Spring 2014
Dollars common &sense Axiom Properties takes underperforming rental properties from failure to success
breaking down Preserving a legacy
focus on Health care reform
getting to know Richard Hanson
going for gold
www.SSandG.com 800-869-1834 info@SSandG.com
Find your why TED Talks, for those of you who haven’t yet heard of the popular speaker series, are short, powerful videos that spread ideas on a wide range of topics — from science to business to global issues to entertainment. TED began in 1984 as a conference on technology, entertainment, and design, and today has developed into a global set of conferences and video presentations in more than 100 languages. The first TED Talk was posted online in 2006, and since then, thousands of TED Talks have been viewed more than a billion times. With so many great speakers sharing so much information and insight, it takes a powerful message to make the list of most-watched talks. And there is a very good reason why the grainy video of Simon Sinek’s 2009 presentation on inspirational leadership remains among the top three most-watched TED Talks of all time. “There are leaders, and there are those who lead. Leaders hold a position of power or authority, but those who lead inspire us,” Sinek says. “Whether they’re individuals or organizations, we follow those who lead not because we have to, but because we want to.” In his popular talk and bestselling book “Start with WHY,” Sinek theorizes that successful leaders and organizations are profitable and garner greater loyalty from employees and customers alike because they focus on the motivation behind their business – the why. Most people can tell you what they do and how they do it, but, as Sinek explains, very few people can tell you why they do what they do. Those who can are able to inspire the people around them and make a significant impact on the world. In the world of business, it is important to remember that the why is not just to turn a profit and make money. Your cause, your drive, your purpose — this is what attracts the kind of customers and employees that will make your organization grow. Great leaders know that employees who are happy where they work will be more productive and more creative. Inspired employees who believe in the mission of their organization treat customers and clients better, building stronger companies and stronger economies. “People don’t buy what you do; they buy why you do it,” Sinek says. “The goal is not to do business with everybody who needs what you have. The goal is to do business with people who believe what you believe.” When we get caught up in the details of how and what we are working on, it is very easy to forget why we are doing it. It is imperative as leaders that we keep a sharp focus on the why to cultivate growth, innovation, and success. Don’t forget your why.
AKRON 301 Springside Drive Akron, OH 44333
CHICAGO 225 West Illinois St., Suite 300 Chicago, IL 60654
CINCINNATI 11500 Northlake Drive, Suite 210 Cincinnati, OH 45249
CLEVELAND 32125 Solon Road Cleveland, OH 44139
COLUMBUS 300 Spruce St., Suite 250 Columbus, OH 43215
DES PLAINES 1665 Elk Blvd. Des Plaines, IL 60016
DOWNTOWN CLEVELAND 1422 Euclid Ave., Ste 1500 Cleveland, OH 44115
ERLANGER 3940 Olympic Blvd., Suite 340 Erlanger, KY 41018
NEW YORK CITY 950 Third Avenue, 24th Floor New York, NY 10022
SKOKIE 8707 Skokie Blvd., Suite 400 Skokie, IL 60077
SS&G HEALTHCARE SERVICES 275 Springside Drive Akron, OH 44333 800-288-2818
SS&G PARKLAND 32125 Solon Road Cleveland, OH 44139 800-869-1834
SS&G WEALTH MANAGEMENT 275 Springside Drive Akron, OH 44333 800-871-0985
PAYTIME INTEGRATED PAYROLL SOLUTIONS 31105 Bainbridge Road Cleveland, OH 44139 800-579-9529
Mark Goldfarb, CPA Senior Managing Director
Send letters to the editor and story ideas to Solutions@SSandG.com.
IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
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SS&G is a founding member of LEA Global, an international professional association of independently owned accounting and consulting firms.
first person Richard Hanson Title: Managing Director, Chicago Degree(s)/College(s): Bachelor of Science in accounting – Southern Illinois University, Master of Science in taxation – DePaul University Hometown: Skokie, Ill. Year I joined SS&G: 2012, when our firm merged with SS&G
When I was growing up, I wanted to be: An accountant. I’ve always liked working with numbers, and ever since my junior year of high school, when I took my first accounting class, I knew that I would be an accountant someday. My first job: I was a stock clerk at Treasure Island Foods, a local family-owned grocery store in Chicago. The word that best describes me: Intense The best part about my job: I enjoy mentoring our young accountants and watching them grow professionally. My favorite moment is when someone who has been struggling with a difficult concept finally gets it, and you see that light bulb of understanding flicker on.
