Cost Segregation for
Self-Storage

Over the years Self-Storage properties seemed to have morphed into a variety styles. The first Self-Storage facilities looked like several hundred garages; endless rows of orange garage doors. Then as America began to move back into cities we saw some office buildings convert to self-storage. Then purpose-built storage towers, multi-story buildings with a retail space and floor after of floor of storage lockers, appear. From the owner’s perspective Self-Storage properties rent for just a few dollars per square foot less than an apartment building but require much less staffing and maintenance. Hence, Self-Storage properties typically generate quite a bit of taxable income yet their costs default into a 39 year tax life. This is what makes Self-Storage properties excellent candidates for a Cost Segregation study.

Most modern Self-Storage properties offer some controlled environment areas for customers to store items which need a specific temperature or humidity range. The supplemental HVAC for these areas can be treated as personal property. Occasionally the interior walls that create the lockers can be treated as personal property depending on how they are constructed. The facilities typically have some personal property in the retail and office areas in addition to some type of security and access control systems which can be treated as personal property.

A converted downtown office building may have no Land Improvements while the single story endless rows of garages may have up to 10% of the property’s cost treated as Land Improvements with a 15 year tax life and 5% to 15% of the property’s costs to be treated as Personal Property with a 5 year tax life. This mostly depends on how the locker walls are built.

Case Study – Self Storage

Facts

The $5,000,000 Self-Storage property had over 400 units. Some were in single story rows; others were in a 6 story building. The 6 story building had stairs, freight elevators big enough for cars and nice retail area where a customer could buy or rent anything they needed to move and store their property. Gates to enter the property were controlled by a key pad and customers had key cards to access their units. Approximately 50 of the units had environmental controls for storing sensitive property and approximately half of the units had walls deemed to be De-Mountable by the standards established in the Whiteco case.

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 5% of the tax basis ($250,000) as 15-year land improvements and 10% of the tax basis ($500,000) as 5-year tangible personal property.

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