Case Study — Retail Building

Retail spaces can vary widely based upon a number of variables.  The square footage of the building and amount of tenants will affect the parking lot size.  A larger parking lot will increase the amount of qualified land improvements such as, but not limited to; certain excavation, storm water systems, asphalt, concrete curbs and sidewalks, concrete loading areas and dumpster pads, dumpster enclosures, parking lot lighting/dedicated electrical, landscaping, irrigation and pylon and brick façade retailer signs.  The amount and type of tenants will affect the cost of the improvements to finish the tenant space.   If the owner of the building is paying for build-out costs for an electronics retailer versus a clothing retailer for example, the percentage and total cost of qualified personal property within the real estate can be much higher.  Depending on the type of tenant, qualified personal property that is subject to accelerated depreciation will include certain millwork, dedicated electrical and plumbing to certain equipment within the tenant space, decorative lighting, POS systems, intercom systems, sound/video systems and floor and wall coverings.  Even if the owner of the building isn’t covering the build-out costs (tenant allowances), a large benefit can still be obtained from the land improvements outside of the building as well as a few personal property items inside of the building.  The best method for identifying all qualified property is the use of a cost segregation study where an engineer and CPA work together to identify and classify all qualified property.

Please note that qualified property, land improvements and personal property are terms used to describe costs in the  real estate that can be written off more quickly for tax purposes.

Retail Example

• Cost of Property (Excluding land): $2,600,000
• Constructed and placed in service in 2005
  

In this case study done for tax year 2006, the retail building had a total cost of $2,600,000, not including land. Through cost segregation analysis, the owner was able to re-classify 10% of the total costs to either 5 or 7 year property and 18% of the total costs to 15 year property. This resulted in a Net Present Value After Tax Benefit of over $116,000. The additional depreciation in the first year of the study was approximately $176,000.

The tax savings in the first year assuming a tax rate of 39% was over $68,000.

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*Net Present Value is a calculation that shows the combined benefits of a cost segregation study over the remaining tax life of the property. The combined benefits each year are adjusted back to today's dollars using a 7% discount factor. This allows our clients to compare the total benefits in today's dollars to the fee of our services.