July 13, 2025 • 12 mins
Ross Slutsky is a commercial appraiser based in Orlando Florida. On today's show we are talking about valuation methods that can result in significant tax savings, particularly if there are future events that can make the realization of that value contingent on those events.
You can learn more by visiting pcecompanies.com or emailing Ross directly at rslutsky@pcecompanies.com.
--------------
**Real Estate Espresso Podcast:**
Spotify: [The Real Estate Espresso Podcast](https://open.spotify.com/show/3GvtwRmTq4r3es8cbw8jW0?si=c75ea506a6694ef1)
iTunes: [The Real Estate Espresso Podcast](https://podcasts.apple.com/ca/podcast/the-real-estate-espresso-podcast/id1340482613)
Website: [www.victorjm.com](http://www.victorjm.com)
LinkedIn: [Victor Menasce](http://www.linkedin.com/in/vmenasce)
YouTube: [The Real Estate Espresso Podcast](http://www.youtube.com/@victorjmenasce6734)
Facebook: [www.facebook.com/realestateespresso](http://www.facebook.com/realestateespresso)
Email: [podcast@victorjm.com](mailto:podcast@victorjm.com)
**Y Street Capital:**
Website: [www.ystreetcapital.com](http://www.ystreetcapital.com)
Facebook: [www.facebook.com/YStreetCapital](https://www.facebook.com/YStreetCapital)
Instagram: [@ystreetcapital](http://www.instagram.com/ystreetcapital)
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:02):
Welcome to the Real Estate Espressal podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. This is the WEEKEND edition
where we interview notable people from the world of real
estate investing. Today is no exception.
We have a great guest all the way from Orlando, FL Welcome to
the show, Ross Lutsky. Thanks for having me Victor,
Great to be here. Well, great to have you here.
(00:22):
Now, Ross, you are in a couple of different segments.
You play in a little bit in realestate, but also in the private
equity world and borrowing some techniques that are more common
in private equity. And I'm excited to have this
conversation because you're bringing something that's not
particularly well understood in real estate.
But maybe before we do, perhaps give a little bit of your back
(00:44):
story and how you got to this point in your journey.
Definitely. I'm a business appraiser, so
intangible assets generally and I've been an appraiser for seven
years. I'd say I have 3 passions in
life, appraisal, work, roller coasters and pickleball in that
order and very excited to talk about one of my true passions.
(01:05):
I love it. So when we talk about appraising
intangible assets, I mean, oftenwhen you're acquiring a
business, sometimes that business comes with, let's say
goodwill on the balance sheet. Sometimes it comes with physical
assets, including buildings, equipment and all of those sorts
of things. And coming up with a fair
valuation is both an exercise inlooking at what exists today as
(01:30):
well as future projections. So it's a lot of moving parts to
this. Walk us through, you know, what
your typical day-to-day looks like and what are the things
that you look for as opportunities.
This is probably the word that you hate to hear, but it
depends. So every intangible asset is
different. So for instance, what I see
often times in the private equity and real estate world is
(01:53):
tax valuations for promote or carried interest, which they're
going to carry with them a contingent payout.
So instead of being linear, right, there's going to be some
sort of investor pref that needsto be hit.
And then only after that do theyreceive any sort of cash flows.
And then those cash flows may change if certain additional
(02:14):
metrics. So maybe it's 25% of the
incremental cash flows between a12 and a 14% investor IRR and
then it switches to 5050 beyond 14%.
And that's going to be a very different payout than just a
normal a normal business where you're just, it's a flat cash
flow and there's no sort of hurdle that needs to be hit.
(02:36):
So you're not a tax account, butyou obviously work very closely
with them in understanding the tax consequence of some of these
different structures. So what we're talking about here
is a waterfall structure where there is some kind of event that
triggers something to happen where the nature or the
characteristic of that payment or distribution changes based on
(03:00):
that trigger event that may or may not happen or may partially
happen. How do you how do you wrap your
mind around that? Yeah.
So there's actually guidance in the Appraisal Foundation, which
is a governing body which suggests what to do when dealing
with what we call a non linear payout, which essentially means
(03:20):
certain events need to get hit. And it's not just a straight
every incremental dollar of Inc of cash flow gets pro added
distributed and we may have to use Monte Carlo was one option
pricing model that falls under the risk neutral framework.
