Andrews: Do everyone a favor and be honest about tax losses
We've passed through the tax filing deadline and completed our extensions or, for those incredibly organized souls, final returns. This is your gentle reminder to get those documents to your lenders, since submitting that information is probably a requirement in your loan agreement. While not necessarily a requirement, it is probably a good idea also to be proactive in explaining any tax losses that appear on the forms to avoid raising any concerns. Real estate developers will typically show a tax loss as the result of a prior year loss carry forward or current year recognition of accelerated depreciation, and lenders are used to seeing these items. However, we should not take for granted that underwriters will dig for explanations before sounding an internal alarm when a tax loss appears. Eventually the story will be told that taxable income was reduced by non-cash items like depreciation or amortization, and that actual global cash flow is still sufficient to service all debt, but it would be better for all concerned if that story were told up front. So please do yourself two favors by 1) getting the tax forms filed and 2) making sure that you or your CPA provide a written explanation of the impact of depreciation or other non-cash items on your financial condition.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Real Estate Services, and he can be reached at email@example.com.)
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