Office Building Construction
Case Study - New Office Building
PROJECT OVERVIEW
A client recently built an eight-story multi-tenant office building, totaling 240,000 square feet. The building was includes typical office space with an insurance company, a law firm, and an investment management firm as the anchor tenants. The development cost, inclusive of interior build-outs but excluding land and furniture/equipment was approximately $60M. The development included minimal site improvements.
THE CHALLENGE
Office buildings default to a 39-year federal tax depreciation life. However, certain components, if properly identified, may qualify for a shorter federal tax life of 5, 7 or 15 years. Examples of the 5-year property include removable floor coverings, cabinetry and decorative millwork, power distribution to office specialty equipment, low voltage and telecom systems, and decorative lighting. The 15-year property category generally includes all the land improvements such as paving and landscaping. A significant tax advantage can be achieved by identifying the shorter life components and segregating them from the default 39-year category. Unfortunately, it was not clear how to delineate between the 39-year components and the 5, 7 and 15-year components. Without a more in-depth analysis, the entire $60M building amount would have to be assigned the 39-year default tax life.
THE SOLUTION
The cost segregation engineers began by reviewing the development cost detail, including invoices, the general contractor's applications for payment, the subcontractors' applications for payment, change order logs, and bank draw requests. They conducted a detailed inspection of the property, reviewed the blueprints, and interviewed key personnel. A detailed report was delivered, identifying and documenting all the components that qualify for a shorter tax life.
RESULTS ACHIEVED
By engaging the Cost Segregation team, this client was able to assign an additional $9M to a 5-year tax depreciation life and $0.5M to a 15-year tax depreciation life. As compared to putting the entire building value into a 39-year life, this strategy reduced the tax obligations over the first six years of ownership by $1.4M (deferred to future years). The net result was a present value benefit of approximately $860,000 (100% realized within the first year of ownership).
