State of the Real Estate Industry

LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM I 23
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24 I LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM
INTRODUCTION
With increasing development opportunities and continued growth changing the local real
estate landscape, Long Island Business News and Berdon LLP are proud to host The State
of the Real Estate Industry on Long Island. We are privileged to hear from top real estate
executives as they talk about development strategies and share their thoughts on the
future of the industry.
TABLE OF CONTENTS
Keynote Speaker .....................................................25
Joanne Minieri, CPA
Moderators ..............................................................26
Maury D. Golbert, CPA, J.D., LL.M.
Meyer Mintz, CPA, J.D., LL.M.
Panelists ..................................................................27
James L. Coughlan
David Pennetta
Jeffrey L. Pliskin
Matthew B. Whalen
Articles
SEVEN-YEAR ITCH ...................................................... 28
Experts: LI real estate future bright, though challenges
remain after rocky recovery
TO CONDO OR NOT TO CONDO: THAT IS THE
QUESTION FOR OWNERS........................................... 29
NEW SAFE HARBOR FOR REMODELING, REFRESHING
RESTAURANTS AND RETAIL STORES ......................... 29
LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM I 25
KEYNOTE SPEAKER
Joanne Minieri, CPA
Deputy County Executive &
Commisioner for Suffolk County
Joanne Minieri, CPA, is the Deputy
County Executive and Commissioner for
Suffolk County Economic Development and
Planning, and is responsible for attracting
and retaining business, promoting new industries, fostering transit-oriented development, managing land use, preserving open
space and expanding affordable housing
options for one of the largest counties in
the United States. In her first public sector
role, Ms. Minieri is leveraging her private
sector experience to improve Suffolk County’s business climate, build consensus and
commitment for development projects, and
retain and create jobs in the region.
Under her leadership, the Department
of Economic Development and Planning is
charged with implementing Innovate Suffolk, Connect Long Island, and Long Island
Innovation Zone (IZone) – three initiatives
that are central to the vision Ms. Minieri
and County Executive Steven Bellone have
to drive Suffolk County’s transformation
as an economic powerhouse. Currently, in
the formative stages, Innovate Suffolk will
create innovation zones for small companies and graduates of technology business
incubators, Connect Long Island will coordinate land use, transit-oriented development and rapid transit options to further
economic expansion, and the IZone is a
north-south rapid transit connection that
will link the Long Island Railroad with
Stony Brook University and Brookhaven
National Labs with the vibrant downtowns
of Patchogue and the Ronkonkoma Hub,
in addition to providing a direct plane-totrain connection to Long Island MacArthur
Airport.
Ms. Minieri’s department administers
millions of dollars of funding for land acquisition, community and transit-oriented
development, affordable housing, tourism,
cultural and film funding, and planning
programs. Ms. Minieri oversees responsibility for protection of more than 30,000
acres of the most productive farmland in
New York. In addition, she has oversight
of the county-owned Frances S. Gabreski
Airport, a general aviation airport that
includes a 450,000 square foot industrial
park.
Ms. Minieri is the Chairman of the Suffolk County Industrial Development Agen-
cy Board. She is a member of numerous
professional organizations, including the
American Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants, and is on the
Board of NEW (Non-Traditional Employment of Women). Ms. Minieri has received
several awards for her accomplishments
and leadership.
Ms. Minieri was honored in 2009 as
one of Crain’s 50 Most Powerful Women in
New York. In 2008, she was the recipient
of the National Italian American Foundation’s (NIAF) Special Achievement Award
and was honored by the Special Olympics
New York at its 9th Annual Real Estate &
Construction Gala. She received an Alumni Achievement Award from Hofstra University, as well as a citation from Nassau
County Executive Thomas Suozzi after
receiving the Women in Housing Development Award from the New York Housing
Conference and National Housing Conference. Ms. Minieri has also been honored
by the Nontraditional Employment for
Women (NEW) organization.
A native of Brooklyn, New York, Joanne
Minieri holds a Bachelor of Business Administration degree from Hofstra University.
26 I LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM
MODERATOR – PANEL DISCUSSION
Maury D. Golbert, CPA, J.D., LL.M.
