By: Paige Eaton
Consider two systems; both of which produce the same outcome and cost virtually the same; however, one costs more in the long run and not because of its functionality. How can that be? Many owners don’t think about the long-term cost-benefit of a new facility’s components during the design/construction phases or when replacing an outdated system, yet there may be hidden benefits that can provide significant returns if chosen thoughtfully.
Cost segregation studies, for example, are utilized to reclassify building component from real property to land improvements or personal property, thereby shortening their depreciable lives. Cash flow is generated through a cost segregation study AFTER construction or acquisition has taken place, but there are simple decisions that guarantee an increase in cash flow BEFORE construction begins.
Consider the following examples: make-up air units (50% personal property, 50% real property) vs air intake louvers (personal property), infrared heaters (personal property) vs unit heaters (real property), free-standing car wash building (land improvement property) vs attached car wash building (real property) and one that may not even be thought about is a glazed curtain wall installed with an aluminum frame (real property) vs frameless aluminum channel (personal property). These personal property components operate similar to their real property counterparts; however, they produce a much better cash flow.
The biggest shocker in the previously mentioned example that should be brought to light, is the frameless glazed curtain wall system installed within aluminum channels. The frameless wall system qualifies for accelerated depreciation with a 5-year life. This system was proven through the United States Court of Appeals, Tenth Circuit; King Radio Corporation, Inc. V. United States 486 F.2d 1091 (10th Cir. 1973) to be personal property due to its removability. As a bonus, because the system is easily removed, it can be reused if the facility revises its floor plan with little or no damage. The glazed panels are slid into aluminum “U” shaped channels that are fastened with screws at the ceiling and floor level. The alternate curtain wall system is fully framed and integrated into the ceiling and drywall systems which causes it to be a real property building component. The frameless glazed curtain system cost less than the more commonly used framed system, and as proven in a recent cost segregation study, generated an $18,000 cash flow increase from an $85,000 expense. A savings of over 20% on just a single component!
The takeaway from these examples is that pre-planning in the design phase can save substantial sums by reclassifying building components that can provide early tax deferrals and increase an owner’s cash flow.