Does a cost segregation study affect CRE loan sizing or DSCR?

Why lenders ignore cost segregation for sizing, and why sponsors still pay for studies

This page is sponsor-POV process commentary, not tax or legal advice. Bring a CPA and tax counsel onto every transaction before relying on any of the mechanics described below.

Standard CRE loan underwriting uses pre-tax property NOI: actual or proforma rental income minus operating expenses, with no deduction for depreciation or interest. Cost segregation only changes the depreciation schedule, which affects taxable income, not NOI. DSCR, debt-yield, and LTV calculations are all unchanged by a cost seg study.

Where cost seg matters to the capital stack is on the equity side. A typical study reclassifies 20% to 35% of the building basis from 39-year to 5/7/15-year property. Combined with bonus depreciation (where applicable), that creates large early-year depreciation deductions that shelter property cash flow from tax. The result is better after-tax cash-on-cash and IRR, which competes for LP equity allocation.

Bonus depreciation interaction: under §168(k), eligible 5/7/15-year property qualifies for bonus depreciation at the percentage in effect for the placed-in-service year. Sponsors who use bonus depreciation on top of cost seg see the largest first-year shelter, but recapture math at exit also amplifies, so model both ends.

Practical sponsor move: order the cost seg study at acquisition or at the placed-in-service date for new construction. Use the after-tax IRR uplift in LP marketing materials, not in the lender package. The lender package should run on standard pre-tax NOI and trailing-twelve-month operating data.