Tax Partner
Berdon LLP
Maury Golbert is a partner in Berdon
LLP’s tax department, Chair, Real Estate
Services, and a member of the firm’s Executive Committee. He works with family/
closely held businesses of all types advising on techniques to preserve and enhance
business and personal net-worth and offers expertise for commercial and residential real estate clients. He has developed
close relationships with leading real estate
owners, operators, developers and investors and devises creative ideas and effective solutions to key issues in real estate
transactions. Mr. Golbert has extensive
experience in structuring various types of
like-kind exchanges and other innovative
transaction techniques.
At various forums, Mr. Golbert has spo-
ken before real estate attorneys on efficient tax structuring and effective income
distribution and allocation. He served
as moderator of a forum on the future of
Downtown Manhattan real estate. In addition, he has provided commentary on
distressed assets, debt cancellation, estate
planning, like-kind exchanges, and retirement planning in an array of publications,
among them The Commercial Observer,
Long Island Business News, Commercial
Real Estate Direct.com, New York Real Estate Journal, BisNow, Real Estate Finance
& Investment, Bankrate.com, Real Estate
New York, The Practical Accountant, and
WebCPA. Mr. Golbert also appears on the
firm’s video series 2MinutesOn.
He is a member of the American Insti-
tute of Certified Public Accountants and
New York State Society of Certified Public
Accountants
Mr. Golbert graduated from SUNY College at Oneonta with a Bachelor of Science
degree in business economics. He received a
Juris Doctor degree magna cum laude from
the University of Bridgeport School of Law,
where he was an associate editor of the law
review, and a Master of Laws degree in taxation from New York University Law School.
He is licensed as a CPA in New York.
MODERATOR – KEYNOTE Q&A SESSION
Meyer Mintz, CPA, J.D., LL.M.
Tax Partner
Berdon LLP
A tax partner at Berdon LLP, Meyer
Mintz has been with the firm for more
than 15 years. He has particular expertise in the tax aspects of partnership
agreements, limited liability companies,
and other business organizations. Analyzing potential transactions from both a
tax and an overall business perspective,
he provides clients with a more comprehensive picture on which to base their
decisions. Mr. Mintz has also worked
with attorneys in litigation matters.
Most recently, he testified as an expert
witness on behalf of a defendant at a
FINRA arbitration hearing. Mr. Mintz’s
testimony regarding a complex tax matter was successful in sustaining the defendant’s tax position. Mr. Mintz is also
a member of the Berdon Real Estate
Committee.
Mr. Mintz serves on the Board of Directors and chairs the Audit Committee
for the Mental Health Association of New
York City. His articles “Tax Consequences
of Debt Relief — Handle With Care” and
“Know Your (REIT) Partner” were published in Real Estate Weekly and he was
interviewed on the benefits of LLCs in The
Commercial Observer.
Mr. Mintz holds a Bachelor of Science
degree in accounting from Touro College,
a Juris Doctor degree from Brooklyn Law
School, and a Master of Laws in taxation
at New York University School of Law. He
is licensed as a certified public accountant
in New York State.
LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM I 27
PANELISTS
James J. Coughlan
Jeffrey L. Pliskin
Mr. Coughlan is a Principal of TRITEC
Real Estate Company and was a co-founder of the company in 1986 with his brother
Bob. TRITEC has four operating entities;
TRITEC Development Group, TRITEC
Capital, TRITEC Building Company
and TRITEC Asset Management, with
offices on Long Island and Washington
D.C. TRITEC has developed apartments,
mixed-use complexes, industrial parks,
mid-rise office buildings, hotels, medical
office buildings, R&D facilities and industrial buildings. Notable projects include;
Ronkonkoma Hub, New Village at Patchogue, Dealertrack at 3400 New Hyde
Jeffrey L. Pliskin is the president and
CEO of Pliskin Realty & Development, located in Garden City. He holds a Bachelor
of Arts in Economics from Yale University
and a Juris Doctor from Columbia Law
School. Prior to starting Pliskin Realty & Development in 1994, Mr. Pliskin
served as a real estate attorney with the
prestigious New York law firms of Simpson Thacher & Bartlett and Robinson
Silverman. At Pliskin, he oversees all
aspects of the firm’s brokerage, property
management, investment and preferred
development activities. Pliskin Realty
and Development currently owns over 30
properties locally and nationwide, consist-
Principal & Co-Founder
TRITEC Real Estate Company, Inc.
