Real estate and construction transactions involve more than determining whether a property or project looks attractive on paper. Financing, construction costs, tax considerations, market assumptions, and long-term operating plans can all affect whether the economics ultimately work.
The challenge is that these decisions are often made by different parties at different points in the transaction. A lender looks at credit and collateral. A broker looks at the market. A contractor looks at construction. An accountant looks at the financial and tax implications.
Real estate transaction advisory services bring another perspective to the table: how those individual decisions affect the economics of the transaction as a whole.
For business owners, developers, and real estate investors, that perspective can be particularly valuable before significant capital has been committed.
What Are Real Estate Transaction Advisory Services?
Real estate transaction advisory services help owners and investors evaluate the financial considerations surrounding an acquisition, development, sale, or other significant transaction.
The specific scope depends on the transaction. It may include financial due diligence, valuation, financial modeling, tax considerations, and analysis of the assumptions supporting a deal.
For construction-related real estate transactions, the analysis may also need to account for development costs, financing requirements, project timelines, and the effect that changes in those assumptions could have on the overall economics.
The goal is not to replace brokers, attorneys, lenders, contractors, or other specialists. It is to give decision-makers a clearer financial picture as they evaluate the transaction.
Due Diligence: Looking Beyond the Purchase Price
Due diligence is one of the most important parts of a real estate transaction because the headline price rarely tells the whole story.
Historical income and expenses, projected operating costs, financing assumptions, capital requirements, and the condition and classification of assets can all influence the economics of a transaction.
For a construction or redevelopment project, the analysis becomes more complicated. An attractive acquisition can look very different once construction costs, financing expenses, delays, or changing operating assumptions are incorporated into the model.
A disciplined due diligence process can help identify those issues before they become embedded in the transaction.
This is also where sensitivity analysis becomes useful. Rather than evaluating only the expected scenario, owners can examine what happens if costs increase, completion takes longer than expected, financing changes, or projected revenue does not materialize on schedule.
The objective is not to predict exactly what will happen. It is to understand where the transaction is most exposed if assumptions change.
Evaluating the Capital Structure Before the Deal Is Done
How a real estate project is financed can be just as important as what is being built or acquired.
Construction and development transactions may involve multiple sources of capital, including debt and equity. Each comes with its own cost, requirements, and effect on cash flow.
Transaction advisory can help owners evaluate how the financing structure performs under different scenarios.
For example, what happens if construction takes longer than planned? How does a change in financing costs affect projected cash flow? How much additional capital could be required if costs exceed the original budget?
Running those scenarios before commitments are finalized gives owners a better understanding of the risks built into the transaction.
It can also help leadership evaluate financing decisions in the context of the broader business. For an operating company building an office, distribution facility, or other property, the question is not simply whether the project can be financed. Leadership also needs to understand how much capital the project will consume and what that means for other business priorities.
Tax Planning Can Start Before the Property Is Placed in Service
Tax considerations are another area where timing matters.
The way a transaction is structured, the type of property involved, and the classification of assets can affect when deductions become available and how the investment affects cash flow.
Cost segregation is one example.
A cost segregation study examines components of a building to determine whether certain qualifying assets can be depreciated over shorter recovery periods rather than as part of the building itself. With 100% bonus depreciation available for certain qualified property, identifying eligible shorter-life assets can significantly affect the timing of depreciation deductions. The potential benefit depends on the property, when it was acquired or placed in service, and the taxpayer’s circumstances.
For a newly constructed or acquired property, considering cost segregation and related depreciation issues early gives owners an opportunity to understand the potential tax effects as part of the broader transaction analysis rather than treating them as an afterthought.
Real estate accounting also plays an important role beyond tax compliance. Financial modeling, tax planning, cost segregation, and depreciation analysis can give owners and investors a clearer view of how a transaction may affect cash flow and their broader tax position. Bringing that analysis into the transaction process helps shift the conversation from reporting what happened to planning for the financial implications of the decision.
The appropriate treatment depends on the property, current tax law, and the taxpayer’s individual circumstances, so these strategies should be evaluated with qualified tax professionals.
