Real estate industry gets extra perk in stimulus act
The Business Journal of Phoenix - by Melissa Castro Washington Business Journal
Buried deep in the new Economic Stimulus Act lies a lucrative perk for landlords and commercial tenants.
In an effort to revive the flagging real estate industry, Congress increased the amount of construction costs that can be written off in the first year for improvements to commercial or residential rental property.
Since 2006, only 2.5 percent of the costs of those improvements could be written off in the first year. The remainder had to be spread out over 39 years.
The new "bonus depreciation" schedule provides much quicker relief, bringing back the most generous depreciation rules that were in place after the Sept. 11 terrorist attacks.
With the change, landlords and commercial tenants can write off 50 percent of the cost for "qualified leasehold improvements" in the first year alone, as long as the improvements are completed by the end of this year, said Dwayne Holt, a partner at Vienna, Va.-based accounting firm Beers & Cutler PLLC. The rest is written off in declining increments over just 15 years.
"That's the big home run for the real estate industry with this stimulus act," Holt said. "If you put $3 million of leasehold improvements into service in 2008, you get to deduct over $1.5 million in the first year."
If you wait until 2009 to make the improvements, you will be able to deduct just $50,000, he said.
Since the new provisions are similar to the bonus depreciation incentives Congress provided in the wake of the Sept. 11 attacks, this type of economic prod does seem to have a track record of success.
However, the real estate boom that followed the 2001 package can't be tied to the tax package alone, in part because those incentives were increased and extended through 2005, experts say.
"Unfortunately, real estate cycles move very slowly, and there is usually a significant lag between the adoption of new incentives and their manifestation in the marketplace," said David Orr, the president of Falls Church, Va.-based development company Orr Partners.
The package also provides a boost for owners that want to implement environmentally friendly improvements, said Dennis Cotter, senior executive vice president at James G. Davis Construction Corp.
Architects, on the other hand, say they did not see any significant jump in business after the Sept. 11 stimulus package, and they don't expect to see one now.
"Maybe if there are enough small gains and lots of companies spending more money, those will create more work for architects and designers," said Thomas Campbell of Burt Hill's Washington office. "I don't see it happening to any great extent though."
Because of the tight time frame for companies to claim the benefits, the provisions might not influence a tenant's decision to build or move, said Rusty Meadows, D.C. principal at Chicago-based Perkins and Will Architects Inc. "What these provisions will likely influence, however, is how much money they may spend on their new project or relocation."
For the retail and restaurant industry, however, the tax package may offer the perfect recipe.
"It's great for restaurants because their interior build-out is so expensive," said Geoff Mackler, a principal broker at Bethesda-based H&R Retail. "To be able to offset some of their costs in the first year is a tremendous advantage. If they can get beyond the first year, they have a much better chance of succeeding."
"While the potential benefits will have to be calculated on an individual basis, "the bigger question, and one for the policymakers, is whether it is worth the cost," said Steven Shapiro, an adjunct real estate development professor at the University of Maryland.
"I'm usually skeptical of using the tax code for short-term economic stimulus," he said. "At the margin, it might help a tenant that is otherwise considering such an expenditure, but I doubt that it influences major decisions."
