Self-storage has been a very popular property type for cost segregation for many years. It ties closely to the boom in multifamily property development we have seen over the last decade or so. Most self-storage properties fall in the $1M-$5M basis range, but basis can stretch into the 10s of millions depending upon property size, location, and unique features.
There are certain features that make a self-storage facility a strong candidate for cost segregation. For instance, does the subject property have climate-controlled lockers? These specialty lockers are eligible for accelerated depreciation. How are the interior walls between the lockers constructed? If they are demountable and therefore movable, then there is a possibility that the walls themselves may be considered a personal property asset, and therefore be depreciated at a greater rate.
Where the property is built also can have a significant impact on the ability to accelerate basis. For example, the traditional suburban build typically features single-story buildings spread across a generous amount of land. These properties will include significant land improvement assets such as paving, fencing, and the like, all of which may be depreciated over 15-years. These land improvements are also generally eligible for 100% bonus depreciation.
Now think about a more urban setting. This self-storage property will mostly likely feature a building of vertical construction with minimal land improvements. A multi-story property like this one requires elevators, stair towers, and greater load-bearing walls and foundation. These are all classified as base building assets in the tax code, and carry a 39-year class life. These assets are not eligible for accelerated depreciation, and typically carry a higher cost than the corresponding personal property assets. This means that self-storage properties located in urban areas will have a lower portion of the basis eligible for acceleration, and as such studies of suburban-set properties will typically result in a greater yield. However, that’s not to say that urban facilities are not good candidates for a study – we often see excellent results in urban areas, despite their higher portion of base building assets.
Consider the example of suburban Property SS, which consists of 8 buildings spread over 8 acres, with 875 units. With a depreciable basis of almost $10.5M, Property SS was designed with many premium features. Curb appeal was a priority, with decorative fencing, attractive retaining walls, and lush landscaping installed around the perimeter. Over 825 units were climate-controlled, and in a unique finishing touch, the entire property was equipped with ceiling speakers playing pleasant music. The Capstan engineer was able to move 16.9% of assets into 5-year personal property, including the aforementioned demountable walls separating interior units. The attention paid to outdoor aesthetics also paid off, as the Capstan engineer moved 33.1% of assets into 15-year land improvements. Boosted by 100% bonus in play under the TCJA, the cost segregation study of Property SS resulted in a first-year tax savings of $2,333,070.
With all the activity that we have seen of late, self-storage has remained a very popular property for acquisitions and construction. If you or your client has a defined tax liability and are planning to hold on to the subject property for more than say 3 years, cost segregation could be a key part of your comprehensive tax strategy. Just remember, the facts for each taxpayer and property can have a significant impact on the application of this powerful income driving tool.
Have a question on cost segregation? Would you like to outsource cost segregation studies? Contact Bruce Johnson, Capstan Tax.
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