I was presented with a problem the other day for a conversion of an older industrial building to creative office space. The problem was complicated because of the costs to renovate a building today with the new Title 24 energy provisions increased the improvement costs substantially. Not only were the costs substantially higher but the time delay was much longer.
As a developer, longer hold time and higher costs equal potential for higher risk. Our banker and our investors are looking for less risk and better returns for our capital. We needed a way to increase our cash flow and construct a better building that conforms to more energy efficient cost savings.
Today, cost segregation is a partnership between CPA's and industrial engineers to provide methods to accelerate depreciation for improvements to your real estate which conform to IRS regulations. I am no expert when it comes to cost segregation or IRS rules but I am a sophisticated developer looking at maximizing my cash flow. In 1997 the United States Tax Court approved provisions in their codes to allow for accelerated depreciation under certain circumstances. It is my understanding that accelerated depreciation can reduce your amortization of improvements from as long as 39 years to as little as 5 years depending upon the type of improvement.
Of course, you must first employ a reputable cost segregation firm and have them provide an analysis of your plan. A number of cost segregation firms can provide you with a cursory estimate of your tax savings at no cost or very little cost to get you into the front door.
I suggest that anyone making major investments in renovation to your commercial real estate should consider this avenue.