A staple of property development in the urban setting, mixed-use properties provide a great opportunity to get the most out of a piece of land. A typical development will contain a mix of differing property types – you might see a combination of office and retail, a blend of retail and multi-family, or even a hybrid of all three. When the owning partnership is looking for tax deductions, cost segregation can be a valuable part of the tax strategy.
The accelerated depreciation yield that these properties can achieve will depend on project basis, date of service, and construction specifics. Typically, this property type will have a sizable basis and a range of assets eligible for acceleration. In an urban setting you would typically see 8-15% of assets eligible for acceleration, with that range increasing to 20-35% in a suburban setting. Assets like elevators and stair towers can add significant basis to the value of real property. Also, if a basement is part of the build, you’ll see a commensurate increase in real property basis due to the added foundation and structural members required.
Another variable that may impact the outcome of a mixed-use property study is the presence or absence of a parking garage. Most of these properties are found in urban settings, and land improvements can be sparse as there is simply not much associated land to improve. As such, if parking is included it usually comes in the form of a garage, which will be either part of the mixed-use structure or attached or adjacent to it. In either case, this is predominately a real property asset. A similar phenomenon is often seen with pools. Since the land footprint is generally limited, pools are often incorporated within or on top of the mixed-use property, and as such are part of the real property basis.
Personal property assets that can be identified are like those found in most office, retail and apartment settings. Things like composite flooring, specialty electric, and cabinetry are examples of these types of asset classification. These assets can be segregated into 5 or 7-year class lives and are eligible for bonus depreciation.
Mixed-use properties that include a residential portion must undergo a “revenue test” to determine whether the development should be depreciated as a commercial property (39-year class life) or as a residential property (27.5-year class life). If owners can demonstrate that 80% or greater of the income is generated via the apartment rentals, then the property can be considered residential, and may use the shorter 27.5-year MACRS life for depreciation of real property. If not, then the property would default to the 39-year MACRS real property life.
There are other subtleties for mixed use properties as well. The unique features of each property will require review in order to determine the property’s fitness for study. Here at Capstan we are happy to assist with this analysis.