Mike Gibbons: Getting 2 deals from 1

Dealmakers who are willing to separate the real estate from the sale of their business and conduct two separate deals often come out ahead, says Michael E. Gibbons, founder of Brown Gibbons Lang & Co.

“Generally a buyer wants the operating business,” Gibbons says. “They don’t always care about the real estate as long as they can control it and they can have the facility meet their needs. We’ve been able to optimize value to sellers by breaking that real estate off.”

In this edition of Dealmakers Live, Gibbons offers his insights into the opportunity presented by looking at two separate deals. What follows is a transcript of the above video, edited for readability.


Real estate as a separate deal

What we’ve been able to find is if you can parse that real estate, break it off into a separate transaction, as long as the buyer is willing to go along with that, generally a buyer wants the operating business. They don’t always care about the real estate as long as they can control it and they can have the facility meet their needs. We’ve been able to optimize value to sellers by breaking that real estate off.

What most people don’t realize is if you’re selling a business at 10 times EBITDA, that’s equivalent to a 10 cap in real estate. Ten times EBITDA is a very high multiple for a manufacturer, for instance. It would be right at the top of anything anybody’s ever gotten. Probably not achievable even in this marketplace. But if you translate that to the way people talk about real estate values, a ten cap is very cheap. Oftentimes we’re seeing real estate being sold to triple net funds at 6 ½ caps. That’s like 18 times earnings.

Unless you’re a tech company or a very high-growth company or a company that can command those kinds of margins because you have a lot of intellectual property and somebody is willing to pay those kinds of multiples to get what you know, you’re not going to achieve those kinds of multiples. If you’re a mundane metalworking company, getting seven times would be an extraordinary number. But that doesn’t mean you can’t sell your real estate for 18 times.

You can allocate those earnings that reflect the cost of the leasing of that real estate, and allocate that to the real estate, take it off your earnings, you’re not going to get that seven times multiple on that portion. But you may be able to go to the marketplace — you should examine this — and sell the real estate separately at 15 or 18 or 20 times. You should always examine that as an alternative. It’s something we do on every occasion with our clients. It has allowed us to get total proceeds to our client at a much higher level than we could without doing that. That’s our job.

Related post: Relationships drive this dealmaker’s approach to his craft

Proposal impacts real estate industry

Ohio legislation has been proposed to close the “LLC Loophole” on real estate transfer taxes. The bill would apply to any transfer of ownership interest in a pass-through entity that owns real estate both directly or indirectly.

“While the change wouldn’t cost a lot for many real estate owners, it is something they need to be aware of,” says Tony Constantine, CPA, tax partner at Ciuni & Panichi, Inc. “Also, if they want to call their state representative to have their voice heard about how this could affect them, now is the time to do it.

Smart Business spoke with Constantine about Ohio’s real estate transfer taxes and how the proposed bill could apply.

What does the current law state with regards to real estate transfer taxes?

The current law imposes a tax on any direct transfer of real property located within the state. The tax consists of a state and county portion, totaling $4 per $1,000 on the transaction, and it’s paid by the transferor. So, a $2.5 million sale would have a transfer tax of $10,000.

The loophole in the current law is that it only applies to direct transfers, not indirect transfers. Indirect transfers are the sale of an ownership interest or entity that owns the property. If you own a building as a single member LLC, you could sell the interest in that LCC to someone else who becomes the owner — doing that is a transfer of an interest in an entity, versus an interest in the actual property.

Why do many real estate investors prefer to purchase real estate indirectly?

There are three main reasons:

1) To shield their identity. Some prefer some privacy with respect to their real estate acquisitions and may purchase through a trust or other entity.
2) To freeze the assessed value for real estate tax purposes. Real estate sales trigger the county to revalue the property to account for any appreciation.
3) To avoid the conveyance fee. When you transfer real property, there is a transfer tax (conveyance fee) that includes a state and county tax. With an acquisition of an LLC interest there is no transfer of title, and thus no transfer tax.

Not everyone sets up their real estate transfers this way, but it happens often. It’s a nuance of the law that not everyone is aware of. It’s also an example of why real estate investors need experts who can advise them on the tax, accounting and legal situation.

Why do some want to close the loophole? Do you think the bill will pass?

They want the extra tax dollars. If you look at how the tax dollars are used, the money — even the state portion — goes to the counties and typically gets allocated to the school systems. So, school boards are big proponents because it will increase their funding. If you look statewide, it could be very beneficial for larger counties, especially since the state has scaled back on its allocations.

The bill is just a proposal, and the likelihood of it passing will become clearer only as it moves through the legislative process. There are arguments to be made on either side. The real estate community could see it as an expensive issue for those with large portfolios.

What does this mean for real estate owners and investors, in practical terms?

If it passes, it won’t stop people from selling a building. The transaction costs could get a little higher, but that’s probably a small line item in most real estate deals. Compliance costs also could go up a little. For example, if you buy a 20 percent interest in a property partnership, there will be some compliance to determine the value of that 20 percent interest.

It would also enable the county to know there was a transfer of real estate, so the assessed value wouldn’t be frozen. However, counties are already getting on top of this by checking the mortgage records.

Really, it’s just a matter of keeping an eye on the situation and making sure your voice is heard if you have an opinion. The real estate market has been steady — and this bill won’t drive that up or down. Northeast Ohio’s cap rates and prices are attractive enough that they’ll continue to draw interest, especially from people outside of the market.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

EY Entrepreneur Of The Year® 2015 Northeast Ohio

Honoring the best of the best …

Since 1986, EY has celebrated the entrepreneurial spirit of men and women who have followed and achieved their dreams, defining their legacy for the future by building their businesses, giving back to their communities and changing the lives of countless others.

Their passion, vision and persistence stand as a testament to their dedication. Twenty-nine years ago, EY founded the EY Entrepreneur Of The Year® Program to recognize these dynamic leaders and to build an influential community of innovative entrepreneurs.

Each June, we host celebrations in 25 U.S. cities to welcome the men and women who are regional finalists into our community and to toast their vision. Their energy and self-confidence have turned their dreams into reality. We applaud them for taking the road less traveled to launch new companies, open new markets and fuel job growth.

Join us in celebrating their passion, innovation and unwavering commitment to find a better way to win in the marketplace. Congratulations to all of you!





Dan Tompkins
EY Akron

2015 Entrepreneur Of The Year ®

Quick links:
COMMUNITY IMPACT Akram Boutros, The MetroHealth System  FAMILY BUSINESS Richard N. Seaman, Seaman Corporation | Scott E. Mawaka, Fleet Response | Jeremy Rayl, J. Rayl Transport | Kim C. Wilson, Chad A. Wilson, Slate Rock Safety, LLC  MANUFACTURING & DISTRIBUTION Ramzi Y. Hermiz, Shiloh Industries | Don Esch, Bettcher Industries | Rick C. Farone and Dave Brickner, Guardian Technologies LLC | Mike Baach, Philpott Solutions Group  NON-PROFIT Lee Friedman, College Now Greater Cleveland | Terry Davis, Our Lady of the Wayside  REAL ESTATE | Michael L. Cantor, Allegro Realty Advisors, Ltd.| Jim R. Santee Jr., Choice Traditions, Inc. | Tracy C. Green, IRG Realty Advisors, LLC  RETAIL & CONSUMER PRODUCTS Anthony J. DeCarlo Jr., IdeaStream Consumer Products, LLC | Mike Davis, Adventure Harley Davidson | Scott D. Kuhn, Driftwood Restaurant Group | Grant Cleveland, DuneCraft Inc.   SERVICES Aaron Grossman, Alliance Solutions Group | Scot Lowry, Fathom | Dave C. Fulton Jr. and Tom Hartland, Hartland & Co. | Jason Farro, Lighthouse Insurance Group, LLC  TECHNOLOGY & IT SERVICES Sam Gerace, Veritix | Suranjan Shome, Epiphany Management Group | Daniel Anstandig, Futuri LIFETIME ACHIEVEMENT AWARD Sandy Cutler, Eaton Corporation

Here are the 2015 Entrepreneurs Of The Year







Akram Boutros, M.D., FACHE
president and CEO
The MetroHealth System
NOMINATED BY: Dave Jacobs, Oswald Companies

It wasn’t the best of times when Dr. Akram Boutros, FACHE arrived as president and CEO at The MetroHealth System. Morale was low, the hospital was struggling financially and the fear of layoffs permeated the thoughts of many employees.

One of the first initiatives undertaken by Boutros was the facilitation of communication between himself and the CEOs of Cleveland Clinic and University Hospitals — a meeting that had not occurred in 10 years. Boutros values competition and believes in the energy it inspires, but he is also committed to focusing on what MetroHealth can bring to the community and how that complements and adds to the health care market as a whole.

Boutros has spoken more than 100 times about MetroHealth to various organizations and has made himself the face of the system who is open to the media and the public.

When Boutros took the reins at MetroHealth, he quickly transformed the culture from uncertainty and contempt to one of success and empowerment. He has built a team that has implemented programs such as opening health clinics in Cleveland Public Schools and a Medicaid expansion plan which preceded a plan from the state of Ohio.

His philosophy of leadership is rooted in having a plan, taking action and maintaining two-way dialogue with his employees and patients.

Boutros spends time each day walking the halls to greet patients and speak with employees. The conversations are not superficial, but rather a way to show them how much they are valued and to gather important feedback that can help MetroHealth be an even better place.

The Think Tank is a prime example of this spirit of collaboration. Modeled off the popular TV show, “Shark Tank,” it has resulted in more than 160 submissions from employees about how MetroHealth can do its job and better serve its patients.

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Richard N. Seaman
chairman and CEO
Seaman Corporation
NOMINATED BY: Dell Judd, Oswald Companies

Richard N. Seaman has led Seaman Corporation for nearly 40 years. He took over the business a few years after graduating from college when his father lost his battle with lung cancer. It wasn’t an easy transition, and on top of that, the company was in debt and generating losses.

