Distribution Warehouse Expansion
Challenge
A client recently built a 347,000 square foot expansion of their distribution center in Waco, TX. The expansion area features metal racking, truck docks, security systems, and battery charger stations. Some of the improvements to the site include paving, site lighting, fencing, and underground site utilities. The project development costs were approximately $10,500,000 (not including land, furniture & equipment).
The building components that can be directly associated with the business functions or reasonably deemed demountable and/or decorative can be assigned a tax depreciation life of 5 or 7 years. In addition, land improvements such as paving, landscaping, and site lighting can be assigned a 15 year tax depreciation life. This creates a significant tax advantage over the default building tax life of 39 years. Unfortunately, it was not clear how to delineate between the building components and the business/demountable/decorative/land-improvement components. For example, the building has a significant amount of power distribution and low voltage wiring dedicated to RFID sytems – components that would qualify for a 5 year tax life. However, no detail on the cost of these components was provided by the construction contractor. They were grouped together with the overall electrical work contract. Without a more in-depth analysis, the entire $10,500,000 building value would have to be assigned the 39 year default tax life.
Solution
Our cost segregation engineers were engaged to analyze the development costs. They began by collecting and reviewing the construction drawings and the contractors’ cost detail. They conducted a detailed inspection, taking notes and photographs of various components. 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, the client was able to assign $767,000 to a 5 year tax depreciation life and $2,508,000 to a 15 year tax depreciation life. As compared to putting the entire property into a 39 year life, this strategy reduced the tax obligations over the first six years of ownership by $562,000 (deferred to future years). The net result was a present value benefit of approximately $456,000 (100% realized within the first five years of ownership).
