Tag Archives: Commercial Properties
Let’s look at how cost segregation can increase cash flow for commercial properties. Have you recently built, purchased, expanded or renovated a commercial property? If so, there may be significant untapped tax savings in the property or facilities. A cost segregation study can unlock those savings through greater tax deductions, accelerated depreciation and increased cash flow. Here’s how it works: Portions of a new or existing building are reclassified as “personal property” or “land improvement.” This cost classification can be depreciated over a shorter five, seven or 15 year period as opposed to the standard 39-year depreciable life of a commercial building.
What if you built, renovated, expanded or purchased a building in prior years? Cost segregation is still an option. The IRS allows taxpayers to change prior accounting methods to take advantage of these previously understated depreciation deductions. This can be done without amending tax returns and can generate a relatively large tax deduction in the year of change.
TAX REFORM MAKES COST SEGREGATION MORE VALUABLE THAN EVER
The tax benefits of cost segregation are even greater thanks to tax reform’s enhancement of bonus depreciation.
In general, bonus depreciation is applicable to depreciable business assets with a recovery period of 20 years
or less. Tax reform doubled bonus depreciation from 50 to 100 percent for qualifying property with acquisition
and in-service dates between September 27, 2017 and December 31, 2022. This means that 100 percent of
qualifying costs would be fully depreciated and recognized in year one and only the remaining building cost
would depreciate going forward over 39 years. After 2022, the bonus rate decreases by 20 percent annually,
so the time to act is now.
REAL RESULTS FOR REAL PROPERTIES
RKL performs over 80 studies every year for companies in a variety of industries, including rental real estate, office buildings, hotels/motels, golf courses, auto dealerships, manufacturing facilities, warehouses and more.
Here are two recent examples to demonstrate cost segregation can increase cash flow.
• Construction of a new hotel facility in 2018: Of the total project cost of $13.5 million, RKL identified $5 million as personal property and land improvements. This cost segregation combined with enhanced 100 percent bonus depreciation a present value of the tax savings of $958,000 (using a 37 percent federal tax rate and six percent discount rate), with projected additional depreciation deductions of $4 million for a tax savings of $1.5 million.
• Turn-key construction of a new medical office in 2017: Of the total project cost of $2.4 million, RKL identified $1 million as personal property and land improvements. This cost segregation combined with enhanced 50 percent bonus depreciation produced a present tax savings of $200,400 (using a 42.67 blended tax rate and six percent discount rate), with projected additional depreciation deductions of $695,000 over the next seven years. This will produce tax savings of $296,500 over that seven-year period with $233,200 in the first year alone.
• 2018 look-back study for a previously purchased office/distribution warehouse facility: RKL identified $326,200 of the original $1.375 million building cost as personal property and land improvements. This resulted in a one-time additional depreciation deduction in the current year’s tax return of $170,700. To obtain an analysis of potential cost segregation tax savings, contact RKL today.
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Stamped asphalt crosswalks and entrances can instantly enhance the appearance of your commercial or residential property. The stamping process is achieved by re-heating new or existing asphalt with an infrared process and using a steel cable template to imprint a pattern in the asphalt. A plate compactor is then used to press the pattern into the asphalt. After stamping, a polymer modified color coating is applied to the surface. A variety of patterns and colors are available. Commonly seen in South Jersey are both traditional brick and diagonal herringbone patterns, which are typically painted in a vibrant red color. This feature is a cost-effective way to increase the curb appeal of any property.
The Benefits of Stamped Asphalt Include:
• Aesthetics – Choose a pattern and color that complement your space. With numerous patterns and colors available, stamped asphalt crosswalks or entrances can provide an immediate upgrade to your property.
• Fast Installation – A crosswalk can typically be installed in just a few hours, which means minimum disruption to tenants, clients and residents. The area can be re-opened to traffic in a relatively short amount of time.
• Lower Installation Costs – Initial installation is less expensive than traditional brick or stone pavers. While traditional pavers are installed individually, the stamping process happens much more quickly, making it less labor-intensive.