Fortunately, Seaman had learned from his father that challenges could be overcome. When his father started the business in 1949, he had to replace a number of the company’s initial products, despite the financial hardship that resulted. The reason was they didn’t meet the high standards that the company had set for itself.

It’s a philosophy that Seaman continues to adhere to as the business looks to retain its position as a leader in the industrial fabrics sector.

Seaman was started as a company that made truck tarps and has expanded into a variety of products such as roofing, geomembrane fabrics and flexible tanks — used by notable companies such as Google, Microsoft, GM and Disney.

The company’s chairman and CEO describes family businesses as a treasure. He attends frequent training sessions and meetings focused on family businesses to ensure Seaman Corporation is leveraging the strengths of being a family business and sustaining its growth opportunities.

Seaman relies heavily on a strong management team for his company’s success. This includes an outside board of directors that includes elite business professionals from varying industries. These experts give a new perspective on the business and challenge Seaman and his team to aim higher and continue to take risks. There is also an active customer feedback mechanism in place to keep the focus on continuous improvement.

Seaman also has his mind on the future. A succession plan is in place to keep the company a family business through an active shareholder relationship for Seaman’s children.

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Scott E. Mawaka
CEO and President
Fleet Response
NOMINATED BY: John Rini, Action Management

CEO and President Scott E. Mawaka has an innate ability to understand the people he leads and serves, and melds traditional corporate, profit-driven goals with individual development that empowers his team.

Mawaka’s father, Ron Mawaka Sr., began Rental Concepts, Inc. in 1986 after he identified a demand for corporate fleet rental and replacement services. With only four shareholders, an administrative assistant and his son, Ron built an HMO-style network of local corporate rental service providers.

After a decade of success, Ron expanded the company’s services to include accident, claims and maintenance management under the name Integrated Vehicle Systems.

Eventually, the two evolved into Fleet Response, a comprehensive fleet services business that realizes consistent annual sales and profit growth.

Under Mawaka’s direction, Fleet Response has become a leader in both its market and Northeast Ohio. For example, in the past 15 years, the company has had only one year with a decline in revenue, which was attributed to the loss of a large client.

The defining characteristic of Fleet Response is its ability to identify an unmet market need and a corresponding, new solution, such as developing online fleet management software tools and mobile service technology and support.

All but one member of Fleet Response’s senior management team has been with the company for over a decade. Over the years, while still wanting to remain informed of key decisions, Mawaka has developed a trust in his management team to make decisions.

Fleet Response also sets an example for corporate philanthropy through its local sponsorship and donation policies — Fleet Response accepts all requests for donation — as well as focused support for Lou Gehrig’s disease research.

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Jeremy Rayl
J. Rayl Transport
NOMINATED BY: Smart Business Network

J. Rayl Transport is a second-generation family business that started in 1987 on a family farm in Green, Ohio. Jeremy Rayl grew up on the farm owned by his father, Tim, and worked many jobs within the company from payroll to truck maintenance before leaving to attend college.

After a failed merger with a rival transport company called Quality Logistics in 2006, the controller, Karen Rafferty, left J. Rayl to work for Quality Logistics. Rafferty’s departure was the catalyst for Rayl to rejoin the company as controller and subsequently become J. Rayl’s CEO in 2006.

Rayl defines himself as an aggressive and opportunistic business owner. During the recession that began in 2008, J. Rayl had access to capital, which it used to make strategic acquisitions, buy expensive technology, invest in people and enter new markets. As a result, J. Rayl’s biggest growth years were during the recession.

For many years, Rayl surrounded himself with a few close young executives, but as the business has grown, he has hired more experienced members for his management team. He now has an eight-person management team with the three most recent hires having more than 80 years of combined industry experience.

Rayl is also starting an internship program at the company through which college graduates will train for one to two years at the company’s headquarters and then become office managers at the new regional offices the company plans to open as part of its growth strategy.

Rayl is open to doing things differently. J. Rayl recently held its first town hall meeting for all employees where Rayl shared the company’s vision and explained the reasons behind changes occurring at the company.

Given the town hall’s success at informing and unifying his employees, Rayl has committed to doing them semiannually in the future. Rayl has plans to keep growing the business while ensuring that quality remains excellent.

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Kim C. Wilson
president and CEO

Chad A. Wilson
Slate Rock Safety, LLC
NOMINATED BY: Eric Shaffer, FirstMerit

Kim C. and Chad A. Wilson were simply hoping to tap into their e-commerce background to solve challenges in the safety apparel industry when they invested in Slate Rock Safety, LLC. Eight years later, the company has double-digit annual sales growth and is revolutionizing the safety apparel industry with innovative technology, passionate professionals and visionary leadership.

As the head of a woman-owned business in a traditionally male-dominated industry, Kim believes women bring unique strengths and a fresh perspective to business. At the same time, she believes that gender is a nonissue. She gains respect by demonstrating knowledge, agility and strategic thinking to meet client needs.

Kim, president and CEO, and Chad, COO, see integrity as the core value for everyone at Slate Rock Safety, in addition to honesty and transparency. Staff meetings take place throughout the year and everyone is given a voice in the direction of the business. Employees are encouraged to voice their concerns and suggestions on how things should be done differently.

For example, an employee’s proposal to change the commission system to incentivize the sales team was promptly adopted. The Wilsons also created a how-to-make-a-mistake policy under which employees can openly discuss mistakes they have made at work with their supervisors without fear of punishment.

Kim believes creating that kind of safe environment nurtures trust, self-reflection and professional growth.

The growth of the company itself did not always come easy. The Wilsons had to make difficult decisions that shaped Slate Rock Safety into the innovative and efficient family business it is today. In 2013, the duo took a tremendous risk by buying out a business partner and taking full ownership of the company. As a result, the Wilsons put their family’s entire livelihood into the business.






Ramzi Y. Hermiz
president and CEO
Shiloh Industries
NOMINATED BY: Robert Klonk, Oswald Companies

When Ramzi Y. Hermiz arrived at Shiloh Industries, he found a company at the precipice of a big change. The reality is, of course, that big changes and innovation always come with risk. While steel is the primary metal used in cars, aluminum and magnesium are lighter and stronger — but more expensive.
Shiloh faces the risk that its investment in aluminum and magnesium could fail if the company can’t help automakers shift their mindset to the benefits of a lighter, stronger product and the efficiencies of laser-welding technology. But the early returns are very encouraging.
Shiloh has doubled in every sense including financial numbers, employees and physical geographic presence.
Hermiz, president and CEO, is a forward-thinking leader who changed Shiloh from an organization looking in the rearview mirror to a company on the front end of vehicle production, one that is behaving more as an engineering consultant for some of the largest automakers in the world.
One of Shiloh’s goals to achieve success is to lead with technology and innovation. Prior to Hermiz’s arrival, Shiloh would just take an order and process it. Now, the company looks to be able to provide its customers with options that include mixes of metals and manufacturing approaches and options that reduce product weight, cost and waste.
Shiloh prides itself on its forward-thinking culture in creating and testing products for the future as evidenced by its Tech Center created in Detroit. It is here that Shiloh develops new, innovative technology to provide customers with possibilities used on prototypes for cars expected to release in 2019.
Another big part of the changes at Shiloh was the ability to change the perception some customers had as to the safety of “lightweight” products. Some have a negative connotation of the term, but the company came up with a slogan, “Lightweight without Compromise,” to ease those concerns.







Don Esch
president and CEO
Bettcher Industries
NOMINATED BY: Dale Kaprosy, Oswald Companies

The owner of Bettcher Industries recruited Don Esch in 2001 as the vice president of sales and marketing, with the goal of increasing sales.

At the time, Bettcher controlled almost 90 percent of its niche market pertaining to the food processing equipment. Esch knew the company would have to enter other regions and markets if it wanted to grow.

He never ruled out an idea for seeming too outside the box, and implemented the Bettcher Idea Factory as part of the strategic plan to stir up employee creativity and look for ways to expand the company’s markets.

Product management, specifically product development and diversification, has been the signature of Esch’s tenure at Bettcher. It’s also why the company is so well positioned to see continued success and double digit annual sales growth for the foreseeable future.

His ability to transform a historic food packaging company into a business that is also involved with state-of-the-art medical procedures is what makes Esch such a visionary. And this is why Esch was promoted to COO and president, before his final move to president and CEO.

The product diversification uses the same core Bettcher technology across all its diverse markets. Today, the newer product lines are approaching 30 percent of the overall business.

In addition, as COO, Esch was crucial to the change of leadership and direction of the company that came with the retirement of the CEO and majority owner. He personally led the transition from a privately owned company to 100 percent employee stock ownership plan.

Esch also has continued the management style Bettcher has prided itself on for the past 70 years. It’s an approach where management doesn’t make hastened decisions but keeps a methodical and thorough long-term approach.







Rick C. Farone
managing partner

Dave Brickner
managing partner
Guardian Technologies LLC
NOMINATED BY: Mark Hopton, Action Management

The management styles of managing partners Rick C. Farone and Dave Brickner set Guardian Technologies LLC apart from other consumer products companies focused on home environmental products.

While most executive-level managers in the industry aren’t directly involved in the day-to-day management, the customer base, etc., Farone and Brickner are both on-site daily and interact with customers and suppliers.

With significant operations experience in the consumer products industry and strong relationships with suppliers and manufacturers in the Asia Pacific region, Farone leads the sourcing, manufacturing, logistics and supply chain management functions of the business. In this role, he has successfully managed the company’s manufacturing processes and supply chain to maximize margin.

Brickner leads the company’s sales and marketing teams. He has been able to leverage his relationships in the retail industry to get the company’s products into Costco, Amazon, Best Buy, Wal-Mart, Lowe’s, Target and Bed Bath Beyond.

When access to capital was limited from late 2007 to 2010, Farone and Brickner redefined the company as a consumer products company focused on home environmental products. In doing so, they eliminated a number of product lines and retained only a select set of highly profitable product lines, such as humidifiers.

