Cost segregation is an excellent strategy for tenant improvements. Both tenants and landlords can benefit greatly from a study. This is especially true through December 31, 2007 due to the extension of the Qualified Leasehold Improvement provision which provides significant benefit for certain qualifying improvements.
When performing a cost segregation study involving tenant improvements it is important to determine which costs are going to be depreciated by the tenant and which will be depreciated by the landlord. The two parties should not be depreciating the same costs. This can be especially tricky when conducting a look-back study or a study on an acquired property due the lack of historical documentation. A quality cost segregation study should provide clarification with regard to this issue.
When a study is performed for a tenant, on a specific space, the percentage of qualifying (accelerated) costs is often much higher proportionately than with a study on an entire building. This is because the study is being conducted on a specific area and not the entire building, which includes the majority of the non-qualifying costs. On average, 20 – 60% of the costs in a tenant space will qualify for allocation to a shorter recovery period (typically 5-year).
In addition to the immediate benefits driven by the accelerated depreciation, the details in the study can be used to support write-offs when renovations are done to the space and certain improvements are retired (thrown away). This can greatly improve the overall value of the study.
Landlords can achieve even greater value from a cost segregation study if it properly addresses tenant improvements. Unfortunately, this aspect of the study is commonly overlooked. Most cost segregation studies focus only on the immediate benefit of accelerated depreciation. At Bedford we take all potential benefits into consideration. With multi-tenant properties our reports can be designed to track costs tenant by tenant. Therefore, in addition to the immediate benefit of accelerated depreciation deductions, the study can be used to support future write-offs when tenant spaces are renovated and existing improvements are retired. Of course this only benefits the landlord to the extent they have a depreciable basis in the assets being retired.
 • Accelerate depreciation on improvements
• Detailed list of assets to support write-offs when the space is eventually renovated
• Special treatment of Qualified Leasehold Improvements through 12/31/07
• After improvements are placed into service
• Immediately following acquisition of an existing property
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