• Lower Overall Maintenance Costs – stamped asphalt can last for years and is easily re-coated. The surface also resists changes in temperature better than pavers, which are prone to shifting during freeze-thaw cycles. There is also no need to remove vegetation that typically grows through the cracks of traditional brick.
• Safer Alternative – The paint adds a skid-resistant texture to the surface of the asphalt, so it is not slick when wet.
• Extend Asphalt Life – When exposed to the elements, asphalt dries out and cracks. The color coating applied after stamping protects the asphalt from harmful UV rays.
How do you know if you have done Due Diligence for Commercial Properties? I hear statements like the one below all the time.
“I’m buying a commercial/industrial property; I need a Phase I Environmental Site Assessment (Phase I ESA)” or “I’m leasing a commercial/ industrial property; I don’t need to worry about performing any due diligence because I’m not purchasing the property”.
But is a Phase I ESA all you need, or is that too much? How much time do you have to perform your due diligence? How much money are you willing to spend? How much risk and potential liability are you willing to accept? These are all questions that you might want to consider as you proceed with your real estate transaction.
As I’ve discussed in an earlier article, when performing due diligence to obtain innocent purchase protection in New Jersey, one needs to perform both an ASTM Phase I ESA and a Preliminary Assessment (PA). But, is that really all you need as far as your due diligence is concerned? While a Phase I ESA or PA report helps provide protections against certain environmental liabilities, risks, and concerns – specifically, the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or the New Jersey Spill Act, respectively – they don’t protect against all liabilities, risks, and concerns. For example, these assessments typically don’t include an evaluation for the presence of wetlands, asbestos, lead-based paint, or radon. Nor do they include an evaluation of the building’s structural or mechanical condition, an evaluation of the building’s energy use or waste management efficiency, or whether the facility operations are in current compliance with applicable state or federal regulations and requirements.
It’s important to know which assessments you need, if any, because not all these due diligence concerns are necessarily your due diligence concerns. If you’re only planning on leasing a facility, you may not be interested in determining the structural or mechanical integrity of the building envelope, since that would likely be the responsibility of the landlord. Or, if you’re involved in litigation regarding the site, you may require a review of the historical conditions and regulatory status of the facility, but not necessarily need a comprehensive review of the current condition of the property. Perhaps you only need a limited scope of work now, such as a simple “desktop review”, or a Phase I ESA for refinancing purposes, but you also plan on expanding the facility in the future; in this case, you may need to know if there are any restrictions to building construction, such as the presence of wetlands or engineering limitations at the site. It all depends on what you plan on doing at the site, both now and in the future.
So how do you know if you’re paying too much for a due diligence assessment you don’t necessarily need, or not performing enough due diligence to give you the protection you need and the comfort and peace of mind you expect?
Answer: Find a consultant whom you trust, and who specializes in environmental, engineering, and land use due diligence. Your consultant should be your advocate. Ask questions of your consultant, and expect your consultant to ask questions of you and what your current and future plans are for the property. If you don’t feel comfortable or understand the answers, it may be best to discuss the matter further with other consultants to ensure you’ve made the best choice for your particular needs.
Here at Whitman, we have extensive experience in real estate due diligence. We work on many different types of projects with all types of clients, including individuals and corporations who want to buy a property, investors who want to sell their properties, banks that are overseeing a property refinance, companies that want to expand their operations, facilities that want to assess the efficiency and compliance of their current operations, businesses that want to rent a leasehold, attorneys who require historical information regarding former site operations, and the list goes on.
More than anything, we take pride in our commitment and dedication to our clients’ best interests, and enjoy finding creative solutions for our clients’ challenges. We look forward to helping you attain and then surpass your business goals.
To help you ascertain what level and amount of due diligence you may require, Whitman has designed a simple= “cheat sheet” that summarizes many of our due diligence services, and when you might consider utilizing them.