Construction Adds Another Layer of Financial Risk
Construction-related transactions introduce variables that do not exist in a straightforward property acquisition.
Budgets change. Timelines move. Financing costs can shift. Change orders accumulate. A decision that appears relatively small on its own can have a larger effect when combined with other changes over the course of a project.
Financial monitoring during construction can help owners understand those effects as the project progresses.
That may include comparing actual spending against the approved budget, updating cost-to-complete projections, evaluating the financial impact of material changes, and revisiting the assumptions used in the original model.
The benefit is visibility. If the expected economics of a project are changing, owners generally want to understand that while there are still decisions available to them, not after construction is complete.
Transaction Advisory Is Also Relevant to Operating Businesses
Real estate transaction advisory is not limited to professional developers and institutional investors.
Operating businesses regularly make significant real estate decisions. A growing company may purchase a new facility. A manufacturer may expand a plant. A professional services firm may evaluate whether to lease or own its next office. A family-owned business may hold real estate separately from its operating company.
These decisions can tie up substantial capital and create financial obligations that last for years.
For an operating business, transaction analysis should therefore consider more than the property itself. Leadership needs to understand how the decision fits with cash flow, financing capacity, tax planning, and the company’s longer-term plans.
That broader perspective can help prevent a real estate decision from working against the needs of the operating business.
When Should You Bring in a Transaction Advisor?
Earlier is generally better. For an acquisition, that may mean during initial due diligence, before the transaction terms are finalized. For a construction project, it may mean while financial assumptions and project budgets are still being developed. For a sale, it may mean well before the property goes to market so owners have time to understand valuation, tax, and transaction considerations.
Advisors can still provide value later in the process, but there are usually more options available before major financial and contractual commitments have been made.
The right timing also depends on the complexity of the decision. Entering a new market, undertaking a significant construction project, acquiring an unfamiliar type of property, or committing substantial business capital may all warrant additional financial analysis.
A More Complete View of the Transaction
The value of transaction advisory is not another layer of complexity. It is a clearer view of the financial decision. Real estate and construction transactions involve interconnected decisions about price, financing, taxes, costs, and timing. Evaluating each one independently can make it difficult to see how a change in one area affects the rest of the deal.
Transaction advisory brings those considerations together. At Duffy Kruspodin we work with business owners and investors on transaction support, financial due diligence, valuation, tax planning, and related financial considerations. Bringing those disciplines together can help decision-makers better understand a real estate or construction transaction before making a significant commitment.
Planning a real estate or construction transaction?
Talk with Duffy Kruspodin about how due diligence, tax planning, and financial analysis can help you evaluate the deal before you commit.
Frequently Asked Questions
What do real estate transaction advisory services include?
The scope depends on the transaction but may include financial due diligence, valuation, financial modeling, tax analysis, and evaluation of the assumptions underlying an acquisition, development, sale, or other transaction. Other professionals, including attorneys, brokers, lenders, and construction specialists, may also be involved depending on the project.
How can transaction advisory help with a construction project?
Construction adds variables such as project costs, financing, timelines, and changing financial assumptions. Transaction advisory can help owners evaluate how those factors affect the economics of the project and update the analysis as circumstances change.
What is the role of due diligence in a real estate transaction?
Financial due diligence helps an owner or investor evaluate the information and assumptions supporting a transaction. Depending on the deal, this can include historical financial performance, projected income and expenses, capital requirements, financing assumptions, and other factors that could affect value or cash flow.
How does cost segregation relate to a real estate transaction?
A cost segregation study evaluates whether qualifying components of a property can be assigned shorter depreciation recovery periods. When appropriate, this can accelerate certain depreciation deductions. The potential benefit depends on the property, applicable tax law, and the taxpayer’s circumstances.
When should a business engage a transaction advisor?
Ideally, financial and tax considerations should be evaluated before significant commitments are finalized. Earlier involvement generally gives owners more opportunity to evaluate alternatives, test assumptions, and understand how a transaction could affect the broader business.