The two also empower their people to make decisions and avoid micromanaging the talent at the company by getting excellent people and giving them the opportunity to do their job.

To share in the success of Guardian Technologies, employees are rewarded for their effort during particularly good years. And in order to continue to increase sales, Guardian Technologies recently moved into a new warehouse to better manage its supply chain.

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Mike Baach
Philpott Solutions Group
NOMINATED BY: Smart Business Network

When Mike Baach was named CEO at Philpott Solutions Group, he enrolled at the University of Akron to study polymer mixing. Baach was already an established leader, but he wanted to understand the technical side of the business. He came to Philpott following the successful IPO of a company he had helped raise from the ground up.

When Baach arrived at Philpott in 2009, he took over a company that was started by John W. Philpott in 1889.

Baach studied the history of the company and found that it had strong principles and was dedicated to providing a high-quality product to its customers. Unfortunately, the company’s growth was nonexistent.

Baach knew that in order to change that, a strategic plan and culture shift were needed. He began to empower his workforce to be innovative, creating an entrepreneurial culture where employees could grow and thrive. His leadership and drive helped turn a once stagnant and complacent company into a growing regional powerhouse in the rubber and polymer industry.

Baach wants employees to think organically, and he asks for input from everyone in the company, believing that such wide-ranging input is needed in order to be successful. He encourages his team to stretch beyond what is comfortable and embrace failure. His push for innovation resulted in the first-ever patent received by a Philpott employee. Prior to his arrival, the company avoided pursuing patents due to the upfront costs associated with the patent application process.

Now, under Baach’s leadership, every product or idea produced by a Philpott employee is thoroughly examined to determine if the technology previously existed or if the new idea is eligible for a patent. He emphasizes that the biggest thing you can control is your attitude, regardless of what else happens throughout the course of a day. Execution is how you present and how you deliver.







Lee Friedman
College Now Greater Cleveland
NOMINATED BY: Meghan Mehalko, Benesch Friedlander Coplan Aronoff LLP

After years at the executive level in various not-for-profit organizations, CEO Lee Friedman has learned to lead effectively by believing in the mission. She is not only passionate about educating underprivileged youth but is equally as passionate about the city she hopes they will work and reside in.

Friedman believes marrying a social service agency model with an economic development agency is the root of success for College Now Greater Cleveland. The organization provides Greater Cleveland students with guidance and access to funds to prepare for and graduate from college.

During Friedman’s five-year tenure at College Now, the organization has quadrupled its total employees and doubled its funding. From 2012 to 2014, College Now’s budget increased by 48 percent — largely due to her ability to successfully raise funds.

In addition, many studies have shown the retention of first-year to second-year students is key to completing a degree. With that as a focus, Friedman began a mentorship program designed to connect students to successful adults within the community.

The program began in 2011 with 38 mentor pairs; in 2014 there were 730 mentorship matches. College Now’s goal is to have 1,100 mentor pairs by 2016.

College Now sees a direct correlation between mentoring and retention, which ensures students remain in school and receive a degree. The organization has a 90 percent first-year to second-year retention rate, compared to the national average of 58 percent for low-income students.

Additionally, the mentor relationships are helping students find internships and work experience.

Friedman attributes much of her success to inclusion from co-workers early in her career, when diversity in the workplace was scarce. She strives to lead in a similar fashion, ensuring her employees feel highly valued through a collaborative work environment with an emphasis on performance reward.

NON-PROFIT, Finalist






Terry Davis
president and CEO
Our Lady of the Wayside
NOMINATED BY: Smart Business Network

It is difficult to measure the impact that Terry Davis has had on Our Lady of the Wayside during his tenure as president and CEO. When he came on-board more than two decades ago, he found an organization on the brink of receivership with only 90 days to enter regulatory compliance.

But Davis saw the vast potential that OLW had in front of it. He was able to take a family-run, volunteer-centric group home for developmentally disabled children that was based in Avon, Ohio, and transform it into a financially stable, multiservice entity that primarily manages more than 70 homes throughout four Northeast Ohio counties.

More importantly, Davis drove the vision throughout the organization that developmentally disabled individuals should be integrated into the community. Davis strongly believed that consumers, the people served by OLW, deserved better than to be placed in a group home and forgotten. They deserve to live as meaningful a life as possible.

Davis and his team have had to overcome numerous obstacles to meet these goals. In trying to assimilate developmentally disabled individuals into the community, there is a constant threat of “not-in-my-backyard” opposition each time OLW wishes to open a new home.

He has faced vocal opposition, but has always addressed any concerns in a direct manner. He has allowed neighbors to visit homes to see that not only will they not be a problem in the community, but they will actually be an asset for the entire neighborhood. He has also brought residents that would stay in these homes to the meetings, thereby allowing everyone to understand the human aspect of the organization’s efforts.

In doing so, Davis has been able to turn some of his early opponents into strong advocates for the efforts of OLW in other communities.







Kevin R. Weidinger
president and CEO
Laudan Properties
NOMINATED BY: Dale Chorba, Action Management

Kevin R. Weidinger prefers to be found at the bottom of the organizational chart at Laudan Properties. He wants to see his employees at the top as they represent the core of his business and are the people who interact most with his customers.

It’s an example of how employees at Laudan are treated with great respect and given plenty of room for growth.

Weidinger’s leadership style at Laudan is welcoming and friendly. He looks for people who can see an opportunity and are willing to put in the hard work now for future reward. Weidinger, president and CEO, prefers to promote from within the company, but he is also willing to admit when his business does not have the resources to properly address a problem.

One of the biggest threats to his business is actually the recovery of the economy from the recession. Weidinger has recognized that the market is recovering and that the foreclosed home inventory of banks and investment groups is dwindling. These are his biggest customers, so he has recognized the potential slowdown in sales.

To counteract this, Weidinger has branched out into new endeavors with similar core skills that have opposite risk profiles.

He has expanded the company into remodeling direct to consumers. Home improvement projects tend to be most popular when the economy is booming and housing prices are on the rise since consumers are then more likely to improve their homes.

Teamwork is an integral part of the culture at Laudan, with groups of four to five people being used to accomplish most functions. When new employees are brought on, they are integrated into a team that trains and helps the employee transition into his or her role. When one function struggles, other team members step in to fill the gap and help the company perform. It’s that collaboration and collective spirit toward maximizing company performance that keeps Laudan on top.







Michael L. Cantor
managing director and principal
Allegro Realty Advisors
NOMINATED BY: Dale Chorba, Action Management

Growing up in Cleveland, Michael L. Cantor was fascinated by the development of the downtown area. This led to a career in commercial real estate, but with a distinction from the typical broker — representation of tenants rather than building owners.

Cantor and two co-founders formed Allegro Realty Advisors, Ltd. in 2001.

Typically, commercial real estate brokers represent building owners whose objective is to sell or lease a building. But Cantor, managing director and principal, came from the perspective of the tenant, whose needs aren’t considered in the usual transaction model.

Allegro is paid on a fee basis rather than commission for sales/leases, so it maintains an independence that benefits its clients when it comes to negotiating terms and rights. There is no conflict of interest, which is why Allegro hasn’t affiliated with an international brand.

This unique business model has been a challenge to introduce. The industry is slow to change, but it’s clear Allegro is making progress — it represented tenants in a majority of the largest deals in Northeast Ohio and has won market share.

Currently 40 percent of revenues are generated from national corporate work, while another 40 percent came from tenant representation work. The remaining revenue streams are consulting work and investment services.

The firm did face challenges in the economic downturn, but through client diversification, Allegro’s goal of 25 percent growth per year in top-line revenue has been achieved since 2010.

Cantor’s dedication to giving back to the community is demonstrated in his depth of involvement with Leadership Cleveland, a nine-month civic education program designed to prepare and build leadership resources within Greater Cleveland.

In addition to serving as 2012 class president in Leadership Cleveland, Cantor participated in the LC2 Fellows Program, a project-based, outcome-driven civic engagement experience.







Jim R. Santee Jr.
Choice Traditions, Inc.
NOMINATED BY: Krista Dobronos, Westfield Group

Jim R. Santee Jr., CEO of Choice Traditions, Inc., is someone who truly embodies entrepreneurial resilience.
Santee has more than 20 years of self-employment and client-relation experience in construction. Although those years have afforded Santee with opportunities to advance his craft and develop leading practices in construction, they also introduced instances of pressure and adversity, particularly in 2008 and 2009 when the construction industry found itself at a near halt.

During the downturn, Santee had to travel for construction jobs for long periods of time and had to take on less-than-ideal jobs, including a newspaper route, just to pay the bills. But his dream to keep the tradition of carpentry alive did not fail.

“Whatever it takes” is a mantra that is deeply rooted in the culture of Choice Traditions and continues to influence the direction of the company as it moves from a small local business to one that performs work nationally for Fortune 500 companies.

From 2012 to 2014, annual sales at the company have increased 294 percent due to remarkable customer relationships. The construction industry is highly dependent on word of mouth, and many companies ask Choice Traditions to bid on projects because of its stellar reputation to get projects done quickly and accurately.

Santee also prides himself on operating Choice Traditions as a cash-based business in an industry where businesses often succumb to debt pitfalls.

Two things that differentiate Choice Traditions from other construction companies are valued-added services and its employees.

Unlike many of its competitors, Choice Traditions is committed to paying its employees, including subcontractors, on a consistent timetable. In addition, not only does Santee provide a high quality benefits package including health care and 401(k) match, but he also is in the process of developing a high performance incentive program.







Tracy C. Green
IRG Realty Advisors, LLC
NOMINATED BY: John Tichar, Oswald Companies

Tracy C. Green has had a passion for real estate and strategic problem-solving since the beginning of his career. Green has worked hard to challenge the traditional function of a real estate property manager and differentiate his real estate properties in the marketplace.

Before he became president at IRG Realty Advisors, LLC, Green saw an environment that viewed property managers as “landlords” and “superintendents” whose primary responsibility was to ensure the furnace was functioning and the sidewalks were shoveled.

