent real estate families. Our dedicated Real Estate Group offers a full range of accounting, tax and advisory solutions that are customized to satisfy the requirements of virtually every real estate stakeholder, from the individual real estate owner to the largest global institutional investor. Other specialty services offered by Marks Paneth include international tax, state and local tax, family office and business management, cybersecurity and technology risk assessment, forensic accounting and valuation, high-net-worth, trusts and estates and employee benefit plans. Visit to learn more.

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