Cost Segregation for Grocery Stores

Grocery stores may range from very small neighborhood markets to wholesale superstores to large and complex themed regional destinations. While all of the stores require point of sale systems as well as electrical and plumbing systems for food storage, the more complex stores have many departments with specialized electrical, plumbing and exhausting systems. The complexity of departments varies but may include bakeries, beer and wine, bulk goods, butchers, delis, dry goods, floral, frozen food, photography, produce, and seafood. Some stores have specialized trenches that provide sub floor cooling to the produce and/or freezer isle cases. Some even have trenches for computer cabling and power supplied to the point of sale systems. Most stores also include a multitude of walk-in freezers and coolers for food storage. In some cases, significant portions of the HVAC may be treated as personal property where the HVAC units are specifically installed to meet the temperature and humidity requirements of the coolers and freezers for the inventory. Site improvements often include large parking lots with ample lighting.

Accelerating the depreciation on 18% – 36% of the capitalized costs is typical, depending on the type of grocery store, complexity of the cooling, number of departments, and extent of the site improvements.

Case Study – Grocery Store

Facts

The subject property is a high end, newly constructed, free-standing grocery store. The construction costs Source Advisors examined was $18,100,000 and it was placed-in-service in 2017. The store is 48,000 square feet and sits on a three acre site.

The building is organized into a main floor for grocery sales with a mezzanine level for administrative functions and classrooms designed for cooking lessons. The main floor has numerous departments including a butcher’s department, seafood, bakery, wine, produce, floral, etc. Interior finishes consist of vinyl tile, carpet, ceramic tile, and drywall partitions finished with paint. The store had significant numbers of cable trays, trenches, produce watering systems, supplemental HVAC, and backup power including a large emergency generator.

Site improvements include asphalt paving, brick paving, concrete paving, cart corrals, fencing, and landscaping.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the actual construction costs, in the form of contractor invoices, and allocated the cost detail to various trades and building components. They conducted detailed estimates from the construction drawings and augmented those findings with additional estimates performed during the site visit 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 8% or $1,450,000 as 15-year land improvements and 22% or $3,980,000 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the high end nature of the store and the complexity of its systems. Because this property is new construction and was placed-in-service in 2017, it qualifies for 50% bonus depreciation.

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