And to me, what's what's really excited, what's really exciting
about those sorts of assets, especially from a tax planning
(03:44):
perspective is how based on the timing of when you gift them
actually changes the taxable value because of the uncertainty
surrounding it, even if the actual projections for the fund
haven't changed. So what you're describing is not
just when the event gets triggered, but also the
recognition of the possibility gets triggered.
(04:07):
Exactly correct. So walk us through an example of
what that might look like, just so that it's clear.
Yeah. So let's say, for instance, that
you're building a development and you know it's going to be
completed 10 years from now, right?
And you say, hey, I'm going to gift my component of promote.
(04:27):
And let's say you're assuming a,you know, 1520% whatever IRR,
right, Let's say 15% IRR on the actual project, not specific to
your interest. So what would end up happening
is we wouldn't expect an actual payout for 10 years from now
when the project is completed and you've now sold it off to
(04:48):
somebody to a different investor.
However, based on when you actually gifted that interest,
the taxable value is going to change drastically because if
you gifted on day 0, right, well, now you don't have
suppliers in place. There's tons of uncertainty
regarding permits. We have no idea if the market
(05:09):
could collapse at any time, right?
There's just a ton that could gowrong there.
And so now we have a higher, a higher discount rate.
And also, if we're looking 10 years out into the future, well,
we're all finance people here and we know that the longer
something gets discounted back for, the less valuable it
(05:30):
typically is. So all else being equal, my
expectation would be that a interest that's gifted on day 0
is going to be less worth less than something that's gifted,
say in year 9 when you know, youfeel pretty confident, maybe you
have an LOI set up for the property, right?
And doesn't really not much riskassociated with it anymore.
(05:53):
And there's a lot of visibility into what the value of this
property is actually going to berealized.
So walk us through the tax consequence because when I think
about, you know, receiving an asset in this case we're talking
about share of ownership. So that's an asset on the books
of of one party and then that assets going to grow in value
(06:16):
over the life of the project. So then there could be
potentially capital gains associated with that asset.
Is it in your best interest to have the highest adjusted cost
basis later in the project, or is it in your best interest to
have the lowest number with the greatest uncertainty at the very
beginning of the project? So specifically for promote
interest, it's typically going to be beneficial to gift it the
(06:40):
earliest possible moment in the project.
And the reason for that is because the only thing that
actually matters is what's beingdistributed from to you as the
individual from your specific promote interests.
And this is where it gets reallyinteresting with that waterfall
because what we're really talking about here is the
(07:01):
probability that your hurdle ends up getting hit.
And so does so say I run scenarios and at day zero,
right, the project is worth 0 because there's no, there's been
no improvements, right. Well, the probability that
you're going to end up exceedingyour 1012 whatever percent
(07:23):
investor IRR is actually like relatively low, right on a on a
risk adjusted basis. So because the common economic
theory states that you really shouldn't be achieving more than
a risk free rate on a risk neutral framework.
So with that, given the case, right when we run that through,
most scenarios are going to havethat, that interest being having
(07:44):
zero value associated with it. There are going to be some
scenarios when we run our simulation that are going to
have a high value, but overall it's going to be lower.
Whereas if now we're saying, hey, you know, this project, we
got an appraisal done, we can see the improvements it's now
expected to be worth, you know, we, we can see the value that's
been added from the process that's gone through.
(08:07):
Well, now it's way more likely that you're going to end up
hitting your hurdle in which case the potential distributions
that's going to that's what's going to end up having a taxable
impact for you and create value to the interest itself.
So really I think that risk and uncertainty in the beginning
typically far outweighs any sortof any sort of related tax
(08:32):
impacts from essentially being successful, right?
Now, in most jurisdictions, the principle is that you're taxed
on what you actually receive. Now, there are certain
circumstances where it's possible to have a tax
obligation on phantom income, but why is this important?
So you, you know, you're into a project 10 years, you sell the
(08:54):
asset, the distributions get made on, on dissolution and then
everybody's happy. How does this early bit of
planning play into that tax consequence, if at all?