Park Road, 100 102 Motor Parkway, St.
Anthony’s High School -Student Center,
and Stony Brook Technology Center.
Mr. Coughlan is actively involved
with a number of charitable and notfor-profit organizations, including being
Chairman of the Board for the Community Development Corporation of Long
Island. Jim also serves on Stony Brook
Medicines Development Council.
Mr. Coughlan is a 1984 graduate
of Brown University, a member of the
Brown Alumni Association and serves as
an interviewer for prospective candidates
for admission from Long Island.
David Pennetta
Executive Director, SIOR, LEED
Cushman & Wakefield, Inc.
David Pennetta is an Executive Director of the Long Island office of Cushman
& Wakefield. Mr.
Pennetta is responsible for overall business operations, including the implementation of the company’s key business initiatives, leadership and strategic direction
of the Long Island office, client relationship management, business development,
recruitment and development of brokers
and staff, as well as ensuring delivery of
the full array of Cushman & Wakefield’s
creative and innovative services to the
company’s clients. He also serves in a
brokerage capacity with an emphasis on
tenant and landlord representation.
Mr. Pennetta graduated, with honors,
from New York University, New York,
NY. He received a Bachelor of Science
Degree, majoring in Real Estate and is a
member in good standing of Alpha Sigma
Lambda honors society.
Mr. Pennetta is a CIBS Strategic Officer (2013-present) and twice Past President (2011-2012 & 1998-1999) of the
Commercial Industrial Brokers Society
of Long Island (CIBS), Member of The
Society of Industrial and Office Realtors®,
Board Member of the Huntington Planning Board. Appointed May 2011- Present, State of New York Unified Court System (2012-2014). Appointed and Eligible
to serve as “Receiver” and “Real Estate
Broker” in the Counties of Nassau and
Suffolk, Energeia Partnership Graduate
(2008-2010)- The Energeia Partnership
is a regional stewardship and leadership
academy.
President & CEO
Pliskin Realty & Development, Inc.
ing of retail, medical office and multi-family buildings. Pliskin also manages almost
100 properties nationwide totaling approximately 1,500,000 square feet.
As a real estate attorney, Mr. Pliskin
also lends his expertise in real estate law
to facilitate transactions and resolve lease
issues. An active and respected member
of the industry, he maintains affiliations
with leading industry associations such as
the International Council of Shopping Centers and is also highly regarded within the
broader business community. Mr. Pliskin
recently earned the designation of Certified Shopping Manager (CSM) from the
International Council of Shopping Centers.
Matthew B. Whalen
Senior Vice President of Development
AvalonBay Communities
Matthew B. Whalen joined AvalonBay
in 1999 and as Senior Vice President of
Development he is responsible for leading
the development and acquisition activity
in the Long Island, Westchester and Connecticut real estate markets. He works out
of the AvalonBay office in Melville, NY.
Mr. Whalen has over 27 years of experience in the real estate business and has
worked in many different sectors, including multifamily, office, industrial, hospitality and single family. Mr. Whalen
began his career with Toll Brothers in
New Jersey, and he has held vice president positions at Security Capital, Homestead Village, Crimson Partners and Cogent Communications.
In 2006, he was elected to the Long Island Builders Institute’s (LIBI) Board of
Directors. He was named LIBI’s president
in 2009 and chairman in 2010. He is currently a board member of LIBI and the
Long Island Association. He has served
on the Boards of the Long Island Real Estate Group, the Real Estate Practitioners
Institute, the Long Island Housing Partnership, Hofstra University’s Institute of
Real Estate, the New York State Builders
Association, and the Community Development Corporation of Long Island. He is
an active member of the Association for a
Better Long Island, the Long Island Real
Estate Group, the Urban Land Institute,
Action Long Island and the Suffolk County Village Officials Association.