Green viewed his properties as complex assets that should be strategically positioned in the marketplace like any other commercial product. He recognized his responsibility to not only the tenants, but to investors in the property as well as the community.

Green began his career as a property manager at Equitec, a national asset management company based in California. Next, he went to Trammel Crow Co., where he ascended to the role of principal and senior vice president. His primary responsibility in this role was managing the real estate enterprise of TCC’s largest national client, KeyBank.

His success gave him another promotion offer, but his work had caught the eye of IRG Realty, a national leader in the real estate development industry. IRG wanted Green to manage its Ohio properties.

Born and raised in Ohio, Green saw this as his entrepreneurial moment and relished the opportunity to have a meaningful impact on his native community.

Green formed Ohio Realty Advisers for the purpose of legally contracting with IRG to manage its Ohio properties. He quickly assembled a team and set in motion a series of events that led Green to sell ORA to IRG and become the president of IRG.

Green has continued to work hard to develop a culture rooted in passion for real estate and rock-solid core values.







Anthony J. DeCarlo Jr.
CEO and co-founder
IdeaStream Consumer Products, LLC
NOMINATED BY: John Tichar, Oswald Companies

Anthony J. DeCarlo Jr. wasn’t sure exactly what he wanted to do when he graduated from John Carroll University. But he knew the lessons he had already learned from his parents would serve him well on whatever path he chose.

DeCarlo’s mother was a teacher and his father was the wrestling and football coach at JCU, and it was from these two profound individuals that DeCarlo drew his personality and sense of self-worth, inspiration to succeed and an incredible ability to lead.

His parents continually impressed upon him that “90 percent of every battle is about preparation and the other 10 percent is having the courage to show up.”

The message taught DeCarlo that life is really about the convergence of opportunity and hard work and that he had to earn everything he wanted and aspired to be.

DeCarlo and his partner, Dan Perella, founded IdeaStream Consumer Products, LLC in 2002. He got to know Perella over 14 impactful years spent working at Manco, Inc. Jack Kahl, Manco’s founder and CEO, was a mentor and close adviser and gave DeCarlo the tools he needed to leave Manco in 2002 to start his own company.

It was a risky move. Both DeCarlo and Perella had comfortable jobs at Manco, and the pair seemed like an unlikely duo — DeCarlo is a creative mind geared toward engineering, marketing and selling while Perella is more analytical and focused on logistics, operations and finance.

But with DeCarlo as CEO and co-founder, the two men proved to be a great complement to each other as they leveraged their strengths and kept each other in check, allowing the business to deliver innovative products with exceptional industrial design.

IdeaStream prides itself on maintaining open lines of communication with its people, creating a sense of community that is used to drive the company forward.







Mike Davis
Adventure Harley Davidson
NOMINATED BY: Joe Luckring, PNC Bank

In 2003, Mike Davis, president of Adventure Harley Davidson, opened a Harley-Davidson dealership in rural Ohio.

He had a vision to build a destination, not just a bike shop, which transformed Adventure Harley into a four-dealership motorcycle group operating across the state of Ohio. Davis changed the prototypical retail business culture into both an incubator for managerial development and a branded lifestyle experience for his customers.

Adventure Harley competes not only with other motorcycle brands, but also with other Harley-Davidson franchises. Consequently, utilizing a creative marketing strategy is imperative to becoming a dealer of choice.

Davis’s top-down strategy of marketing all of his dealerships as a whole has allowed him to develop his own sub-brand within Harley-Davidson.

He combines inventories, policies, procedures and programs — such as the customer rewards program — to make them available at any of his dealerships. And while each of his dealerships has its own identity, they collectively operate as one cohesive unit.

Davis invests in his employees like no other dealership. For the past five years, he has closed the dealerships for a day and bused every employee to an off-site event with training and development, industry updates, entertainment and motivational speakers.

In addition, the business offers a voluntary leadership development class for any interested employee — more than 80 employees have graduated since its development,.

Adventure Harley also was one of the first in the market to leverage social media, as evidenced by its more than 207,000 unique Facebook followers — the largest in the nation for Harley-Davison dealers.

Under Davis’s leadership, Adventure Harley has been recognized by the Harley-Davidson Motor Company as one of the top dealerships in the nation nine out of the last 12 years.







Scott D. Kuhn
Driftwood Restaurant Group
NOMINATED BY: Anna Sobkiv, PNC Financial Services

Succeeding in an industry where businesses fail at an 80 to 90 percent rate has required Scott D. Kuhn, owner of Driftwood Restaurant Group, to be more than just a leader.

While heading an organization of 300 people brings its own challenges, Kuhn has overcome personal life challenges and an economic downturn that put restaurants out of business at historic rates, all the while he was developing as the chief executive and financial officer of a business that continues to experience rapid growth.

Under Kuhn, Driftwood now owns, operates and licenses 15 diverse hospitality brands including eight restaurants, stadium concessions, design and startup consulting, wine bars and award-winning food truck and catering businesses.

Kuhn’s career in the restaurant industry started after he suffered a spinal injury that resulted in an invasive corrective surgery, which caused him to re-evaluate the path he was on.

He purchased his first restaurant directly out of college, and Kuhn spent a good part of that first year working every position in the restaurant to truly learn the business from the inside out. That provided a foundation of knowledge he could leverage for the rest of his career.

Driftwood has been growing at the rate of nearly a restaurant a year, but during the economic downturn, Driftwood was comprised of just three restaurants. Kuhn took a risk and didn’t lay off any employees, but all employees were required to sacrifice for the collective good.

Over time, Kuhn developed a business model that uses key markers to monitor the business’s performance and cash flow. It includes limiting prime costs — labor and the blended cost of goods — to 60 percent of the top line. This takes extreme discipline and strong coordination.

He is also proud that Driftwood is able to retain 43 percent of its hospitality staff, compared to the national average of 30 percent.







Grant Cleveland
DuneCraft Inc.
NOMINATED BY: Smart Business Network

Prior to DuneCraft Inc., entrepreneur Grant Cleveland ran an Internet company that was preparing to go public. But the markets collapsed, the company folded, and he was left bankrupt.

Cleveland spent the next year searching for a big idea, while working various odd jobs to keep food on the table for his family. Eventually, in 2002, he decided to start DuneCraft Inc. because of his background in landscaping and his passion for experimenting and educating.

The first product he created was called Odd Pods, designed to grow cacti from seeds. Even though his initial investor pulled out, Cleveland wasn’t deterred. He secured a deal with one of his suppliers to get the initial product to market.

Since it inception, DuneCraft Inc. has created more than 250 products focused on nature and education. The employees constantly brainstorm, and the company has a room full of prototypes and ideas.

DuneCraft has grown steadily and seen top-line revenues increase 12 percent and 22 percent in the past two years, although Cleveland still faces challenges getting the product and brand name to the mainstream public.

Cleveland is a very hands-on owner. He works directly with his team or in the assembly room during peak times, while always looking to improve productivity.

One lesson he learned from past endeavors was to incentivize his employees. Cleveland pays his manufacturing labor workers by the piece, instead of by the hour. This has doubled cost but quadrupled production and greatly increased worker morale and retention.

He also set up a unique office environment with a koi pond, plants, multiple couches, a pingpong table and an air hockey table.

Cleveland serves as president of the board of trustees for the Fairmount Center of Fine Arts, which he saved from collapse through marketing campaigns and shifting the programming to profitable shows.







Aaron Grossman
Alliance Solutions Group
NOMINATED BY: Smart Business Network

CEO Aaron Grossman draws on his experience as a collegiate wrestler to lead by example and ensure accountability, competition, active learning, fun and gratitude are engrained in the culture of Alliance Solutions Group.

Grossman started the firm in the early 2000s, and during its early years, Alliance Solutions Group went through some difficulties, including having a former partner pay for his own leisure activities with company funds and losing another key executive due to differences in business and cultural philosophy.

Through these challenges, Grossman made sure to take employees out for lunch in groups and listen to their concerns. His open and direct communication helped keep the employees engaged and together.

Grossman gives his employees freedom to manage their own tasks but also provides necessary support. He believes strongly in taking the time to think through the culture of an organization and make sure cultural characteristics trickle down from the top.

Grossman set up Alliance Solutions Group as 10 specialized staffing service groups to create a competitive atmosphere, while various employee events are held throughout the year to promote a family tie among employees.

A few years ago, Grossman hired a new CIO who helped change the technology side of the company tremendously.

The two have revolutionized their interview process. The company’s new technology allows interviews to be conducted via videoconference — and then recorded, stored and shared with potential employers.

Alliance Solutions Group also has created software to automate on-boarding and reduce the administrative on-boarding effort from 19 minutes to four minutes per employee.

Besides his success in business, Grossman is heavily involved in the community. In 2010, he started Wrestlers in Business to provide networking opportunities for this unique group. He’s also the area director for the Entrepreneurs’ Organization, where he has achieved a 97 percent retention rate of members. 

SERVICES, Finalist






Scot Lowry
NOMINATED BY: Smart Business Network

Scot Lowry started in the construction management industry, overseeing the construction of large ski lodges and hotels in Colorado. But he wanted something more.

Lowry decided to attend Case Western Reserve University’s Weatherhead School of Management. It was there he was introduced to Promise Partners, a nonprofit network supporting aspiring business owners.

Upon completing an apprenticeship, Lowry searched for 18 months, living only on savings, to realize his dream of business ownership. He bought Fathom in 2007 with a silent partner.

Lowry agreed to run the business operations while Fathom’s founder stayed on as a minority partner to run sales and marketing. Under his leadership, Fathom transformed its culture, capabilities, sales organization and strategy.

In 2010, Fathom’s founder passed away, which increased the challenges Lowry faced as a majority owner of a rapidly growing company during an economic recession — in an industry with constantly changing environments. Even during the recession, however, Fathom increased its average engagement size by 300 percent and grew revenue on average 30 percent annually.