Yeah, and it's important to separate out what your long term
goals are, right? So if you're looking at it
(09:15):
saying, hey, you know, I'm goingto be a wealthy person and I'm
going to end up passing down, you know, 10s of millions of
dollars or even millions of dollars to my to my kids or
whomever, right, then, you know,you essentially have the choice,
right? You can either racket pay the
full taxes on that up to the $15million gift tax exclusion, or
(09:40):
you can essentially try and value these and gift these
assets when they're worth less money, assuming that they're
going to grow into more valuableassets so that you don't have to
pay that 40% tax rate on for gifting estate purposes.
But if you're sitting there saying, hey, you know, all my
money is going to be mine and I'm going to spend it all and I
don't want to leave any to anybody else, then this to your
(10:04):
point, right, This doesn't necessarily make sense because
this is only applicable to the extent that it's impacting the
gift in estate tax. Now, if you were transferring
assets, say into a, into a trust, maybe an irrevocable
trust, how was that different? Because from my understanding,
(10:25):
the tax treatment within a trustversus outside the trust
theoretically could be the identical.
But if you're gifting to a trust, is that does that change
things? No, it's the same thing.
And and that's what we typicallysee is that these gifts are made
to a trust and then that trust might be for the benefit of
somebody else and 100%. So in that case, it might be a
(10:47):
testamentary trust as opposed tosimply an irrevocable living
trust. Yeah.
That makes sense. Well, Russ, this is fascinating.
If, if there was a particular test case that you would say is,
let's say the most common for you, what would that be?
What would that look like? Just so the listeners in the
audience here are, as they're thinking about this, say, oh,
(11:10):
well, that's my circumstance. Exactly what?
What? What would you describe?
Yeah, I'd say most commonly we see it with probably somebody
raising a fund that's going to be 50 million plus.
I'd say that's, that's kind of the starting point where you'd
want to be considering this, especially if you've had a, if
(11:30):
you're on your second fund, especially because the the
second fund is probably the timewe're saying, hey, I know I can
do this. I've done it before.
I feel really good about this. I'm going to be able to create
generational wealth. And now the question is, how do
I keep as much generational wealth within my family instead
of necessarily giving it all to the government?
(11:51):
Not that if you want to give it to the government, decrease my
taxes. I'm totally for it, but a lot of
people don't feel that way. Sure, sure.
Well, Ross, if folks want to connect, if they want to learn
more, what's the best way? Yeah, definitely e-mail me.
So that's Rs l.utsky@pcecompanies.com or you
(12:16):
know, feel free to message me onLinkedIn.
Ross Lutsky. That's SLUTSKY.
Perfect. Well, Ross, love what you're
doing. Fascinating topic.
And for the listeners at home, definitely connect with Ross
Slutsky at our Slutsky at pcecompanies.com.
The links will be in the show notes.
(12:36):
And in the meantime, have an awesome rest of your weekend.
Go make some great things happenand we'll talk to you again
tomorrow.
Welcome to the Real Estate Espressal podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. This is the WEEKEND edition
where we interview notable people from the world of real
estate investing. Today is no exception.
We have a great guest all the way from Orlando, FL Welcome to
the show, Ross Lutsky. Thanks for having me Victor,
Great to be here. Well, great to have you here.
(00:22):
Now, Ross, you are in a couple of different segments.
You play in a little bit in realestate, but also in the private
equity world and borrowing some techniques that are more common
in private equity. And I'm excited to have this
conversation because you're bringing something that's not
particularly well understood in real estate.
But maybe before we do, perhaps give a little bit of your back
(00:44):
story and how you got to this point in your journey.
Definitely. I'm a business appraiser, so
intangible assets generally and I've been an appraiser for seven
years. I'd say I have 3 passions in
life, appraisal, work, roller coasters and pickleball in that
order and very excited to talk about one of my true passions.
(01:05):
I love it. So when we talk about appraising
intangible assets, I mean, oftenwhen you're acquiring a
business, sometimes that business comes with, let's say
goodwill on the balance sheet. Sometimes it comes with physical
assets, including buildings, equipment and all of those sorts
of things. And coming up with a fair
valuation is both an exercise inlooking at what exists today as
(01:30):
well as future projections. So it's a lot of moving parts to
this. Walk us through, you know, what
your typical day-to-day looks like and what are the things
that you look for as opportunities.