If I weren’t doing this, I would: Be living in Northern Wisconsin My favorite movie: Caddyshack, or any movie that involves the mob. My next personal goal is: I would like to finish several books that I put off reading during busy season. On weekends, I look forward to: Golfing with my son
My business philosophy: Work hard, and success will follow.
My favorite place in the world is: Northern Wisconsin
The people I admire most: My father. He always pushed me to do my best at whatever I did.
When I get discouraged, I: Call one of my daughters. They are always able to cheer me up when I am having a bad day.
My greatest achievement so far in life: I’ve taken quite a few risks in my life, and so far, they’ve all paid off.
My attitude toward change is: It’s going to happen, so deal with it.
At least once in their life, I think everyone should: Be adventurous and step outside their comfort zone. Do something that is going to push you to your limits.
Success is: When you are making the people around you better j
One thing people might find surprising about me is: I ride a Harley.
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industry Preserving a legacy The right investment partner can help you reach your goals
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f a business wants to maintain its brand identity, it should be positive outlooks — not dire straits — that trigger a relationship with an investment partner. “We really want to be a true partner with business owners and be involved in helping drive strategy, setting the vision, and bringing resources to bear,” says Steve Perry, co-president and senior managing director of private equity firm Linsalata Capital Partners. “If a business owner isn’t ready for that involvement, you need to think long and hard about partnering, because the worst situation you can get into is where you’re not aligned — particularly if you want to stay involved in the business.” Building a relationship with an investment partner requires serious forethought and advanced planning to ensure that the transaction will catapult your business in the right direction. Identifying your objectives for the partnership should be the first step, as that will guide the process. Early stage ventures seeking startup capital, for example, will have different goals than mature businesses seeking growth capital to fund strategic initiatives, acquisitions, or expansions into new markets. “You may have a business that operates within a particular market, but your capabilities may extend into other unfamiliar channels,” Perry says, using the example of a window company that sells to distributors but considers expanding into construction. “The business owner may need additional capital, but may also need the resources and knowledge an investment partner may bring.”
Planning for the future It isn’t always about capital. Family ownership groups may seek an investment partner to preserve their legacy through succession planning, asset or wealth diversification — strategies that require more than just money. Perry says he commonly sees successful entrepreneurs who build a stable business but fail to groom a future leader. Without a succession plan, the business’s potential to reach maximum profitability may suffer as the founder’s interests change.
“If you find yourself needing to sell and the business isn’t prepared, the results are going to be compromised.” — Steve Perry, co-president and senior managing director, Linsalata Capital Partners
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Perry recommends preparing to sell long before you need to by involving advisers and accountants early on, which will allow the founding principles and brand identity to shine through any sale. “You always want to sell when the prospects for the future are bright and the growth trajectory is strong,” Perry says. “If you find yourself needing to sell and the business isn’t prepared, the results are going to be compromised, not only in terms of value, but also in terms of accomplishing your objectives.” The better you can articulate your objectives to an investment partner — and the earlier you can plan for a sale — the better you can identify a partner who aligns with that path. “A private equity investment partner is ideal in allowing the business to carry on its legacy, maintain its identity, sharpen its strategy, focus on its vision, and build upon what the company has achieved to
“A private equity investment partner is ideal in allowing the business to carry on its legacy, maintain its identity, sharpen its strategy, focus on its vision, and build upon what the company has achieved to date.” — Steve Perry
date,” Perry says. “Knowing what you want to accomplish will help you avoid spending time with someone who really doesn’t fit your situation.” j How to reach Linsalata Capital Partners: www.linsalatacapital.com or (440) 684-1400
Adding objectivity to investment It’s not easy for passionate entrepreneurs to take a step back from a business they built, and it’s even harder to envision someone else measuring up to the role of owner. But when dealing with investment partners, entrepreneurs need to set that uneasiness aside and be objective. “This is their life and they’re very attached, but they need to be realistic,” says Perry. “Keep emotional attachments in check and develop a level of detachment so you can maintain objectivity throughout the process.” Perry recommends involving advisers and accountants long before meeting with potential investment partners to begin planning the transaction — and verifying those plans objectively. That team can help you gather indicators to establish a realistic business projection and determine a detailed game plan with specific initiatives to achieve it. “There’s a natural tendency of business owners to think in a positive light about the prospects of their particular business,” Perry says. “But you really need to be able to substantiate how that’s going to be accomplished.” j
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case study
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Dollars common sense Axiom Properties takes underperforming rental properties from failure to success
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anaging a successful rental property requires a diverse skill set: the ability to negotiate, reliable intuition, and a go-getter attitude, to name a few. But above all, the greatest asset to a property manager isn’t money or relationships — it’s good, old-fashioned common sense, says Roger Cagann, president and COO of Illinois-based Axiom Properties Inc. “Property management is not a very complicated business, but it means being responsible for an important part of people’s lives,” says Cagann, who has led operations at Axiom since 1999 and became president in 2007. “Good common sense is a must for property management. When you see something that’s wrong, you need to come up with a way to solve the problem.” There’s no shortage of common sense in Axiom’s management team, which includes Cagann, his father, Bob Cagann, and Vice Chairman and Principal Joel Levin. Together, the three partners bring more than 100 years of collective real estate management experience and a track record of repositioning underperforming properties and problem assets for profitability. Here are a few of the secrets behind the company’s proven real estate management model that have allowed Axiom Properties to build so many successful communities.