When Lowry, CEO, purchased Fathom, the company focused solely on search engine optimization and email marketing. Today, Fathom offers SEO and social media, email marketing, digital advertising, analytics, video, design and development, mobile/local and proprietary solutions. This has allowed Fathom to stay relevant as one of the fastest-growing independent companies in the digital marketing industry.

Lowry’s passion for entrepreneurship inspired Fathom’s business model, which is broken into five business segments that are run by aspiring entrepreneurs who aren’t ready to take on the level of risk involved in purchasing a company. Lowry mentors these individuals and provides them opportunities to independently build their business segment and team.

SERVICES, Finalist






Dave C. Fulton
president and CEO

Tom Hartland
chairman and founder
Hartland & Co.
NOMINATED BY: Joe Juster, Calfee, Halter & Griswold, LLP

Tom Hartland has been advising institutional investors for more than 40 years. During his time as a principal investment consultant, he saw a gap in the advisory market in which there was a lack of independent investment advisory firms. Most firms generate revenue based on money management products, but these firms had inherent conflicts of interest because they profited based on the sale of their own products.

This reality compelled Hartland to develop a firm where revenue is based solely on fees paid by the client for advisory services, a true differentiator from competitors. The needs of such services in the market propelled Hartland’s departure from his prior firm and the launch of a new firm which he called Hartland & Co.

As the firm’s chairman and founder, Hartland took a big risk when he started the new business in 1989. He had no clients, but gradually built a business by offering investment advice, developing investment policy and asset allocation, selecting investment vehicles and reporting to institutional and private clients.

Hartland has evolved over the years. Historically, the core focus was institutional investments, but through a change in leadership and acquisitions, a majority of the firm’s business is now with private clients.

One big change came during the economic downturn that began in 2008. Hartland decided to invest in new leadership that significantly changed the firm’s bottom line. He recruited Dave C. Fulton Jr. to come on-board as the firm’s president and COO. Within five years, Fulton held the title of president and CEO.

Professionals are attracted to Hartland because they have an opportunity to become shareholders. This has been a primary driver of growth for the firm since it leads these professionals to hold themselves accountable to the highest levels of client service, professional excellence and shared commitment.

SERVICES, Finalist






Jason Farro
Lighthouse Insurance Group, LLC
NOMINATED BY: Marty Butler, ExactCare Pharmacy

Jason Farro has been dedicated to providing insurance products and services to families for more than 25 years. With the principles that were instilled in him during his younger years working with his father’s insurance business, Farro created Lighthouse Insurance Group, LLC.

Farro has a history as an insurance agent himself, experience he leverages to assist his employees with hands-on training. He has ensured that constant development can be managed in-house by maintaining a designated training room where his agents and staff reside.

He enjoys the thrill of the floor, “especially when everyone is clicking and you can just tell that it’s going to be a good day.” Farro routinely listens in on employee calls and provides feedback. He chooses to lead from the front and be more than just a figurehead who lives in his office.

When it comes to measuring success, Farro considers three factors: his ability to make the company profitable to reward investors, the ability to be a job creator for his employees and community, and his ability to overcome future risks that could impact the prior two factors.

Farro works directly with agents to understand the business, and he revels in being available to provide motivation to build people up when they are feeling down. He also enforces quarterly events outside of the office to bond with employees and develop relationships.

Even if an employee identifies a potential opportunity elsewhere, Farro, CEO, will evaluate the entirety of the opportunity with the person and provide unbiased insight and perspective. The approach has led to the retention of many employees who have been with Lighthouse since its inception in 2009.

Farro wants employees to have an opportunity to climb the ladder and value the growth of the company, as well as themselves.







Sam Gerace
founding CEO
NOMINATED BY: Ron Boynar, Oswald Companies

Sam Gerace has always had a passion for computers, allowing him to create a groundbreaking business that has transformed the way the public can buy tickets for sports and entertainment events.

Dan Gilbert, owner of the Cleveland Cavaliers, approached Gerace in May 2006. He was tasked with transforming a demo application into a final product in order to establish a paperless ticket company that had previously not existed.

Gerace embraced the challenge of developing the product and reached out to his network to build the business. He was able to convince former employees to take the plunge with him on short notice and have the new company up and running prior to the start of the 2006-07 NBA season in October.

During the first full year of operations, the management team at Gerace’s company learned that the business plan as it had been defined was not possible. Ticketmaster would not agree to interface with the company’s Flash Seats software. At this point, Flash Seats pivoted to become an end-to-end ticketing platform and merged with Vertical Alliance to become Veritix.

The founding CEO was charged with merging the culture and business purposes of the two entities while growing market share.

Veritix was founded to be the paperless ticketing company for the Cavaliers, but has since grown through a merger with a Dallas company in 2007, as well as organically, to serve 13 percent of NBA teams and 18 percent of MLS teams. It was also awarded the ticketing and secondary market contract for the Detroit Lions last year, the first NFL team to move away from Ticketmaster.

The culture at Veritix is one of action, innovation and integrity. Employees are empowered to make decisions and do what’s right. The system itself is also nimble, allowing new employees to be up and running in rapid fashion.







Suranjan Shome
president and CEO
Epiphany Management Group
NOMINATED BY: David Mauro, Epiphany Management

President and CEO Suranjan Shome’s extensive sales experience has contributed to the success of Epiphany Management Group. He uses his people skills and emphasis on employee satisfaction to create an exceptional work environment and lead the sales department.

Shome founded the information technology management company to provide services to educational institutions, a market that had never been explored.

With three children in primary and secondary school, he observed that his children’s schools were investing in it but didn’t know how to utilize the technology to its full potential.

Since Epiphany is the first company to offer IT management and consulting services to schools, Shome has faced challenges convincing schools of the company’s value. Once school districts hired Epiphany, however, they either lowered or froze their IT costs.

Shome is involved in all aspects of his business. If he is not traveling to meet with potential or existing clients, he is on-site assisting employees.

Epiphany has experienced consistent growth throughout its first eight years. The company also projects it will continue to double its sales year-over-year through 2020.

To help guide the company through its current growth phase, Shome hired a former Fortune 500 CFO and multiple individuals who have held senior management positions within the IT industry.

Shome understands that he needs to attract and retain talented IT professionals, so he hired Gallup to help him gauge the satisfaction of his employees through an annual survey.

Epiphany is in the process of moving into a new headquarters in Akron that will allow the company to streamline its services as well as provide an environment that emphasizes teamwork. This new facility contains multiple conference rooms where employees can hold meetings and videoconferences with colleagues that are working remotely.







Daniel Anstandig
NOMINATED BY: Lee Zapis, Zapis Capital

At age 9, Daniel Anstandig began broadcasting a radio program from his basement, which gained unintended notoriety when his broadcast signal interfered with Cleveland’s FOX 8 programming.

He later launched an Internet radio-streaming network that focused on publishing online content of other radio stations. He sold this innovative product to Microsoft and began working for Clear Channel, which enabled him to connect to important decision-makers in the broadcast world.

In 2009, Anstandig, 25, launched LDR Inc. — rebranded as Futuri this year — which included the pioneering “crowdcasting” technology that empowers listeners to become collaborators by voting on what songs or other content to play.

During the recession, when TV and radio stations scaled back operating budgets, he implemented a unique bartering strategy. Clients could exchange unused advertising time for Futuri’s crowdcasting services. Futuri was then able to package the advertising time together and resell it to large, multinational companies.

As the company continues to grow, Anstandig has focused on hiring college graduates with degrees in broadcast engineering, broadcast management and software engineering who speak the language of TV and radio clients.

Anstandig, CEO, continues to champion innovation, which has led to the development of over 150 mobile apps for radio and TV, as well as digital dashboards like the company’s most widely used product, TopicPulse.

TopicPulse was created with the intention of increasing ratings, revenues and Web traffic for TV and radio stations by allowing them to instantly read current trending topics in social media.

Futuri’s programming is used in more than 400 TV and radio stations throughout North America, Africa and Asia and reaches over 100 million consumers on a monthly basis. Plans include expansion into Europe.







Sandy Cutler
chairman and CEO
Eaton Corporation

Sandy Cutler is chairman and CEO of Eaton Corporation, a worldwide power management company that provides energy-efficient solutions for electrical, hydraulic and mechanical power. Born in Milwaukee, Cutler graduated from the Loomis Chaffee School in Windsor, Connecticut. He received a bachelor’s degree from Yale University and an MBA from the Amos Tuck School of Business Administration at Dartmouth College.

He began his career with Cutler-Hammer in 1975 as a financial analyst. After Eaton acquired Cutler-Hammer, he held various positions before becoming Eaton’s president and COO in 1995. He assumed his current position in August 2000.

Cutler is a board member of DuPont, KeyCorp, the Greater Cleveland Partnership, United Way Services of Greater Cleveland and the Musical Arts Association. He is a member of the Business Roundtable and The Business Council.

Previously, he chaired the Corporate Governance Committee of the Business Roundtable, and served as chairman of the Greater Cleveland Partnership, the United Way of Greater Cleveland, the National Electrical Manufacturers Association, the Visiting Committee of the Weatherhead School of Management at Case Western Reserve University and sat on the Board of Governors of The Electrical Manufacturers Club. He is a past co-chairman and co-founder of the Greater Cleveland Partnership’s Commission on Economic Inclusion and has also served as president of the Yale Alumni Association of Cleveland.

He is a past member of the board of the Yale University Alumni Fund, the Yale University Development Board, the Amos Tuck School of Business Administration at Dartmouth College and the Loomis Chaffee School.

Cutler also served on the boards of the Cleveland Play House and the Museum of Natural History.

Since taking the helm at Eaton, the company has nearly doubled both its revenue and employee count, growing both organically and through acquisitions.