This is probably the word that you hate to hear, but it
depends. So every intangible asset is
different. So for instance, what I see
often times in the private equity and real estate world is
(01:53):
tax valuations for promote or carried interest, which they're
going to carry with them a contingent payout.
So instead of being linear, right, there's going to be some
sort of investor pref that needsto be hit.
And then only after that do theyreceive any sort of cash flows.
And then those cash flows may change if certain additional
(02:14):
metrics. So maybe it's 25% of the
incremental cash flows between a12 and a 14% investor IRR and
then it switches to 5050 beyond 14%.
And that's going to be a very different payout than just a
normal a normal business where you're just, it's a flat cash
flow and there's no sort of hurdle that needs to be hit.
(02:36):
So you're not a tax account, butyou obviously work very closely
with them in understanding the tax consequence of some of these
different structures. So what we're talking about here
is a waterfall structure where there is some kind of event that
triggers something to happen where the nature or the
characteristic of that payment or distribution changes based on
(03:00):
that trigger event that may or may not happen or may partially
happen. How do you how do you wrap your
mind around that? Yeah.
So there's actually guidance in the Appraisal Foundation, which
is a governing body which suggests what to do when dealing
with what we call a non linear payout, which essentially means
(03:20):
certain events need to get hit. And it's not just a straight
every incremental dollar of Inc of cash flow gets pro added
distributed and we may have to use Monte Carlo was one option
pricing model that falls under the risk neutral framework.
And to me, what's what's really excited, what's really exciting
about those sorts of assets, especially from a tax planning
(03:44):
perspective is how based on the timing of when you gift them
actually changes the taxable value because of the uncertainty
surrounding it, even if the actual projections for the fund
haven't changed. So what you're describing is not
just when the event gets triggered, but also the
recognition of the possibility gets triggered.
(04:07):
Exactly correct. So walk us through an example of
what that might look like, just so that it's clear.
Yeah. So let's say, for instance, that
you're building a development and you know it's going to be
completed 10 years from now, right?
And you say, hey, I'm going to gift my component of promote.
(04:27):
And let's say you're assuming a,you know, 1520% whatever IRR,
right, Let's say 15% IRR on the actual project, not specific to
your interest. So what would end up happening
is we wouldn't expect an actual payout for 10 years from now
when the project is completed and you've now sold it off to
(04:48):
somebody to a different investor.
However, based on when you actually gifted that interest,
the taxable value is going to change drastically because if
you gifted on day 0, right, well, now you don't have
suppliers in place. There's tons of uncertainty
regarding permits. We have no idea if the market
(05:09):
could collapse at any time, right?
There's just a ton that could gowrong there.
And so now we have a higher, a higher discount rate.
And also, if we're looking 10 years out into the future, well,
we're all finance people here and we know that the longer
something gets discounted back for, the less valuable it
(05:30):
typically is. So all else being equal, my
expectation would be that a interest that's gifted on day 0
is going to be less worth less than something that's gifted,
say in year 9 when you know, youfeel pretty confident, maybe you
have an LOI set up for the property, right?
And doesn't really not much riskassociated with it anymore.
(05:53):
And there's a lot of visibility into what the value of this
property is actually going to berealized.
So walk us through the tax consequence because when I think
about, you know, receiving an asset in this case we're talking
about share of ownership. So that's an asset on the books
of of one party and then that assets going to grow in value
(06:16):
over the life of the project. So then there could be
potentially capital gains associated with that asset.
Is it in your best interest to have the highest adjusted cost
basis later in the project, or is it in your best interest to
have the lowest number with the greatest uncertainty at the very
beginning of the project? So specifically for promote
interest, it's typically going to be beneficial to gift it the
(06:40):
earliest possible moment in the project.
And the reason for that is because the only thing that
actually matters is what's beingdistributed from to you as the
individual from your specific promote interests.
And this is where it gets reallyinteresting with that waterfall
because what we're really talking about here is the
(07:01):
probability that your hurdle ends up getting hit.
And so does so say I run scenarios and at day zero,
right, the project is worth 0 because there's no, there's been
no improvements, right. Well, the probability that
you're going to end up exceedingyour 1012 whatever percent
(07:23):
investor IRR is actually like relatively low, right on a on a
risk adjusted basis. So because the common economic
theory states that you really shouldn't be achieving more than
a risk free rate on a risk neutral framework.