Photos: Michael Monar
Do your homework The first rule of property management is simple but critical: Acquire the right property at the right price. “If you acquire the wrong property, it’s something you can’t get out of,” Cagann says. “You need to be able to create substantial value, or you’re doomed for failure right off the bat.” That starts with learning as much as possible about a prospective investment. When you first visit a property, you are just taking a tour, so you don’t really get to see the nitty gritty behind the scenes of how it is being run, says Bob Cagann, founder, chairman and CEO of Axiom Properties.
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“If you acquire the wrong property, it’s something you can’t get out of. You need to be able to create substantial value, or you’re doomed for failure right off the bat.” — Roger Cagann, president and COO, Axiom Properties Inc.
“You need to do your homework and analyze properties thoroughly,” he says. Avoid buyer’s remorse by requesting a copy of the property’s current rent roll, which contains a listing of every unit, the names of tenants, and what they are paying. Then perform your own lease audit by walking through every unit on the list and comparing it against information in the lease file. “Walking through a property gives you the opportunity to get an overall picture of the quality and the clientele,” Bob Cagann says. “A lot of companies doing their due diligence will only walk half of the units, but we always walk 100 percent to make sure the lease files aren’t bogus.” You may find that some units are listed as occupied but contain no furniture. A few may have major damage, list an incorrect number of units, or are not up to code. Seeing the physical asset in detail not only gives you a more objective view of your investment, it can supply additional leverage for the negotiating table. Bob Cagann says he will readily cancel a contract if Axiom can’t guarantee a preferred return for its investors. “I believe in the diligence of the dollar,” he says. “If someone gives me a buck, I feel I owe them that money back, or more. When you do that, you aren’t always going to grow quickly because you are being careful about what you acquire, but when you do acquire something, it tends to be a winner.”
Put yourself in the customer’s shoes Being out in the field is the easiest and best way to stay attuned to the interests and needs of your customer base. Profitable rental communities are those that are able to offer good products that people want. Axiom Properties accomplishes this by always checking the market to find out what the competition — and the industry — is doing. “The basic concept of rental housing is never going to go away,” Roger Cagann says. “So it’s just keeping up with marketing to the next generation of renters. It’s finding out what their likes are going to be.”
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After taking a critical look at the property you want to purchase, go out into the market and see what other deals are available. Who are your potential customers? And more important, what are your competitors offering them? Then choose several potential competitors to visit, playing the part of an interested renter. “We have to figure out what the majority thinks is important,” Bob Cagann says. “I would often go out personally and shop properties to see what’s good and what’s bad and to find out what the market is demanding.” Take notes and ask questions about different features, rent rates, and the types of people who see it. Once you have looked at several properties, compare them to see who provides the best deal. Consciously save the analysis of that information for later so that you can get a realistic customer experience. “You want the leasing agent at the property you’re shopping to really try to sell you,” Bob Cagann says.
Don’t overdo or underdo Repositioning a problem rental property almost always requires investment in capital improvements. Again, you need to get the best financial return for your investment. “We always ask, ‘What is this improvement going to do for the income of the property?’” Roger Cagann says. “Are we going to be able to get additional rent for this? If not, it’s not worth making that investment in the property.” After you finalize a deal, use the feedback you’ve collected from market research to see where there is the most opportunity for you to add value for your renters. Perhaps one property you visited has the nicest landscaping, but another had an on-site fitness center. Which amenities don’t you offer that competitors do, or that customers want? Listening to the market will ensure you make only improvements that your customers care about — not more, and not less. For example, if your property’s bad landscaping is alienating potential renters, hiring a landscaping crew is a sound investment. But installing expensive appliances in an apartment that is renting for $800 a month is only going to eat up your budget with minimal return. “When you see a property that is well run, that is getting top rents and that is full, see what they have done and replicate that,” Bob Cagann says. “Don’t overdo or underdo. Do what the people are telling you.” The same goes for any improvements you are considering that go against what the market is telling you. “You don’t say, ‘I know you like blue, but I’ll get you to like red,’” he says. “You need to make decisions based
on what is going to be market acceptable and meet people’s expectations.”
