Tax Advantages of Movable Units

Improving your return on investment in the self-storage business has traditionally been a direct function of and limited to controlling costs in the construction phase, securing customers that will pay a fair price for the use of the facilities and services provided, and closely monitoring operating expenses. Improving cash flow and return on investment by taking advantage of favorable tax opportunities related to depreciation has, since the tax law change in 1986, played a small part in improving operating performance of a storage park.

Surprisingly enough, by focusing on the design and construction of a new storage facility to take advantage of the depreciation allowance offered certain type of structures, a taxpayer can have more impact on the park's performance than through almost any other single element of the business venture. By constructing your storage park to take full advantage of the current tax laws, you can greatly enhance your current cash return on investment with no adverse effect on the facility's functionality or customer appeal.

This opportunity has, until now, only been used by specialty operators who rent modular storage container units or recycled shipping containers that are portable. Unfortunately, these containers are very expensive ($14 per square foot, or more) and they are limited in available unit sizes.

In what may look to some as modern day alchemy, there is now a new option available to mini-storage operators that offers complete size availability, attractive design, and architectural aesthetics, portability, and building integrity that easily equals or exceeds frame or metal building construction and it qualifies for seven-year instead of 39-year depreciation allowance.

Tax Law That Enhances Your Investment

Simply stated, if you build and operate a self-storage park that is personal property as defined in Section 1245(a)(3) of the Internal Revenue Code, you can depreciate the cost of your facility in seven years instead of the traditional 39 years allowed for in section 1250 real property. Traditional design, engineering, and construction with materials of steel, brick, wood, or cinder brick do not result in movable and reusable buildings or storage units.

To qualify as Section 1245 (a)(3) property, the units must be modular in nature and movable. Except for foundations, footings, and floor, the buildings must be able to be moved or disassembled and moved without causing damage to the components of the building. Additionally, if the taxpayer does not intend to move or modify the structure, but instead intends to keep it as a permanent structure, the property should be considered real property. However, if it is clear that the taxpayer intends to use the structure as a nonpermanent facility, intending to change its present shape, size, or location, then the taxpayer should be able to consider the structure personal property.

The New Alternative

Up until now, the concept of building structures that have the stability and appearance of permanent structures yet are completely demountable has not bee realized. There just wasn't anything in the marketplace that met the structural and aesthetic requirements needed for mini-storage that also had the construction and demountability characteristics required to qualify for tax purposes as personal property.

That has now changed with the introduction of pre-engineered building systems that are completely demountable and designed for cost-effective construction, zero maintenance, and long-term service life. Visually, the structures appear to be standard frame and metal construction so the zoning difficulties often faced when using modular container storage units are not an issue. The basic building block of one system is a 4 x 8 panel that is laminated with a urethane-based adhesive and encased in a tract type framework mad of 50,0000-pound yield strength 14-gauge galvanized steel. Various wood, stucco, and galvanized steel finishes are available on the panels that are then bolted together with galvanized steel connector columns for building assembly.

This alternative in mini-storage construction is cost competitive with steel buildings with the aesthetic appeal of frame or brick construction. After the concrete footings are completed, erection time fro a typical mini-storage facility should be about 30 days, which is considerably shorter than traditional construction. The actual ability to unbolt and relocate the buildings is ideal for the operator who wants to construct a storage site on speculative property that increases in value over time. When a higher and better use for the property develops, the operator can simply move the building to a new location.

Understanding the Financial Incentives

Table 1 illustrates the exceptional improvement to cash flow in the first seven years of operation of a facility if it is designed and built to qualify for the seven-year instead of the 39-year depreciation allowance.

To fully appreciate the benefits of designing and building your facilities so that they qualify for seven-year depreciation, Table 2 shows the impact to internal rate of return after seven years on two identical facilities except that one does qualify for seven-year depreciation and the other one does not. The cost, revenues, and expenses associated with this table are the same as the previous illustrations.

Table 1

Table 2

Conclusion

The graph above illustrates the positive impact on annual cash flow that results from constructing a modular project. In essence, as illustrated here, the return on investment increases by 670 percent just by qualifying for the seven-year depreciation allowance. The numbers are compelling and clearly speak for themselves. What remains is for mini-storage developers and operators to familiarize themselves with new and viable alternatives to traditional construction which so greatly enhance a mini-storage facility's operating performance that they cannot be ignored.

The auditing firm of Hansen, Barnett, and Maxwell of Salt Lake City, Utah, has reviewed a mini-storage park using this type of building system. The firm believes the park qualifies for the depreciation allowance provided in Section 1245(a)(3) of the Internal Revenue Code. Additionally, an accounting firm has completed research with respect to the classification for federal tax depreciation purposes of movable storage units. The research identified two cases that lend support to the argument that the building system is a tangible personal property for federal tax depreciation. You should consult your own tax advisor with respect to your own facility and construction.

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