Self-Storage Development
Challenge
A client recently acquired a vacant 58,000 square foot industrial warehouse. The property was acquired for approximately $500,000 of which $250,000 was initially allocated to the underlying land value and $250,000 was allocated to the building. The client subsequently spent $1,200,000 to convert the property to a self-storage warehouse with 50% climate controlled. Significant improvements were also made to the parking lot and site storm drainage system.
Self storage facilities typically qualify for a 39-year straight-line federal tax depreciation life. However, certain components, if properly identified, may qualify for a shorter federal tax life of 5 years. Examples of the 5-year property include interior partitions & fencing, signage, cabinetry, and power distribution to Point-Of-Sale systems. The land improvements such as paving, parking lot lights, landscaping, and storm water drainage may all qualify for a 15-year 150% declining balance tax life. Identifying the shorter life components creates a significant tax advantage over the default tax life of 39-years straight-line. 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 straight-line components and accelerated depreciation components. Without a more in-depth analysis, the entire $1,450,000 non-land property basis would be assigned to the 39-year straight-line default tax life.
Solution
Our Cost Segregation engineers were engaged to analyze the acquisition and improvement costs. 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, reviewed the available blueprints & surveys, and interviewed the facility manager. A detailed report was delivered, identifying and documenting all the components that qualify for accelerated tax lives.
Results
By engaging our Cost Segregation team, this client was able to assign $338,000 to a 5-year tax depreciation life and $224,000 to a 15-year 150% declining balance tax depreciation life. As compared to putting the entire building value into a 39-year straight-line life, this strategy reduced the tax obligation over the first 6 years of ownership by $146,000 (deferred to future years). The net result was a present value benefit of approximately $106,000.
