Distressed Commercial Real Estate: Cost Segregation a "Pandora's Box"

Commercial real estate values have declined by 45% since 2008 and there are ominous signs that matters could get worse. In 2008, the number of distressed commercial loans was about 1%. Three years later, the number of distressed commercial loans exceeds 9%. Through 2015, it is estimated that there are approximately $300+ billion in commercial mortgages coming due every year. While several articles have been written about various aspects of cost segregation, most of these papers have been limited in depth or focused on the use of cost segregation with new properties. Allen and Foster (2009) examine the potential for combining cost segregation with like-kind exchanges. In this article the authors address the controversies that surround cost segregation and highlight the risks and the benefits of using cost segregation in a distressed real estate environment. They will initially explore the evolution of cost segregation in order to explain the issues that should be considered when applying cost segregation to distressed real estate.