If you have any questions regarding real estate due diligence, would like a copy of the due diligence cheat sheet, or would like a quote for any of Whitman’s wide selection of due diligence services, please contact Chemmie Sokolic, Whitman’s Director of Due Diligence Services, at 732-390-5858 or email@example.com.
Let’s explore fixtures, trade fixtures and who owns what at lease expiration. In order to facilitate a smooth transition between commercial tenants, it is important for landlords to understand their rights regarding items attached to their property. Generally, a lease will govern these rights. However, if the lease is silent on the issue, articles annexed to the property deemed “fixtures” must stay with the property, while articles deemed “trade fixtures” may be removed by a vacating tenant.
In New Jersey, a fixture is an object that “become[s] so related to particular real estate that an interest… arises under real estate law.” N.J.S.A. 12A:2A-309(1)(a). In contrast, an article may be considered to be a trade fixture if: (1) the article is annexed to the property for the purpose of aiding in the conduct of a trade or business exercised on the premises; and (2) the article is capable of removal from the premises without material injury thereto. Handler v. Horns, 2 N.J. 18, 24-25 (1949). As such, an important distinction between fixtures and trade fixtures is whether removal of the item will cause material injury to the premises. See e.g. GMC v. City of Linden, 150 N.J. 522, 534 (1997). In applying this test, courts infer that if removal of an article would cause material injury to the premises, the parties must have intended for the article to remain beyond the lease term. Id.
A typical conflict involving this nuanced distinction may involve a vacating tenant removing an item from the leased premises under the assumption that it was (1) attached to the premises for the purpose of conducting a trade or business; and (2) capable of removal without material injury to the premises. A landlord may dispute one or more of these assumptions, arguing that the article was not used in the conduct of business (that it was in fact attached to improve the structure) or is not capable of removal without material injury to the premises. Over the years, vacating tenants have attempted to remove countless items from leased premises, including air conditioning systems, irrigation systems, bolted down light fixtures and even circuit breaker panels, by arguing these items were trade fixtures. See e.g. In re Jackson Tanker Corp., 69 B.R. 850 (Bankr. S.D.N.Y. 1987).
However, it isn’t difficult to imagine a hypothetical where the traditional landlord and tenant arguments are reversed – that is, where the tenant argues that the article must remain with the property and the landlord argues that the tenant is responsible for its removal. This unusual fact pattern may especially arise where the tenant’s business is specialized in nature, and where equipment is not easily removed from the premises.
For example, Landlord rents out space to Tenant, who plans on operating a restaurant. The lease does not specifically address what does and does not constitute a trade fixture. Tenant plans on installing a walk in freezer and other specialized, complex systems. After several years of operating, Tenant declines to renew the lease, closes, and vacates the premises. Tenant removes the furniture, appliances not fixed to the premises and other items it deems to be trade fixtures and leaves the walk-in freezer infrastructure.
Tenant refuses to remove the walk-in freezer, arguing its removal will cause substantial damage to the premises. Unable to re-let the premises to a restaurant tenant, Landlord is left with a walk-in freezer occupying a substantial portion of the premises.
It is important that during the lease negotiation, landlords think carefully about the business their prospective tenant is in, the kinds of equipment the tenant will install and what will happen to that equipment upon termination of the lease. This same thought process applies when landlords receive requests for alterations. In the above hypothetical, Landlord could have avoided being left with a walk-in freezer and a less than desirable space if it addressed the issue during negotiation of the lease. A discussion with prospective tenants concerning the specific kinds equipment the tenant will install is always a good idea, followed by specifications and drawings for approval. Landlords are wise to reduce these conversations to writing, and specifically address each party’s expectations regarding the disposition of specific equipment when the lease inevitably comes to an end. As always, an ounce of prevention is worth a pound of cure.
The contents of this article are for informational purposes only and none of these materials is offered, nor should be construed, as legal advice or a legal opinion based on any specific facts or circumstances.
William F. Hanna, Esquire
Hyland Levin LLP
6000 Sagemore Drive, Suite 6301
Marlton, NJ 08053-3900