Self-Storage Chain Uses Cost Segregation To Boost Cash Flow

Hearing of the benefits of cost segregation from his CPA, the owner of a chain of Self-Storage Facilities turned to Madison SPECS, one of the nation's leading cost segregation companies, to handle a comprehensive engineering and tax assessment of one of his facilities in Fort Worth, Texas.

THE SITUATION:

Experiencing a slower economy and more competition coupled with the inability to raise rents over the past few years, the owner of a chain of self-storage facilities was feeling the pinch of stagnating cash flow. To test the value of cost segregation, he hired Madison SPECS to perform a cost segregation study on a 55,000 square foot facility he had constructed in 2005. The cost of the facility excluding land was $2,500,000.

THE CHALLENGE:

For Madison SPECS, the project was typical of the cost segregation studies they conduct on a daily basis. But for the self-storage facility owner, the biggest challenge was just learning about the benefits of cost segregation in the first place since he hadn't heard about it from other self-storage owners. This wasn't surprising to the team at Madison SPECS. "Cost segregation is often looked upon by self-storage owners as a competitive advantage that they do not want to share... and for good reason," explained Moshe Becker, Director of Operations for Madison SPECS. "The result of a cost-seg study on a typical facility could double the after-tax cash flow for the current year depending when the facility was originally placed in service,"" he explained.

Thanks to his CPA, the self-storage facility owner learned that his facilities are a perfect fit for cost segregation since typically about 30 percent of the cost can be classified to accelerated recovery periods. For instance, instead of 39 years, land improvements can be recovered in 15 years. This accelerated depreciation helps owners defer federal and state income taxes.

THE PROCESS:

A typical 55,000-square-foot single-story self-storage facility, the depreciable basis of the property was the hard and soft costs associated with the building, site work and personal property. This was more than a matter of reclassifying personal equipment to a five- or seven-year recovery period. Items reclassified included land improvements, such as paving, curbing, site lighting, storm drainage, fencing, and landscaping, as well as personal property including signage, security systems, certain floor coverings and special climate-control systems. The list was extensive.

Madison SPECS also worked to obtain the pricing on the interior removable panels from the manufacturer of the prefabricated, self storage buildings. "Typically, the manufacturer is able to provide their pricing, which is most accurate," explained Tom Varney, engineer for the project. Madison also depreciated the removable interior partition panels and the HVAC systems for the climate controlled units as 5-year property. Madison SPECS was able to deliver to the client's CPA a very precise and comprehensive study in record time, just before the end of tax season.

THE RESULTS:

While the Madison SPECS staff is accustomed to projects such as this, the client was impressed by the results.

• The facility's total depreciable basis was $2,500,000 Of this total, the cost segregation study permitted $575,000 to be reclassified from 39-year to 5-year MACRS (Modified Accelerated Cost Recovery System) property.
• $245,000 was reclassified to 15-year MACRS property.
• This reclassification of assets resulted in a Net Tax Benefit of $50,000 in the first year and a $245,000 Net Tax Benefit over the firs six years.

The self-storage facility owner was so pleased with the results that he hired Madison SPECS to prepare cost segregation studies for his other seven self-storage facilities.