So with that, given the case, right when we run that through,
most scenarios are going to havethat, that interest being having
(07:44):
zero value associated with it. There are going to be some
scenarios when we run our simulation that are going to
have a high value, but overall it's going to be lower.
Whereas if now we're saying, hey, you know, this project, we
got an appraisal done, we can see the improvements it's now
expected to be worth, you know, we, we can see the value that's
been added from the process that's gone through.
(08:07):
Well, now it's way more likely that you're going to end up
hitting your hurdle in which case the potential distributions
that's going to that's what's going to end up having a taxable
impact for you and create value to the interest itself.
So really I think that risk and uncertainty in the beginning
typically far outweighs any sortof any sort of related tax
(08:32):
impacts from essentially being successful, right?
Now, in most jurisdictions, the principle is that you're taxed
on what you actually receive. Now, there are certain
circumstances where it's possible to have a tax
obligation on phantom income, but why is this important?
So you, you know, you're into a project 10 years, you sell the
(08:54):
asset, the distributions get made on, on dissolution and then
everybody's happy. How does this early bit of
planning play into that tax consequence, if at all?
Yeah, and it's important to separate out what your long term
goals are, right? So if you're looking at it
(09:15):
saying, hey, you know, I'm goingto be a wealthy person and I'm
going to end up passing down, you know, 10s of millions of
dollars or even millions of dollars to my to my kids or
whomever, right, then, you know,you essentially have the choice,
right? You can either racket pay the
full taxes on that up to the $15million gift tax exclusion, or
(09:40):
you can essentially try and value these and gift these
assets when they're worth less money, assuming that they're
going to grow into more valuableassets so that you don't have to
pay that 40% tax rate on for gifting estate purposes.
But if you're sitting there saying, hey, you know, all my
money is going to be mine and I'm going to spend it all and I
don't want to leave any to anybody else, then this to your
(10:04):
point, right, This doesn't necessarily make sense because
this is only applicable to the extent that it's impacting the
gift in estate tax. Now, if you were transferring
assets, say into a, into a trust, maybe an irrevocable
trust, how was that different? Because from my understanding,
(10:25):
the tax treatment within a trustversus outside the trust
theoretically could be the identical.
But if you're gifting to a trust, is that does that change
things? No, it's the same thing.
And and that's what we typicallysee is that these gifts are made
to a trust and then that trust might be for the benefit of
somebody else and 100%. So in that case, it might be a
(10:47):
testamentary trust as opposed tosimply an irrevocable living
trust. Yeah.
That makes sense. Well, Russ, this is fascinating.
If, if there was a particular test case that you would say is,
let's say the most common for you, what would that be?
What would that look like? Just so the listeners in the
audience here are, as they're thinking about this, say, oh,
(11:10):
well, that's my circumstance. Exactly what?
What? What would you describe?
Yeah, I'd say most commonly we see it with probably somebody
raising a fund that's going to be 50 million plus.
I'd say that's, that's kind of the starting point where you'd
want to be considering this, especially if you've had a, if
(11:30):
you're on your second fund, especially because the the
second fund is probably the timewe're saying, hey, I know I can
do this. I've done it before.
I feel really good about this. I'm going to be able to create
generational wealth. And now the question is, how do
I keep as much generational wealth within my family instead
of necessarily giving it all to the government?
(11:51):
Not that if you want to give it to the government, decrease my
taxes. I'm totally for it, but a lot of
people don't feel that way. Sure, sure.
Well, Ross, if folks want to connect, if they want to learn
more, what's the best way? Yeah, definitely e-mail me.
So that's Rs l.utsky@pcecompanies.com or you
(12:16):
know, feel free to message me onLinkedIn.
Ross Lutsky. That's SLUTSKY.
Perfect. Well, Ross, love what you're
doing. Fascinating topic.
And for the listeners at home, definitely connect with Ross
Slutsky at our Slutsky at pcecompanies.com.
The links will be in the show notes.
(12:36):
And in the meantime, have an awesome rest of your weekend.
Go make some great things happenand we'll talk to you again
tomorrow.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Special Summer Offer: Exclusively on Apple Podcasts, try our Dateline Premium subscription completely free for one month! With Dateline Premium, you get every episode ad-free plus exclusive bonus content.