Ski resort imageThe sheer variety of ways in which cost segregation can be utilized is staggering. Many people don’t realize that the technique can be applied to almost any type of income-producing property, in virtually any industry. Here at Capstan we’ve certainly seen our share of warehouses, multi-family properties, office buildings, and the like. However, in our 40+ years in commercial real estate, we’ve performed studies on a number of unusual property types, including distilleries, racetracks, and even a professional culinary institute. Our engineers make a point of doing their homework before every project, but they make an extra effort when heading out to an unusual property, to ensure familiarity with specialized site features and equipment. The Capstan team welcomes the challenge an atypical project provides, and consistently provides the client with strategy development on the front end to yield the maximum tax savings, no matter how unconventional the job may be. In this blog we’ll take a closer look at two unique Capstan studies that are noteworthy for their unusual subjects and for their excellent results.

A local developer acquired a large ski resort and golf club for a veritable steal, and approached the Capstan team for guidance in maximizing tax savings on their newest property. The client conveyed that they hoped to perform extensive renovations on the property at some point in the future. After reviewing the project and discussing the owner’s vision for the long-term, the Capstan team recommended our most thorough cost segregation analysis — the Advanced Cost Segregation Study (ACSS). This analysis provides an enhanced level of pricing detail in regards to base-building assets and is well-suited for the maximization of depreciation deductions from year one. In light of future renovations, Capstan also suggested a Unit of Property analysis be performed simultaneously to provide an even more detailed assessment of historic assets and a breakdown of building systems. Creating a complete and accurate assessment of all cumulative assets pre-renovation provides the client with a powerful tax-savings tool to use in evaluating the property once the dust has settled.

This is a classic example of Capstan’s careful consideration of each client’s needs, and that in itself is nothing unusual. So what is so unique about this situation? One word: scope. The site itself was magnificent and immense, an incredibly elaborate mosaic of complex property types. The property contained retail and office spaces, restaurants, two banquet facilities, a conference center, a gym with sauna, a luxury spa, a full-service hotel, several wedding-specific venues, and even a “slope-side pub.” Any one of those properties would be a sufficient subject on which to perform a study – the Capstan engineer was tasked with addressing them all. Unusually, the ski area and golf green were situated on completely separate parcels of land, further contributing to the size and scope of the project. The ski area consisted of almost 30 slopes and trails, and the golf green spanned 6,500 yards of perfection, maintained by an extensive underground irrigation system.

The staff engineer completed her meticulous assessment of the entire property in a timely fashion. The owners had purchased the resort at a deep discount and were very pleased that Capstan successfully moved over 35% of the depreciable basis out of 39-year class life. The owners were also pleased to have compiled the most accurate and complete asset listing possible, positioning themselves for potential future savings through partial asset disposition and/or reclassification of assets.

You may be thinking, “Okay, that place was pretty intense, but I’ve been on golf courses, I’ve gone skiing, it’s not that unusual.” This brings us to the second study we’ll be examining – the sawmill study. Unless you’re a modern-day Paul Bunyan, this topic should be much less familiar.

A successful manufacturer of wooden pallets was faced with a quandary. The demand for his high-quality product was soaring, but the closing of numerous sawmills in the area left him scrambling for sufficient raw material. The manufacturer decided to open his own sawmill to ensure the availability of lumber, and purchased a property for this purpose. It was subsequently determined that much renovation was required, and the main building was destroyed and replaced by the construction of three new entities. This process was costly, and the pallet manufacturer approached Capstan in the hopes of recouping part of this expenditure through the use of innovative tax strategies.

After considering the client’s history and evaluating the scope of the property, the Capstan team recommended that an Advanced Cost Segregation Study (ACSS) be performed on both the three new buildings and the three preexisting structures. The entire property had been placed in service simultaneously just a few months prior, and the Capstan team encouraged the client to maximize depreciation deductions from year one by performing a timely ACSS.

This was a tricky one from all angles, involving land improvements, installation of a septic field, building construction from the footers up and considerable improvements to the existing structures. The Capstan engineer faced a significant challenge in the unique nature of the property – contemporary sawmills require specialized and unusual equipment. Sawmills today boast high efficiency dry kilns, sawdust fired boilers, optimized slashing systems and more. The assigned engineer researched the nature of the modern sawmill in advance, and arrived at the site armed with the knowledge required to accurately evaluate all included equipment.

The homework paid off – an incredible 75% of real property was moved to personal property when all buildings on site were included. When the engineer focused on the new construction alone, the results were even more striking. Since the new buildings were placed in service between 1/1/08-12/31/14, they were eligible for 50% bonus depreciation. This resulted in an automatic write off of over $2.6 million and a corresponding tax savings of $1.3 million in the first year alone. Needless to say, the pallet manufacturer was thrilled with the results and felt confident in his decision to expand into the sawmill industry.

The moral of the story is to think outside the box when it comes to commercial real estate. Taking the time up front to understand each client’s situation and goals translates into opportunity, achievement, and trust. Here at Capstan we make it our business to get to know your business and offer you personalized strategies, every time, no matter how unusual your industry. So why not give us a call? Contact Terri Johnson or Bruce Johnson at 215.885.7510 and we hope you’ll find that when it comes to cost seg, the sky’s the limit.