Mr. Whalen is a 1988 graduate of
Princeton University where he received a
B.A. in History, and in 2012 he completed
the AMDP program at Harvard University Graduate School of Design.
28 I LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM
Seven-year itch
Experts: LI real estate future bright, though
challenges remain after rocky recovery
By DAVID
WINZELBERG
With the Great Recession continuing to fade in Long Island
real estate’s rear-view mirror, the industry has been buoyed by rising demand for
multifamily housing and industrial space,
though the office and retail sectors still
worry about market contraction.
Despite the uneven recovery, the area’s
commercial real estate experts are cautiously optimistic that their overall markets will prosper in the short term. Possibly the best performer lately has been the
Island’s industrial sector, which continues
to be fueled by strong demand by end-users outpriced in Queens and Brooklyn.
However, a tightening supply of available properties has put a crimp in leasing
activity in the area’s industrial market
so far this year. There was about 512,000
square feet of industrial space leased
in Nassau and Suffolk counties in the
first quarter, as reported by Cushman &
Wakefield. That’s only a little more than
half the 988,000 square feet of industrial
leasing activity recorded in Q1 2015.
First quarter leasing activity for Long
Island office at just over 75,000 square
feet was off a whopping 81.5 percent from
Q1 2015, according to C&W’s numbers.
One bright spot for the office market is
the area’s Class A vacancy rate, which has
trended lower during the past year. Long
Island’s Class A vacancy rate was 13.1
percent in the first quarter of 2016, down
significantly from the 16.2 percent vacancy
rate of a year ago, according to JLL.
“There is a shortage of Class A space of
50,000-square-feet or more,” said C&W’s
David Pennetta.
While Long Island employment numbers are higher than they’ve been, many
firms continue to downsize when it comes
to office space.
“Companies don’t need as much space,”
Pennetta said. “The new metric is 185
square feet per employee, down from 235
square feet a couple of years ago.”
Another change in the office market
is the demand for a new-urbanist environment, where employees can shop, eat
and even live within walking distance to
where they work.
James Coughlan, principal of East Setauket-based Tritec Real Estate, said the
new breed of employees want to blend
lifestyle with where they work.
“People want to live where they have
amenities they can walk to, and people
want to work there,” Coughlan said. “The
days of the standalone suburban office
park are numbered.”
At Tritec’s Stony Brook Technology
Center, which has its own sewer system,
the company is working towards adding
some convenience retail to that environment, things like restaurants, pharmacies, fitness centers and banks.
“We’re looking to convert some to mixeduse buildings with retail on the ground floor
and office above,” Coughlan said.
Tritec is also in the midst of its transformative transit-oriented mixed-use redevelopment known as the Ronkonkoma
Hub. The developer will soon break ground
on the first phase of the $650 million plan,
six buildings on the east side of the project
area that will hold 489 rental apartments.
The project’s second phase consists of
65,000 square feet of retail stores, 60,000
square feet of office space, 260 rental
apartments and three parking garages
of three stories each that will add 650
parking spaces. Altogether, the project
will eventually bring a total of 1,450 residences, 360,000 square feet of commercial
space and 195,000 square feet of retail
space to an under-used 50 acres surrounding the Ronkonkoma Long Island Rail
Road station.
“New urbanism and convenience of the
transit-oriented development is preferable
for the up-and-coming work environment
and for empty nesters as well,” Coughlan
said.
Pennetta said projects like the
Ronkonkoma Hub are being made possible by progressive zoning rarely seen
here a decade ago. He also gave a nod to
the performance-based zoning at the Enterprise Park at Calverton and the flexible zoning proposed for the Syosset Park
mixed-use plan.
“That’s a huge change. Long Island has
made a huge amount of progress in the
last decade,” Pennetta said. He pointed to
the increase in transit-oriented projects,
the push for more sewers, the LIRR’s expansion efforts and more rental housing.
Responsible for a good chunk of the
new rental housing stock here, Matthew
Whalen, senior vice president for AvalonBay Communities, said the state of the
multifamily industry is very strong.
“Ten years ago you’d probably hear a
lot of negativity about developing rental housing, but in certain circumstances
we’ve broken through,” Whalen said.
