Buying a strip mall as an investment? Do you know if there has ever been a drycleaners in that strip mall before? Were they cleaning on the premises or was it strickly just a drop off and pick up store?
This a very informative string of Tweets from The StripMallGuy about concerns regarding dry cleaning tenants and if they have every used the space you are considering buying as you evaluate a strip mall. He has an entire thread and I would encourage you to read it if you’re in the business of buying strip malls. And to his point…if you are a seller trying to sell a strip mall, at least consider getting a Phase 1 study completed prior to listing the property. It will make life easier on everyone and not waste buyers’ time nor their brokers. Give him a follow on Twitter. He always has valuable insights. You can follow me as well at @costsegbuilding.
Tired of strip mall owners burying their heads in the sand about the dry cleaner issue.
Wasting the broker's time. Wasting the buyer's time.
Kills more of our deals than anything else, and it's not even close.
Retail Strip Centers or Strip Malls are great candidates for cost segregation
Retail strip centers are a highly sought after asset class for commercial real estate investors. I think part of the reason they are liked is because you typically have anywhere from 4 -15 tenants depending upon the size of the building. This spreads out the risk with the cashflow so that if one or two tenants vacate, it’s usually not a huge burden. This is not the case of course if you have one of the tenants taking up a big part of the space. But normally when that happens, those tenants are on a significant, long-term lease.
Our firm studies lots of of strip malls or retail strip centers. Cost segregation for retail strip centers is an excellent idea for the owners. Besides the big depreciation expense that gets generated and of course if the main thing people hire us for, it’s really helpful to have a breakdown of all of the sytems and components of your buildings. Retail strips, just like other commercial property, require constant upkeep, maintenance and repair. If you have things identified, it then makes it easier to make decisions about expensing vs. capitalizing when it comes to repairs or improvements.
In terms of the study results, normally we see that the 5 year property might be 8-10% of the building cost. Sometimes if the property is dominated by a tenant that might be something like a Dollar-type store, those interiors are pretty sparse by design. Those might end up being 5-7% that get identified as 5 year property. But these properties tend to have ample parking and that’s where the big payoff comes in with cost segregation. It’s not uncommon to see these buildings have 10-20% of their overall cost tied to the land improvements. Land improvements are 15 year class life property and include things like the parking lot, lighting, landscaping, patios, signage etc. Because the way bonus depreciation works, this class life qualifies for it. Bonus Depreciation schedule is noted below.
Bonus Depreciation schedule as of 3/29/24 – subject to change by Congress any minute now as they look to bump bonus depreciation back up to 100% through 2025 but that has not yet been approved.
Buildings in-service date
After Sept. 27, 2017 and by Dec. 31, 2022 – 100% bonus depreciation
Jan. 1, 2023 – Dec. 31, 2023 – 80%
Jan. 1, 2024 – Dec. 31, 2024 – 60%
Jan. 1, 2025 – Dec. 31, 2025 – 40%
Jan. 1, 2026 – Dec. 31, 2026 – 20%
Jan. 1, 2027 – bonus depreciation goes to 0.
If you would like to talk about your building or get a quote for cost segregation, please don’t hesitate to reach out. There’s no cost or obligation. I’m not going to charge you in 15 minute increments to discuss. The consultations are free.
