By: Larry Miller
One of the more surprising results we have experienced in the performance of a cost segregation study is that associated with self-storage facilities. On the surface, these monolithic structures appear to be nominally depreciated as real property and subject to 39-year, straight-line depreciation treatment; however, a deeper inspection may find as much as 40% or more of the assets can be depreciated on an accelerated basis thus providing a significant cash flow for the owner in the early years of the cost recovery cycle.
For example, site improvements can be recovered over a 15 year period commonly known as Asset Classification 00.3. What makes the self-storage facility so attractive for a cost segregation study is the large percentage of site work that is required as compared to the overall cost of the building itself. Site work which includes asphalt paving & striping, concrete sidewalks, curbing and equipment pads, concrete pavers, fencing and gates, underground storm sewers, underground utilities, landscaping and irrigation, etc. has been specifically identified by the IRS in publication 946 as assets that can be properly recovered over a 15 year period rather than real property known as Section 1250 property such as buildings or building components that can only be recovered over longer periods up to 39 years.
In addition, what is deemed as Section 1245 property or personal property can be recovered over either 7 or 5 year periods depending on their classification. Items commonly found in the self-storage environment that fall under this classification are CCTV systems, automatic access gate systems, rental payment kiosks, computerized locking and alarm systems, dock levelers, brand signage, office furniture, fixtures and equipment, protective pipe bollards, etc.
The final thing that can determine the ability to reduce the cost recovery cycle time is the type of construction that is utilized for the storage units themselves. One of the IRS tests for the classification of Section 1245 property is called the “permanency test” in which the cost of items that are not inherent parts of a permanent, non-movable structure may qualify as personal property. Therefore, if the storage units are specially designed and constructed as bolted units that could easily be disassembled and relocated elsewhere with minimal damage to the components then they are eligible to be classified as Section 1245 personal property. Similarly, the concrete slab upon which these units are attached can then be considered land improvements as they are provided as a concrete pad for the attachment of this equipment.
As stated above, the opportunity for the self-storage owner to increase cash flow in the early years of the cost recovery cycle is significant due to the high percentage of site work costs associated with self-storage facilities as a percentage of the overall facility cost. The purpose of a cost segregation study is to identify and segregate the facility component costs into section 1245 property which is generally depreciable personal or other tangible property or into section 1250 property which is real property that is depreciable and not classified as section 1245 property. It is important to note that land does not fall under either of the above classifications and as such is not depreciable.