Focus on the Market: Medical Office Properties

April 2021

New Rev. Proc. Clarifies Timeline Regarding QIP EligibilityToday we will consider a property type that has been a growing focus for federal tax strategies such as cost segregation: the medical office building (MOB).  The MOB market remains robust even in our turbulent times — Americans will always need healthcare.  Medical office buildings are often standalone developments, but they are also found within multi-tenant properties such as traditional office buildings and even retail shopping centers, once the appropriate build-out has taken place.

MOBs come in a wide variety of build-outs, depending upon the type of practice being conducted. Is it an outpatient surgical center? Or a primary care physician’s office? Is it a dialysis center or perhaps a physical therapy practice?  Each practice will contain a unique set of assets that can leverage accelerated depreciation. For example, a surgical center will have a greater degree of specialty electric and plumbing, whereas the average general practitioner’s set up will be very similar to a standard office arrangement.

MOB location and structure will also play a role in determining how successful a cost segregation study may be.  If the property is in an urban setting or is simply a build-out of a retail center, there will be little to no associated land improvements. If the property is multi-story, it will contain a greater amount of 39-year base building assets.  Assets like elevators, stair towers, and load-bearing walls are all non-depreciable, and as such a smaller portion of the cost basis will be available for cost segregation.

There are several other strategies to consider as well, each of which may result in dramatic benefit to the taxpayer.

  • When dealing with a fit-out and/or renovation project, bonus-eligible Qualified Improvement Property is in play. This powerful designation applies to assets that are not personal property.
  • When renovating an MOB, a taxpayer may potentially leverage the benefits of the Tangible Property Regulations (TPRs) to guide the taxpayer through expensing vs. capitalization decisions. The TPRs also permit Partial Asset Disposition, in which the remaining depreciable basis of assets that have been replaced, demolished, or abandoned, may be written off immediately.
  • The new Section 179 expensing rules may also be appropriate for some MOBs.

These tools each have unique applications and careful thought is required before a plan is created.  For example, can the taxpayer leverage the losses? If the plan is to use the 179 rules, will they push the taxpayer into a loss situation?  Many important factors need to be considered before employing a new tax strategy.

The medical office building property type remains evergreen, and there is much opportunity in this market.  As always, planning, timing, and execution are key.

Capstan is here and ready to help you navigate these scenarios. Please let us know if we can be of assistance.