Multifamily and Cost Segregation Studies

[Costin I.]

Inquiry to CSS, CPAs and MF experts:

Many sponsors of multifamily deals advertise the Cost Segregation study as a magic pill that creates money out of thin air, some claiming that by making one they will be able to return 40% of the investors money, even in the first or second year of the deal - how is that possible?

For all I know, a CSS only creates an acceleration of depreciation, that can be used to offset taxes on income. But that assumes you have that income from the deal, or similar. 

And then, if invested within a self-directed IRA, one can't take advantage of this depreciation. On that basis, the sponsor wants to redistribute the depreciation to "cash" investors only. Is that legal/possible?

And on the same basis, shouldn't then the UBIT be allocated only to same "cash" investors?

At the end of the deal lifetime ("selling in 5 years"), what happens with the depreciation (afaik it gets recaptured) ? And, is it correct/fair/legal to "be recaptured" by the entire pool of investors, or should be "recaptured" only from the "cash" investors that received said depreciation? 

Please help me complete/correct my understanding in these matters.   

[Reginald Ross]

@Costin I.

I suspect you may be conflating two separate and distinct events in a syndication: 1) member capital return and 2) cost segregation

A cost segregation front loads depreciation in year 1 to offset gains, in a nutshell. Syndications are usually structured so that the deprecation passes through to each investor’s personal tax filings.

Now, they may or may not be able to use some or all of the depreciation depending on their specific tax situation but that’s the gist of it.

The return of member capital could be coming from any number of sources: a strategic refinance, significantly increased cash flows, release of escrow monies, new construction coming online, strong appreciation/compressed cap rates, opening of an Amazon Prime Warehouse next door, etc Each deal has its own uniqueness.

Does that clarify things at all?