Stay on top of your company’s key real estate needs and obligations

Business owners must balance numerous responsibilities to ensure their company is operating at peak efficiency. Real estate is an obligation that often falls on the priority list in favor of more pressing concerns. But when it’s put off for too long, it can cause problems, says Bill Saltzman, SIOR, CCIM, executive vice president and director of office services at Cushman & Wakefield/CRESCO Real Estate.

“When real estate is not your core business, it’s often viewed simply as a place to house your company,” he says. “But you need to craft a plan so that both you and the key leaders in your organization understand how real estate supports your core business.”

Smart Business spoke with Saltzman about managing your company’s real estate obligations.

Where do business leaders get themselves into trouble with real estate matters?

Today businesses seek to do more with fewer people, so down time is exceedingly rare. When it comes to real estate concerns, it is critical to allow enough time to plan and evaluate all of the important issues. As a tenant, you are well-advised to begin the review process with sufficient lead time. Otherwise, you run the risk of making this important decision in a vacuum or under duress. Leases often contain a holdover provision. Generally, upon lease expiration, the tenant may only remain in the premises on a month-to-month basis, and the rent can double. If you don’t go about making these decisions in a methodical and organized process, you can certainly run into trouble.

How do you develop a methodical process?

Make sure you know the commencement date and the expiration date of your lease. Develop a schedule as to when you’ll sit down with your internal team to evaluate your needs. In most companies, multiple parties need to weigh in on this process. For example, the CFO is looking at your space and lease terms from a financial perspective. Human resources may view real estate needs from the perspective of attraction and retention of employees. And the CEO may focus on corporate image and branding and will try to assess real property in the context of what the competition is doing.

It’s important to determine how decisions are made. Make sure there is consensus in terms of the role real estate plays within your organization and specific goals and objectives to be considered in any expansion or relocation. Once these basic discussions are completed, seek the advice of a professional to guide you and your team with issues such as timeline, budget, market conditions, economic incentives and needs analysis.

What motivates a business to evaluate its real estate options?

One approach is to break these options down into qualitative and quantitative factors. Qualitative is about attracting and retaining top talent. It’s the building’s proximity to a skilled workforce and the demographic you seek. You also look at amenities, signage, parking availability and cost, and access to public transportation as well as the benefits of the property itself.

Does it have required technology, acceptable views, food service, fitness or other amenities that are important to you? How well is the building maintained? Is it a comfortable place to do business? Quantitative is the value proposition. This is not just rent, but total occupancy cost, a combination of the rent, utility expenses, space utilization and efficiency, tenant improvements and other elements that make up what is paid on an annualized basis. What are you getting for your occupancy dollar?

How do you know if your occupancy cost is too high?

Total occupancy cost depends upon a number of factors including, but not limited to, the type of lease agreement between the parties, the effective rate (which is calculated after taking into account incentives, abatement etc.), escalation expense ‘pass-throughs’ and amortization of tenant improvements. With the assistance of a tenant advocate to provide you with detailed market information about trends and the occupancy cost of comparable properties, you should obtain a solid perspective of your cost on an ‘apples-to-apples’ NPV basis to determine whether or not you are paying too much.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate.

How to weigh the decision of buy versus lease

Joseph V. Barna, SIOR, principal, CRESCO Real Estate

Joseph V. Barna, SIOR, principal, CRESCO Real Estate

Whether to buy or lease is a question real estate professionals hear from business owners all the time. It’s a difficult decision that’s based on several factors.

You should evaluate your needs, as well as your personal and business goals, with a qualified real estate consultant, says Joseph V. Barna, SIOR, principal at CRESCO Real Estate. Also, understand your motivation drivers — are you interested in the bottom-line cost of occupancy, long-term ownership, image or flexibility?

“You need to step back and look at where you’re at, where you want to go, and how important your personal goals on the ownership side are in order to understand the best manner in which to invest your money,” he says.

Smart Business spoke with Barna about what propels owners to buy or lease.

What drives owners to buy?

One example would be if you are in a specialized industry and you’re going to make a significant investment in the space’s infrastructure. You don’t want to be unable to come to terms on a down-the-road lease renewal or expansion and have to reinvest in another building.

Another scenario is that you don’t anticipate long-term future growth and the facility you identify is in a desirable location that meets your projected needs.
Many times, the deciding factor is whether you can buy a building, ‘right.’ If a building can be acquired in the lower range or below market value and/or combined with market-driven incentives, the opportunity is worth serious consideration.

Sometimes it comes back to pride of ownership. In Northeast Ohio, we are fortunate to have a wealth of successful entrepreneurs who want to own their real estate simply for pride or a desired image, even if they have to pay a premium for it.

Why do business owners decide to lease?

One reason would be that your space requirements could fluctuate, so you don’t want to be locked into a building. Often this can be market driven; your business grows when the market’s healthy and contracts when it’s not. Also, many large national or global companies lease space because they don’t want to be in the real estate business and worry about selling a property when they decide to relocate.

You also should look at the return on investment. In real estate, a typical return for a market transaction would be 8 to 13 percent on the property’s value. However, if you have a dynamic business that’s getting a 25 to 30 percent margin on your products, it may be better to put your cash into increasing manufacturing and market share for the higher ROI. In addition, our financial markets have changed over the past five years. In most cases, traditional real estate financing has higher equity requirements, such as 25 to 35 percent down, which could also be a deal killer.

How can a lease-purchase analysis help?

To determine the actual cost of occupancy, bring in a qualified broker or consultant to run a lease versus purchase analysis. On the lease side, you look at your base lease rate, utilities, pass throughs and any other additional costs. On the sale side, you’re weighing your equity requirement, mortgage payment, property upkeep, maintenance, insurance and taxes. The analysis gives you a clear-cut idea of whether you’re better off leasing or buying.

The final decision will not always be the lowest cost alternative, but this analysis will at least let you know where you stand based on the cost of occupancy. Then you can consider other factors, like proximity to your customer base as well as employees, flexibility and personal objectives.

How far out should you start considering whether to lease or buy?

The perfect situation is at least one-and-a-half to two years ahead of when you need to make a decision. You need to understand the current market trends, all of the logical lease and sale alternates and the price of new construction, while projecting where your business will be in five or 10 years combined with personal objectives. You can go into the market and identify the perfect alternative, but it could take a year to consummate a transaction — and even more time if you’re building new, retrofitting or applying for government incentives. If you let that fuse get too short, it limits your alternatives.

Joseph V. Barna, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1464 or [email protected]

Get analysis of trends in the industrial and office real estate markets by downloading our quarterly Market Beats report.

Insights Real Estate is brought to you by CRESCO

How going green is becoming an essential business practice

Greg Martin, Partner, National Real Estate & Hospitality Practice leader, Moss Adams

As sustainability continues to gain momentum, business leaders need to address how this movement will influence the way they run their organizations. Doing so can lead to immediate savings in power and other costs, and boosts the market value of the property.

“It’s a change in culture versus something that’s just an on-and-off switch,” says Greg Martin, partner and National Real Estate & Hospitality Practice leader at Moss Adams.

Smart Business spoke with Martin about what’s happening in the field of sustainability and how an accountant or adviser can help.

What’s happening with sustainability today?

Sustainability and Leadership in Energy and Environmental Design (LEED)-certified buildings have been talked about for some time. Early sign of sustainability in practice started out simply with hotel properties putting out signs about reusing towels or unplugging phone chargers. Then, many moved on to using low-flow showerheads or locally sourcing food. That sentiment has crossed over into the expectations of commercial building tenants, many of whom got the idea, at least in part, from attending conferences in energy-efficient hotels.

From a real estate perspective, more and more tenants in a commercial office building want to see sustainable practices followed in their workplaces. Those companies that can show they are concentrated on green living can use that as a competitive advantage. Eventually, sustainability will be part of our everyday psyche, so you want to take advantage of these competitive strengths when you can.

How does going green translate to the bottom line and profits?

It’s expensive to put energy-efficient measures in place, such as those that limit water or power consumption. But in doing so, you can significantly reduce your operating costs from day one and possibly attract sources of capital — some investment groups will only invest in properties or companies that have sustainability policies and procedures in place.

A number of studies found increased operating incomes and higher market values and returns for sound sustainable properties versus non-sustainable properties. A green label such as LEED or Energy Star raised market rents and values of commercial space, including a 16 percent increased sale price, according to a 2010 University of California, Berkeley study of 10,000 U.S. office buildings. A Davis Langdon study estimated upfront costs for high-sustainability design can be $1.50 to $3 per square foot, but those outlays also can bring up to 14 percent reductions in energy costs. In addition, PNC Bank put together a study of their LEED-certified branches compared to non-LEED branches, and found LEED branches had more income, deposit accounts opened and consumer loans.

As more data becomes available on the returns, cash flow and market appreciation of sustainability, we’ll likely see more and more benefits from following these types of policies and practices.

How can an accountant or adviser help with sustainability reports and programs?

CPAs are getting involved in reporting on whether companies are meeting sustainability policies and procedures. Often, an independent and objective CPA will look at the data provided by the management of the company on what they have done in the area of sustainability, referring it back to the company’s policies and procedures. The CPA basically concludes whether they are in agreement or not with management’s assertions. It lends another level of credence and credibility by generating a report based on benchmarks.

Another value-added service that’s gaining momentum is our sustainability consulting group, which consults with companies on setting up green policies and procedures as well as a process to monitor how companies are doing against their goals.

Is this a newer aspect of sustainability — showing that you are accountable?

It’s catching on. Is there some set of rules that say, ‘Thou shalt,’ like the SEC says that public companies shall present audited financial statements? Not really — it’s a best practice. It shows how the company is serious enough that they are going to bring in a credible, objective, independent party to verify what they have represented to others.

Sustainability is not a fad. Ignoring it is not going to make it go away. And because it’s here to stay, it will only continue to gain importance.

Greg Martin is a partner, National Real Estate & Hospitality Practice leader at Moss Adams. Reach him at (415) 677-8277 or [email protected]

Insights Accounting & Consulting is brought to you by Moss Adams

How to relocate your business by considering what’s important to you

Carter Holston, general manager, Real Estate, NEC Corporation of America

When a business owner wants to relocate, the task can seem daunting. However, by exploring some key considerations, you can prioritize the move and find a location that works well for your present company and your future growth.

