Cost Segregation

CASE
STUDY

Source Advisors

DISTRIBUTION CENTER

Distribution Center

FACTS

The subject property is a newly constructed 97,000 square foot distribution center. It is situated on 19 acres and was placed-in-service in 2018. The company is a distributor of chemicals and other products for the commercial landscaping industry.

The building has a showroom with offices on the 1st floor and a small mezzanine with typical finishes and equipment connections. The warehouse also has typical finishes and equipment for this type of facility. In addition, it has a seed cooler room with specialized mechanical equipment and special electrical connections for lighted racking that qualify as personal property. Land improvements included all concrete paving, fencing, a rail spur, landscaping, and a covered fuel island.

EXECUTION

The Source Advisors Cost Segregation engineers were engaged to analyze the construction cost. Contractor payment applications, record ledgers, and architectural plans were analyzed for proper building, land improvement, and personal property classifications. They conducted a thorough inspection of the property. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

RESULT

Source Advisors reclassified 31% or $2,450,000 as 15-year land improvements and 13% or $1,030,000 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the specialized mechanical equipment, the extensive concrete paving, the rail spur, and the fuel island. Construction for this facility was well under way prior to 09/27/20; therefore, personal property and land improvements qualified for 40% bonus depreciation under the PATH Act.

% OF RECLASSIFIED PROPERTY

Percent of reclassified property
BENEFITS*
Increased Depreciation in 1st year $1,540,000
Increased Depreciation in years 1-5 $2,120,000
Increased Cash Flow in 1st year $540,000
Increased Cash Flow in years 1-5 $740,000
Net Present Value over 39 years $560,000

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