Cost Segregation for Medical Facilities

Medical facilities cover a broad spectrum of properties. Small clinics may have one service or practitioner; mid-sized facilities may include offices or clinics with many providers and services; and large facilities may house hundreds of providers and a vast array of services in one facility. The buildings these businesses occupy may be storefront shops in retail buildings, multi-story offices buildings, or specially constructed facilities such as labs, urgent care centers, and hospitals. The building property generally has a depreciable life of 39-years.

Typical properties may have departments that include; emergency rooms, exam rooms, ICU, labs, MRI, nuclear medicine, nurseries, nurses stations, operating rooms, pathology, and radiology. These highly specialized rooms include specialized systems such as; biohazard disposal, electromagnetic shielding, exhaust systems, lead shielding, medical gasses, nurse call systems, specialized lighting systems and other specialized electrical, HVAC and plumbing systems. Glued on finishes and millwork are also typical and of varying complexity. Land improvements often include asphalt and concrete paving, site lighting, fencing, storm water drainage, and trash enclosures.

Accelerating the depreciation on 15% – 30% of the capitalized costs is typical, depending on the type of facility, level of specialized systems, quality of the finishes, and extent of the site improvements.

Case Study – Urgent Care Center

Facts

The subject property is an urgent care center that was constructed for $2,500,000 and placed-in-service in 2018. It totals 6,850 square feet. The space is leased from a third party in a multi-tenant building and the owner did not install any land improvements on the property.

The building is a single story cold shell that this tenant finished out to their particular need. The urgent care center has multiple exam rooms, short-term patient rooms, a MRI and x-ray room, nurse station, and offices. There is specialized electrical, plumbing, and HVAC equipment.

Execution

The Source Advisors Cost Segregation engineers were engaged to allocate the construction cost between building property and personal property. The construction costs and architectural plans were analyzed to properly allocate the various costs into the correct building components and identify personal property. Indirect costs were allocated on a pro-rata basis. They conducted a thorough inspection of the property and documented the improvements. 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 46% or $1,150,000 as 5-year personal property and 52% or $1,300,000 as Qualified Improvement Property. This leans towards the high end of the expected range and was due to the property having extensive electrical, HVAC and plumbing equipment that Source Advisors classified as personal property. The building had been previously been placed in-service, therefore a majority of the tenant’s improvements were actually 15-year Qualified Improvement Property (QIP). The personal property and the QIP qualify for 100% bonus depreciation under the Tax Cuts and Jobs Act.

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