After a decade-long battle to build 349
apartments in Rockville Centre, Whalen
said the company has enjoyed “a very cooperative experience” with the mayor and
village officials in building phase-two of
the project.
“The fear was that it would over-burden the schools, which it didn’t, and create too much traffic congestion downtown,
which it didn’t,” he said.
Whalen said there’s been such great demand for apartments, especially from Mil-
Rendering of Tritec’s Ronkonkoma Hub project.
LI INDUSTRIAL MARKET
Q1 2015
Q1 2016
OVERALL VACANCY RATE
8%
7.5%
LEASING ACTIVITY (SF)
988,804
512,165
OVERALL ABSORPTION (SF)
255,776
212,960
LI OFFICE MARKET
Q1 2015
Q1 2016
OVERALL VACANCY RATE
17%
16.6%
LEASING ACTIVITY (SF)
408,230
75,647
OVERALL ABSORPTION (SF)
265,149
-116,289
SOURCE: CUSHMAN & WAKEFIELD
lennials and empty nesters, who are now
looking at rentals as retirement options.
“AvalonBay has the highest percentage
of empty-nester residents in our Long
Island properties than in our entire portfolio nationwide,” he said.
Whalen noted that Long Island is now
adding 1,000 to 2,000 rental apartments
a year, three or four times what was built
in years past.
“We were somewhat of a pioneer 10
years ago, Whalen said. “We’re bullish
on Long Island. The real key right now
is that Long Island starts to compete for
Millennials and there be some cool places
to live.”
And while demand is strong for multifamily rental housing, the tenant pool for
Long Island’s retail spaces is shrinking,
according to Jeffrey Pliskin, principal of
Pliskin Realty & Development in Garden
City, which owns and manages 1.5 million
square feet of retail real estate in the New
York area.
“Retail leasing has been pretty weak
lately,” Pliskin said. “There aren’t a lot of
phone calls. Tenants have left and we’re not
getting a lot of calls to fill those spaces.”
Pliskin said an increasing headwind
for retail real estate is the Internet.
“Book stores, video stores and clothing stores have all taken a hit,” he said.
“Most of the prospective retail tenants are
personal services businesses and things
you can’t get online, such as nail salons,
urgent care clinics, fitness centers and
restaurants. But they require a lot of
parking, so landlords have to get variances and ask higher rents. In Suffolk,
many of these businesses are challenged
because they need more sewage capacity.”
Despite increased vacancies caused by
the A&P bankruptcy and looming vacancies in the bankruptcies of Sports Authority and Bob’s Stores, the area’s overall
retail vacancy is still in the single digits.
“Nationally, Long Island is still in the
lower half for retail space per capita,”
Pliskin said. “We don’t have a lot of malls
as they have in planned communities
in places like Florida and several other
states. In that sense, we’re under-stored.”
All in all, Pliskin sees the area’s retail
sector’s glass as half full.
“The outlook overall is good,” he said.
“We’re in a lull in retail leasing for whatever
reason but I’m optimistic it will come back.”
■ [email protected]
LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM I 29
To condo or not to condo: That is the question for owners
By MEYER MINTZ,
CPA, J.D. LL.M.
Tax Partner,
Berdon LLP
With the condominium market heating
up in many areas across the country, some
real estate owners are tempted to take advantage of the high prices to cash out.
In addition to residential condo projects, some owners are also starting to use
this exit strategy for commercial property
by selling office condominium units as either investments or owner-occupied units.
While generally "more is better," selling
rental real estate is very different from selling
condo units - not just for legal reasons, but
also for some very important tax distinctions.
When rental real estate is sold, the gain
generally qualifies as a "section 1231 gain."
This is a huge opportunity for several
reasons:
•Gains are taxed at a preferential rate
of 20 percent (plus an additional 5 percent
to the extent of any depreciation taken on
the building) and can be offset by any capital loss carryforwards. Section 1231 losses,
however, are considered ordinary losses
and may be used to offset any current ordinary income at a higher tax rate. If there
is a section 1231 gain in the five years
following a section 1231 loss, the owners
will "recapture" this benefit and the gain
will be taxed at the ordinary income rates
instead of capital gain rates.
