Cost segregation


Source Advisors


Standalone Franchise Restaurant


The $3,000,000 property is a national Drive-Thru and Eat-In hamburger focused restaurant. The building is approximately 2,000 square feet. The lot is 25,000 square foot and includes parking, sidewalks, curbs, trash can surround, underground rainwater runoff and landscaping that are treated as Land Improvements with a 15 year tax life rather than 39 years. The interior retail/food service spaces had millwork, data, pointof-sale, vinyl flooring, drive thru windows, decorative light, electrical, plumbing and HVAC that are treated as Personal Property with a 5 year tax life rather than 39 years.


The Source Advisors Cost Segregation engineers were engaged to analyze the acquisition cost. They then applied a cost model to allocate the purchase price to various trades and building components. They conducted a thorough inspection of the property where estimates were performed. Key property personnel were also nterviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.


Source Advisors reclassified 15% or $450,000 as 15-year Land Improvements and 25% or $750,000 as 5-year tangible personal property. This is a typical

result for a national franchise hamburger focused restaurant. The results were driven up by the speciality grocer and high-end food service tenants.


In 2001 the concept of Bonus Depreciation was introduced. Bonus Depreciation is relevant to building components with a tax life of 20 years or less. Residential Rental property has a tax life of 27.5 years and Commercial Real Estate has a tax life of 39 years. This means a tax payer must do a Cost Segregation analysis in order to have any building components with a tax life less than 20 years. Bonus Depreciation has ranged from 30% all the way to 100% and is currently applicable to new construction and acquisitions.


Percent of reclassified property
Increased Depreciation in 1st year $1,57,116
Increased Depreciation in years 1-5 $737,904
Increased Cash Flow in 1st year $62,846
Increased Cash Flow in years 1-5 $295,162
Net Present Value over 39 years $206,589

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years