Cost Segregation

CASE
STUDY

Source Advisors

FITNESS CENTER

Fitness Center

FACTS

The subject property is a 32,000 square foot fitness center that was acquired in 2015 for $2,300,000. The building is a one-story, steel frame structure, with an elastomeric embrane roof, and with brick and EIFS veneer. Interior finishes include ceramic tile, rubber flooring, wood flooring, mirrored walls, and paint. The interior is wired for television and fitness equipment, and is also furnished with a sauna, swimming pool and basketball court. Site improvements include asphalt and concrete pavement, steel railings, and landscaping.

EXECUTION

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 interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

RESULT

Source Advisors reclassified 10% or $230,000 as 15-year land improvements and 19% or $440,000 as 5-year tangible personal property. Source Advisor’s findings were within the normal expectations for this building type. Since the swimming pool is on the interior of the building, the pool itself may not be treated as personal property due to it being structural in nature; however, the pool equipment does qualify. The property qualifies for 50% bonus depreciation under the PATH Act.

% OF RECLASSIFIED PROPERTY

Percent of reclassified property
BENEFITS*
Increased Depreciation in 1st year $370,000
Increased Depreciation in years 1-5 $500,000
Increased Cash Flow in 1st year $130,000
Increased Cash Flow in years 1-5 $180,000
Net Present Value over 39 years $120,000

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