Shopping Center Acquisition
Challenge
A client recently acquired a shopping center as an investment property for $4,250,000 (not including land). The property had approximately 350,000 square feet under roof with 30 tenant spaces. The anchor tenants included a department store, a grocery store, and sporting goods retailer. Other tenants included three restaurants, a dry cleaner, a jewelry store, and a video arcade.
Commercial 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 or 15 years. Examples of the 5 year property include vinyl floor tiles, decorative and display lighting, kitchen equipment power & plumbing, reception counters, and Point of Sale equipment power. The 15 year property category generally includes land improvements such as paving, parking lot lights, landscaping, and signage. Identifying the shorter life components creates a significant tax advantage over the default building tax life of 39 years. By accelerating depreciation, tax obligations are deferred to future years, thus generating a substantial present value benefit. Unfortunately, it was not clear how to delineate between the 39 year components and the 5 year and 15 year components. Without a more in-depth analysis, the entire $4,250,000 building amount would have to be assigned the 39 year default tax life.
Solution
Our Cost Segregation engineers were engaged to analyze the acquisition cost. They began by applying a cost model to allocate the purchase price to various trades and building components. They conducted a detailed inspection of the property (including every tenant space), reviewed the available blueprints, and interviewed key personnel. A detailed report was delivered, identifying and documenting all the components that qualify for a shorter tax life.
Results
By engaging our Cost Segregation team, this client was able to assign $840,000 to a 5 year tax depreciation life and $250,000 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 $305,000 (deferred to future years). The net result was a present value benefit of approximately $219,000 (100% realized within the first four years of ownership).