Empower your team Apartment vacancy and turnover are two of the biggest threats to rental property. The best way to avoid both is to start the lease renewal process from day one, making sure your renters move in with the feeling that they are getting exactly what they signed up for, at a fair price. Then it’s just a matter of following through with good leasing and management practices. “It was always something that I could see creating value — if you could take something that was being mismanaged, turn it around, and turn it around into a profitable deal,” Bob Cagann says. Axiom Properties provides mandatory online training courses for all of its leasing agents so they are empowered to make the best decisions for customers. “It’s the leasing agent that is dealing with, and touching and feeling the market every day,” Roger Cagann says. “The key is to give baseline employees the information they need to make decisions, and then bring ideas to the table.” Providing employees with information about how their property is performing is one way that the company makes them part of the management process. Axiom also gives managers and site staff the opportunity to prepare the site budget so they can make recommendations based on market and customer demand. Even if the partners disagree with a proposed budget,
providing the opportunity for people to offer their ideas creates a collaborative and idea-driven organization. “It makes the employees more a part of the budget, as opposed to it being something that they just have to live with,” Roger Cagann says. “They actually have some say and authorship with that, and it makes people work harder.” For example, one of Axiom’s property managers had been complaining about the condition of windows at her property, even though it wasn’t in the capital budget to replace them. She continued bringing the issue to management’s attention for years. “We finally said, ‘If you can rent the apartments for $10 more a month, we can replace windows in one building,’” he says. “She was able to do it. She felt like part of the idea and was able to make it happen.” Three years later, the company has replaced all of the windows in the building. These are the kinds of things that have helped Axiom continue to grow and transition from a family business into a highly successful management firm. “One of the big challenges for a leasing agent is that this your job, and you leave at the end of the day,” he says. “But for a tenant, this is their home. This is where they are going to live. We understand that these are big decisions for our customers, and we want to provide that good experience.” j How to reach Axiom Properties: www.axiomproperties.com or (847) 945-1500
A suit-and-tie culture Bob Cagann recognized early in his career that when it comes to the real estate brokerage business, image is everything. “When I started out on my own, I had two residential appraisals and one 26-unit apartment building,” says Cagann. “I also had two brand new suits.” Although it was initially tough going, he used hard work and due diligence to sell himself and his skill set to investors, eventually repositioning and selling more than $400 million of real estate assets as a real estate consultant. Cagann applied many of the lessons from his
early real estate career at his own company. For example, the company has always been firm on a suit-and-tie policy for men, and business dress for women. “We are into the professional image,” he says. “Our managers like the policy because they say, ‘It sets me apart from the customers.’ You have a different aura and confidence that make a big difference in the way that you conduct your business.” Another best practice is employee empowerment. The company has always been upfront about asking managers and site staff to think for themselves, to be proactive, and to be honest about their needs and interests. The result is a stronger company overall. “I always try to work with the team that I have and then put the employees in the best situation to perform well,” says Roger Cagann, who joined his father in the family business as Axiom’s president and COO. “We don’t ask people to do something they aren’t good at, even if we have to adapt and move things around.” j
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focus on Health care reform
What to know and what has changed
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s the Affordable Care Act continues to evolve, it can be difficult to keep up with the ever-changing requirements. But it is critical to do so to remain in compliance, says Kimberly Flett, director of retirement plan design and administration at SS&G. “There is a lot of information out there, and both employers and individuals can feel overwhelmed when attempting to comply with the Affordable Care Act,” says Flett. “They should work with their teams of lawyers, accountants, and advisers to make sure they have everything they need in place.”
