New lighting code standards could have unforeseen consequences for both tenants and building owners.
OPERATING COMMERCIAL real estate is such a complex process that it can sometimes be overwhelming. Building owners and operators need to keep track of demand, interest rates, management, attracting and retaining tenants, lease negotiations and so many other things that it is easy for some things to fall through the cracks. Often, those things that are overlooked can result in very expensive consequences.
One such event recently occurred. At the beginning of July 2015, new standards were released, which took effect that same month. These codes deal with energy efficiency standards that are mandatory for residential and commercial building owners to follow. One aspect of the code changes that could have unforeseen consequences for both tenants and owners of commercial space is new mandates associated with lighting fixtures and switches.
Read more: New Mandatory Lighting Codes
By: Robert Hartley, director of research for Colliers International in the Greater Washington D.C. area.
This article is adapted from one that originally appeared in “Colliers Insights.” Winter 2015 2016
Tenants who meet certain conditions can get a tax break for TI allowances.
NEW LEASE AGREEMENTS are typically viewed as routine business decisions rather than tax-saving opportunities. Ignorance of rules can prove costly to a tenant who is unaware of the potential tax implications. As an enticement to a new tenant, landlords commonly offer a tenant improvement (TI) allowance to help offset the tenant’s cost of moving into the new space and fitting it to their unique needs. For leases with a term of 15 years or less, there are special tax treatments for these allowances.
Financial Reporting Versus Tax Treatment
For financial reporting purposes, generally accepted accounting principles (GAAP) typically require that an allowance used for property improvements be amortized over the life of the lease. The allowance is also recorded by the tenant as a deferred rent liability and prorated over the life of the lease. For book purposes, then, the tenant is deemed the bona fide owner of the improvements.
If tax rules followed GAAP, the tenant would be required to use a 39-year proper tax life for non-residential real property (or 15 years, if the improvements meet the definition of qualified leasehold improvement property). Moreover, the tenant would also have to recognize the full allowance in gross income when received. Therefore, from a tax perspective, it is far more advantageous for the tenant to have the landlord own the improvements.
READ MORE – Achieving the Best Tax Results From Tenant Improvements
By Jeffrey J. Schragg, Partner, BDO USA LLP
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Are you thinking about relocating or “rightsizing” and renewing an existing lease? Perhaps you’re contemplating a new facility to accommodate what will be significant future growth. It’s always prudent to know the alternatives available in the marketplace and fully understand the financial implications involved.