One such location — Irving, Texas — is in the Dallas-Fort Worth Metroplex. Irving has more than 8,500 businesses already operating in the region.

“You need a value-driven proposition,” says Carter Holston, general manager of Real Estate NEC Corporation of America. “You have to have a good location. You have to have a great office space. You have to have access to your employees and pay the right amount of tax, both school and other. All that goes into the mix when you make the decision.”

Smart Business spoke with Holston about what employers need to consider for relocation and why the Greater Irving-Las Colinas area fits that bill.

If you’re thinking of relocating to a new city, what needs to be considered? How does that relate to the Irving area? 

There are three components any company needs to weigh:

• Workforce.

• How you access the workforce, the accessibility within the region, and how you move about via the roadways and mass transit.

• The business-friendly environment.

Irving is in the center of the Dallas-Fort Worth Metroplex, so access to an available work force is not a problem. The area also is adjacent to a major airport — the Dallas/Fort Worth International Airport.

The Irving area has accessibility from the standpoint of mass transit, which is a game changer in business today. The new work force prefers living, working and playing in the same area.

Then there’s the business-friendly environment, one of the most important factors. Companies need to be in cities that believe in business, that understand the revenue derived from taxes and what it means to have citizens employed.

What’s the current state of Irving’s commercial real estate market?

Commercial real estate in Irving is firming up. Generally Texas and specifically Irving represent good market value to corporations considering relocating.

Irving has more than 30 million square feet of commercial office space and is the third-largest submarket in the Dallas-Fort Worth Metroplex. Typically, there is about a 20 percent vacancy rate, which has been as high as 25 percent, so Irving is a value-driven market. Most companies seem to be taken aback at the leasing rates in Dallas compared to other regions.

Irving also has a new light rail system running through the central urban center, which should positively affect commercial real estate.

What else makes the North Texas region so attractive?

Texas and Dallas, in particular, are ‘can do’ regions. There’s no geographic reason for Dallas to exist, no great river system or other natural resources. In spite of its lack of natural resources, the people who settled here on the prairie a long time ago made it work, and that theme and attitude have carried through the years. Even when the oil business was in decline, Dallas found a way to diversify and sought other industries to attract such as banking and insurance, real estate and huge service industry providers.

This ‘can do’ attitude holds true for the area’s longevity and its future, which is based on finding a way to get things done.

How can an employer find tax breaks and incentives when moving into a new area?

You should be represented well and ask your representative what types of incentives have been granted previously.  However, don’t let incentives be the only factor that you consider when relocating your company.

The Greater Irving-Las Colinas area is certainly very affordable with available space and incentives. It’s clearly a value driven proposition for business owners in a business-friendly environment.

Holston oversees all domestic commercial real estate functions at Real Estate NEC Corporation of America and is responsible for more than 1 million square feet of leased and owned facilities. He also serves as a consultant to the Irving Economic Development Partnership at the Greater Irving-Las Colinas Chamber of Commerce.

Carter Holston is general manager of Real Estate at NEC Corporation of America. Reach him at (214) 262-2190 or [email protected]

Insights Economic Development is brought to you by the Greater Irving-Las Colinas Chamber of Commerce

Jim Litten gets the players at F.C. Tucker Co. to put on a game face every day

Jim Litten, owner and president. F.C. Tucker Co. Inc.

Jim Litten has a saying that sums up his approach to operating F.C. Tucker Co. Inc.: “We are a success today, but nothing is guaranteed for tomorrow unless we have our game face on.”

But it’s not the only line of attack that helped him guide the largest Indianapolis-area residential real estate agency through a real estate market that dropped 32 percent between 2007 and 2009.

“Look at most businesses; if their business was off 32 percent, that would require monumental change to everything they do,” says Litten, president of F.C. Tucker. “Do you quit matching on the 401(k)? Do you put a hiring freeze on? Do you evaluate every single expense line that you have? We went through all those different processes, and as we saw the market continue to contract, we continued to cut. If we saw the market dropped 10 percent, we cut 10 percent.”
While cutbacks were necessary, it was disheartening for Litten to make them and to see his family of agents suffer as a result. Nevertheless, he knew he had another job on hand — to keep up the spirits of his employees.
“As a CEO of a company, you have to be realistic about what’s going on, but you can’t be pessimistic,” he says. “In a sales-driven organization, there has to be a cheerleader that keeps the organization moving forward.”
Litten’s 40-year career in real estate sales has taught him that he needs to keep his associates focused when facing challenges. He says that means not backing off and staying engaged.
“And it’s letting the agents know that we were in it with them,” he says. “The downturn wasn’t something that was their problem; it was all of ours.”
Here’s how Litten leads 1,500 agents across Indiana to stay engaged, focused and on top, with more than $2 billion in annual sales.

Empower, but don’t micromanage
Many leaders understand the value of empowerment. You give your employees more responsibility, they have more control of their position, and they start looking for solutions rather than making excuses.
With empowerment, however, comes the ability to delegate. It doesn’t work if the leader is a control freak. Litten says that he doesn’t micromanage the company’s business units or their leaders. When someone is hired to run a unit, the first thing he tells that person is that he expects him or her to run the operation as if it were his or her own. That doesn’t mean that Litten is unwilling to answer questions or offer guidance.
“But if I have to come out and micromanage it for you, I’ve got the wrong person in the seat,’” Litten says.
While empowerment means more authority for employees, it also means more responsibility — and being accountable. Leaders need to have quarterly reviews with each of the division heads and branch managers and review metrics to evaluate where they are, where the market share is and the growth they’ve experienced in the position. Litten also discusses every agent in the office with their managers to see how they are doing and find out where they may need help.
He says that one of the best indexes of performance is productivity, and if your managers keep an eye on individual productivity, they will be able to manage more effectively where it is needed most.
“You may get fooled by some who can sing a pretty good song,” Litten says. “But the reality of it is just productivity. When I look at the offices, are they doing comparable to what they did the prior year? If not, why not?”
In a smaller office, if there are just a few big producers and they are having an off year, it can impact the entire office. A leader who is tuned in to what is going on will be aware of why that office’s sales are off, and instead of thinking it may be a leadership issue in that office, will be aware that agents are simply having an off year.
“You’ve got to know what is going on in your business,” Litten says. “If levels of management just go through the motions, those days are numbered for them because you can’t do it anymore. You’ve got to know what is going on, what the trends are, what the strategic issues facing you are and how you are going to deal with them.”

Communicate, but don’t hover
While it may seem to be at odds with the practice of empowerment, staying in frequent touch with employees is vital to a company’s success. However, the leader needs to draw a fine line, because if it appears he or she is hovering, employees will not feel truly empowered.
Litten says that coaching is critical. Spend time with associates not only to help them but to simply check in and see what is going on with them. If you fail to do so, it may send a message that you don’t really care enough about them to ask or that you are making assumptions about their situation.
“The worst thing that you can do is to assume that somebody is OK,” Litten says. “You have to touch them regularly. Often, unless you are checking in with them, you really don’t know if there is something going on attitudinally on which you need to work with them or just be a good listener to them and let them come in and vent.”
Your leadership team, and thus the company as a whole, needs to understand what the fuel is that runs the engine. In the case of F.C. Tucker, that fuel is the agents, which is why Litten says it is critical to be plugged in to their needs.
In any business, employers try to retain their top performers. Litten says doing so is even more critical in real estate, as the top performers are usually independent contractors with the option to go elsewhere. Litten uses a sports analogy to make his point.
“Imagine the Indianapolis Colts having a stable of superstar players, with virtually no contracts with them, and those players have the ability to take their talents to any team in the NFL,” he says. “As an owner of the team and coach of the team, you would make sure that you bring value to them every day in what you do and the systems that you put in place, the platform and the tools of differentiation that you give them.
“In our case, if an agent doesn’t like what management is doing, he or she can pick up and move across the street in a New York minute. You don’t want that. Our only real asset is our sales force.”

Use tools to be proactive
Businesses today have to be proactive, says Litten. If they just react to what’s happening around them, it can be fatal.
“And never, ever, ever, ever be satisfied with the status quo,” he says. “One of two things happen in life: you grow or you die. The same thing happens in business. You either grow or you die.”
Business is continually evolving, and if a business tries to rest on its laurels, it will find itself left in the dust, because there is always someone behind you looking to take your market from you.
“Certainly it would be nice to be able to sit back and catch your breath, but business today is just so competitive that if you back off, you become vulnerable.”
To help agents stay on top of trends, changes and sales techniques, F.C. Tucker Co. established Tucker University to offer tools of differentiation for the agents who are interfacing with the consumer and keep the management team’s skills at a game-day level. Tucker University recently started a new sales training class. During classes, Litten usually talks to agents about the company culture, its values and its belief system. He also tells them that the only things they can really control are their attitudes and their activities.
He says that if you can control those two things, you are going to get your share of the market that you are operating in. But if your activity level isn’t top-notch and your attitude is bad — whether it’s because of the economy or worrying about what will happen if the mortgage interest deduction goes away — you will find yourself struggling.
“And if you play the best you can play by being on top of your game every day, you’re going to win,” Litten says. “If you don’t, shame on you; you are going to lose.” 
How to reach: F.C. Tucker Co. Inc., (888) 588-2537 or talktotucker.com

The Litten file

Jim Litten
F.C. Tucker Co. Inc.

Born: Dayton, Ohio. I was raised in a small town called Martin’s Ferry. It’s on the Ohio River by Wheeling, W.Va.

Education: I went to Ohio University on a football scholarship. I studied physical education and was going to be a football coach. When I tell people that, they look at me and say, ‘You’re doing what now?’