Employers The mandate for employers to provide health care coverage to their employees, initially scheduled to go into effect in 2014, has been delayed until 2015 for employers of 100 or more full-time-equivalent employees and until 2016 for employers of 50 to 99 employees. However, employers should not wait to begin planning, Flett says. There has been confusion about what constitutes a full-time-equivalent employee. Employees who work 30 or more hours a week are considered full time. In addition, employers must add the total number of hours worked by all part-time employees, divide that number by 30, and add it to the number of full-time employees. Seasonal employees who work no more than 120 days, contractors, and business owners don’t count toward the total. The fee for not providing coverage is $2,000 per employee per year, and the first 30 full-time employees are exempt. In addition, if at least one full-time employee receives a premium tax credit because coverage is either unaffordable (more than 9.5 percent of the employee’s yearly household income) or the coverage does not cover 60 percent of total costs, the employer must pay the lesser of $3,000 for each employee receiving a credit or $750 for each of the total number of full-time employees. “The penalty will not apply unless the employee goes out to the Health Insurance Marketplace, also known as the exchange,” Flett says. “If the employee gets a subsidy, or the government cuts a discount or their insurance, that will trigger the government looking at the employer.” Finally, one often-overlooked aspect of the ACA is the Patient Centered Outcomes Research Institute fee, which
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helps pay for the ACA. For companies that sponsor a fully insured health plan, the carrier had to pay $1 per covered life by July 31, 2013, with an additional fee of $2 per life due by July 31, 2014. If a company self-funds its plan, it is required to pay the fee instead of the carrier.
Individuals The individual mandate went into effect in 2014, meaning that all individuals are required to have health insurance. This year, the penalty is the greater of $95 or 1 percent of yearly household income. This increases to $325, or 2 percent, in 2015, and $695, or 2.5 percent, in 2016. However, the mandate does not apply to certain religious groups, non-U.S. citizens, people whose premiums cost more than 8 percent of their household income, or individuals who are not required to file a tax return. Individuals who are uncertain whether the mandate applies to them should check with their tax adviser. In addition, the ACA mandates a Medicare tax of 0.9 percent for high-net-worth individuals. The tax will be applied to married couples whose adjusted gross income is $250,000 or more if filing jointly, $125,000 if filing separately, and $200,000 for individuals. These individuals are also subject to a 3.8 percent Medicare tax on net investment income, or unearned income, which includes gross income from interest dividends, royalties, rents and annuities, other gross income derived from a trade or business and gain attributable to the disposition of property. A change in the medical expenses deduction affects itemized deductions on Schedule A of Form 1040. Previously, taxpayers could deduct medical expense in excess of 7.5 percent of their adjusted gross income. Under the new rules, that amount increases to 10 percent for those younger than 65, while those who were 65 or older before the close of the 2013 tax year can continue to use the 7.5 percent number. “The important thing as an individual is that you are covered through a private carrier or through the exchange,” Flett says. “As far as pricing goes, if you’re within a certain threshold as far as income level, you will get a rebate or tax subsidy, and that’s really nice for people below the poverty level. Also, you cannot be denied coverage due to a pre-existing condition, which is a really good thing for many people.” j
the last word
with Bob Littman
Building Relationships Working year-round to help business succeed
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any people think that busy season ends at SS&G on April 15. While it’s true that the long hours and late nights typically slow down after the filing deadline passes, that doesn’t mean that our work is finished. In reality, delivering value to our clients is a year-round responsibility. At SS&G, our CPAs and professionals stay busy well past busy season because we want to know more about you than just your federal tax ID. We want to learn about your company culture, how you operate, and what your plan and vision for the future look like. It is our goal to become more than just accountants who crunch numbers. We aim to be your trusted advisers who can identify ways to enhance your success and help you grow. Part of this involves staying in regular contact January through December to keep you updated on industry developments, changing regulations, and trends we see that can affect you and your business. It means providing solutions in areas beyond traditional tax and accounting — from performing cost segregation studies and business consulting, to assisting with the implementation of employee benefit plans and providing estate planning. But the most important part of becoming a trusted adviser is building a strong relationship based on knowledge, mutual understanding, and respect. And building a successful business relationship involves looking up from the spreadsheet every once in awhile.
“We work hard to stay in regular contact with clients and keep them up to date on industry developments and changing regulations that can affect their businesses.”
It involves having meaningful conversations and meetings that don’t always focus on numbers. Whether that conversation happens in an office, over lunch, or on the golf course, we enjoy taking the time to really get to know our clients on a personal level. And we look forward to having the time in the upcoming months to do just that. It is our belief that meeting with our staff shouldn’t be a once-a-year necessity but part of a larger process for clients, aimed at personal and professional growth and development. Creating an ongoing relationship with your accountant can benefit you and your business year-round, so don’t wait until it’s tax time again to give us a call. We are here now and ready to help. j
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