What was your first job?
When I was 15, I delivered groceries for a small grocery store in Bridgeport, Ohio. When I became 16, I could drive, so I could go further on the route. I was very blessed. My dad was a salesman for an oil company, and he had a tremendous work ethic. Every morning by 7:30, he had his suit and tie on and was out making calls to steel mills. I also think athletics instilled a discipline in me so that if I were going to get ahead, there were no shortcuts.

Whom do you admire in business?
I have friends in the Realty Alliance. There is a man named Ron Peltier who is president of HomeServices of America, a Berkshire Hathaway company. Ron and I have been friends for 25 years. He’s a good businessman and an exceptionally good person. I have a friend who is a U.S. senator from Georgia, Johnny Isaacson. He used to run a real estate company in Atlanta. I have tremendous respect for Johnny. He is a very, very bright and a very compassionate individual.

What is the best business advice you ever received?
Our office used to be in the OneAmerica Tower (formerly AUL Tower) in Indianapolis. When we bought the company, we were on the 25th floor. My mother and father came up to visit, and my dad was always scared of heights. He walked into my office and looked down. It was shortly after we bought the company. We were sort of all starry-eyed about it, and he looked at me and he said, ‘Son, be nice to everybody on the way up because on the way down, you’re going to need friends.’ He was holding on to the side of my desk and looking out the window at the time. My father was just a wise, wise man and just a very good person.

What is your definition of business success?
To be respected by the people who you serve and to be respected by your competitors. You go about doing things the right way, and you treat people the way they are supposed to be treated.


Understanding your options in a commercial lease to create flexibility in an ever-changing economy

Steve Kim, Senior Associate, Transaction Management, Plante Moran CRESA

As a company weighs its options between signing a short-term and a long-term commercial lease, there are many things it must consider.

“Organizations need to weigh the benefits of locking in historically low lease rates long-term (seven to 10 years) or having the flexibility of a short-term lease,” says Steve Kim, a senior associate, Transaction Management, with Plante Moran CRESA. “Each comes with benefits and risks.”

Low real estate costs can help increase your competitive advantage. However, there are potential downsides to entering into a longer contract that need to be realized and hedged against to create maximum flexibility for your company.

Smart Business spoke with Kim about lease terms and how to negotiate the right conditions to suit your business needs, both today and in the future.

What crucial areas should a lessee consider when choosing real estate for a long-term lease? 

When considering a long-term lease, a business should first determine whether the real estate is aligned with its strategic business plan. For example, does the space have room to accommodate your long-term growth plans? Does the building fit with your company’s image and brand? Conducting a space program is essential versus adding a percentage to your current square footage. This exercise will categorize and assign a square footage to all of your space, including conference rooms, executive offices, staff work spaces, common areas and storage, as well as account for future growth.

In addition, with building values at historic lows, purchasing real estate may be a viable option to consider, giving you the ability to lease out space until you need it.

What conditions would signal to a business whether a short- or long-term commercial lease is a more favorable option for a business?

Short-term leases offer a company the most flexibility, but they do have a downside. Lessees often don’t have as much room to negotiate terms and conditions in a short-term agreement as they do in a longer-term one. Also, landlords know all too well the cost of moving a business and could raise your rent at renewal, betting that you will not want to relocate. In addition to potential rate increases, there is no guarantee that you will be able to renew a short-term lease, especially if a large or long-term tenant needs your space.

Long-term leases will typically offer higher tenant improvement allowances, while short-term leases may require out-of-pocket costs by the tenant. But long-term leases also carry risks. Business conditions may change while you are locked into a long-term agreement, making it difficult to expand or contract your business based on a change in your strategic direction. However, an early termination option can be negotiated into a long-term lease to offer some flexibility while maintaining the security and extended savings.

What is an early termination option?

An early termination option allows you to opt out of your lease at a certain point in the contract, which reduces some of the risks that can come with being locked into a long-term agreement. It also offers an opportunity to renegotiate with your landlord midway through your agreement.

A company could work out an option to extend a short-term lease to hedge against losing the space or being hit with a rent increase, but the protections are not guaranteed, as those that accompany a long-term agreement would be.

When trying to negotiate a termination right in a lease, it is helpful to understand the landlord’s potential challenges in providing this option. The situation varies from building to building in regard to ownership structure and the debt situation, for example, and investigating these facts prior to the request is mission critical. Furthermore, the ability to terminate a lease may also be less advantageous if the termination fee is equaled to an amount that is perceivably unlikely to be paid.

Termination option fees requested by landlords are typically for the unamortized portion of the costs based on the market value of the transaction made when the lease was signed, along with an interest rate factor and a penalty equal to the value of rent for a few months. However, if the landlord receives adequate notice that a tenant is leaving, it should allow that tenant to lease the space and head off any loss of income. Termination fees require time to negotiate and ultimately should reward the landlord for offering additional concessions in exchange for extending the term.

What else can a company do to mitigate risk and reduce costs in a lease situation?

Another option to consider is subleasing, which can help a company recoup a portion of its rental expenses. However, expect to invest time and money on the front end to find a tenant and adapt the space.

If the necessary tenant improvements are financially viable for a company to pay upfront, the landlord has a greater ability to accept the termination option because the initial investment in the transaction has been reduced. Furthermore, a lease rate associated with an ‘as-is’ deal is usually below market and can protect tenants with renewal options going forward. Finally, some of the tenant improvements may be depreciated, ultimately lowering some of the company’s potential tax
liability for a given year.

Steve Kim is a senior associate, Transaction Management, with Plante Moran CRESA. Reach him at (248) 223-3494 or [email protected]

Insights Real Estate is brought to you by Plante Moran CRESA

How real estate owners can take advantage of expiring tax provisions before it’s too late

Terry Coyne, SIOR, CCIM, Executive Vice President, Newmark Grubb Knight Frank

At the end of the year, a couple of tax provisions are expiring that have been a great benefit to those who own real estate. First, the 15 percent capital gains tax rate will return to where it was before 2003, to 20 percent. The historically low capital gains tax rate allowed many to sell their properties with a significantly reduced tax obligation. Second, bonus depreciation has made it possible for property owners to write off as much as 100 percent of the cost of machinery, equipment, vehicles, furniture and other qualifying property. This method of depreciation allows the business owner to record lower incomes, and therefore pay less in taxes.

While these tax features will come to an end, Terry Coyne, SIOR, CCIM, an executive vice president with Newmark Grubb Knight Frank, formerly Grubb & Ellis, says there are still solutions that will allow property owners to defer expenses.

Smart Business spoke with Coyne about the changes and what to do if you can’t take advantage of them before they expire.

What real estate tax strategies should business owners take advantage of in the short term?

The capital gains tax rate is scheduled to go up on Jan. 1 from the current, historically low rate of 15 percent to 20 percent because the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act that extended the Bush-era tax cuts until the end of this year will expire. In addition, the Patient Protection and Affordable Care Act, in 2013, will impose a new 3.8 percent tax on certain investment income for households that make more than $200,000 for singles and $250,000 for married couples, which includes real estate transactions. So the net effect of these two tax increases could result in a 23.8 percent tax rate for high earners.

When capital gains rates are raised, those still wanting to unload an investment property should consider a 1031 like-kind exchange. These real estate transactions have actually become less popular in the past couple of years because the capital gains rate has been so low, and building owners are trying to sell by year-end to take advantage of the rates.

This tax-deferred exchange involves selling one qualified property for another within a specific time frame. For example, you can sell a property and take up to 45 days to identify three qualified properties for the exchange. You’ll then have 180 days to close. To do a 1031 exchange, you need to work through a qualified entity, so make sure you’re dealing with someone reputable because if they’re wrong and it blows up, you’ll be stuck with the tax.

Next year, many owners will go from paying the capital gains rate to transacting through a 1031 exchange to avoid paying the taxes on those sales altogether. So, if you can, try to close your transactions this year, and if not, expect to pay more next year if you don’t use a 1031 exchange.

What real estate tax strategies exist for those who own and occupy their building?

For those who own their buildings, the biggest impact could be the potential change to bonus depreciation, which has been around for the past couple of years and was extended by the American Recovery and Re-Investment Act.

Typically, in real estate, you spend money and capitalize it. So, if you put a new roof on your building, you look at the cost of the roof and how long it takes to depreciate it, let’s say over the course of 20 years. Recently, bonus depreciation has allowed you to expense as much as 100 percent of an investment in qualified business properties. The bonus depreciation will likely go away, though it’s not clear when. Going back to standard methods of depreciation is a big deal because it ends a program that provided an immediate tax benefit. Bonus depreciation has had a positive impact on the real estate industry because builders will spend more on improvements or spend on speculation because they’re trading dollars — rather than paying taxes, you’re spending that money on real estate.

You’re well advised to pay close attention to depreciation. The question remains whether it will go back to normal right away or if it will be phased out. If it is phased out, take advantage of it soon because it will never be 100 percent again. Bonus depreciation absolutely creates jobs in the short term because it encourages people to spend money.

What if I miss out on bonus depreciation? Are there other strategies a business owner can use to defer expenses?

It’s a good idea to cost segregate your building, using the expertise of a professional such as an accountant and an engineer, so you can depreciate the components of your property over the life of each component’s expected use and not over 39.5 years, which is a typical depreciation cycle for a building. More sophisticated business owners are segregating their costs and depreciating everything they can because it gives great tax benefits for those who are unable to do bonus depreciation.

The Internal Revenue Service allows you to depreciate a building, not the land, over 39.5 years, so that every year you get a benefit on your taxes, which is a noncash loss. But the code also allows you to cost segregate all of your different costs. For example, the roof is segregated from the parking lot, which is segregated from the HVAC, etc., on a schedule that outlines the ‘life,’ or schedule of depreciation, of the different components of your building. It’s a way to reduce your current income tax obligations.

Terry Coyne, SIOR, CCIM, is an executive vice president with Newmark Grubb Knight Frank, formerly Grubb & Ellis. Reach him at (216) 453-3001 or [email protected]

Insights Real Estateis brought to you by Newmark Grubb Knight Frank