•Second, if the owner materially participates in the real estate business enough to
qualify as a "Real Estate Professional" for
purposes of the passive activity rules, gains
on sale of the building may also be exempt
from the new 3.8 perecent tax on passive
income.
•Third, in New York City where real
estate is exempt from the 4 percent Unincorporated Business Tax (UBT), there will
be no UBT tax on the sale of the building.
Converting real estate to a condo is considered a business and subject to the UBT tax.
•Lastly, the gain on the sale of a rental
building can be deferred by doing a likekind exchange, unlike a condo project that
is considered held for sale and therefore
not eligible for deferral treatment.
Rental real estate will generally be depreciated over a 27.5-year life (or 39 years
for nonresidential real estate).
If the building is held for a long period,
the tax basis of the building will be substantially lower than the original purchase
price due to depreciation over the ownership period.
This decrease in basis, as well as the
increase in value, will contribute to the
taxable gain.
In addition to filing the appropriate papers with the authorities, a condo conversion
usually involves additional cash outlays. In
order to increase the value of the units, work
is often done to update the lobby, carpet the
hallways, spruce up the exterior, as well as
other general repairs that may have otherwise been done over time.
For example, each unit is often fitted
with new appliances, the floors redone,
and the walls painted.
There are also legal fees for the applica-
tion, professional fees regarding any planning and construction, marketing costs,
and the funding of the reserves for the
condominium association.
Carrying costs are incurred and revenue
is lost while units are vacant, and with construction also comes risk, especially when the
units are sold as condos since the Attorney
General is involved to protect the buyers.
The Attorney General's Office approves the condo development plan and all
amendments to that plan. With this level
of visibility and oversight, a developer and
any representatives needs to be familiar
with the rules, regulations, and the legal
process in order to deliver a good product.
All these risks, as well as the risk of "missing the market," need to be factored into the
decision to convert to a condominium.
By converting the building to a condo
and making all these improvements, what
was a capital asset is now converted into
an asset held for sale.
This change has a major impact on how
the building is taxed when it is sold. The
gain will now be taxed at ordinary income
rates of up to 39.6 percent and is subject to
New York City UBT.
Let's look at a quick example. A developer has a building that is now worth $105
million. It was purchased for $30 million,
but there was $10 million in depreciation,
reducing the tax basis to $20 million.
In order to convert to a condo, assume
that there will be another $15 million in
costs, but the condo sales will generate
$140 million. While this may seem like a
good deal, let's now analyze the tax ramifications of the condo conversion.
If the developer is a New York City resident and sold the building for $105 million,
$5 million of closing costs (transfer tax, brokerage costs/fees, etc.) would be incurred.
The taxable gain would be $80 million,
generating federal tax at a 20 percent rate (25
percent for the depreciation taken) ($16 million) and New York State and City tax at 12
percent ($10 million), for approximately $26
million, leaving the developer with after-tax
proceeds of approximately $74 million.
If the building was converted to a condominium, the sellout price would be $140 million with closing costs totaling $6 million ($5
million plus an extra $1 million for transfer
tax on additional sales price) and a cost basis
of $35 million (the original $20 million basis
plus the $15 million improvements).
On this gain of $99 million, total taxes
will be $54 million with New York City
UBT at 4 percent ($4 million), federal tax at
39.6 percent ($37.5 million), and New York
State and City taxes of about 12 percent
($12.5 million.
From a cash flow standpoint, the net
sales price of $134 million less the improvements of $15 million will yield cash
flow of $119 million. This leaves the developer with $65 million of after-tax proceeds.
As you can see from the above example,
the doubling of the federal taxes on the
condominium project will cause the developer to net more cash on an after-tax basis
by selling the building outright.
There are also less business risks to an
outright sale and the potential of being able
to defer the gain in a like kind exchange.
It is very important to include the tax
treatment of the sale when comparing the
scenarios as a simple deal may also yield
more money.
New safe harbor for remodeling, refreshing restaurants and retail stores
new lessee and to qualified lessee construction allowances under Section 110.
By LEE ZIMET,
CPA, J.D., LL.M.
Tax Principal,
Berdon LLP
The IRS has released a Revenue Procedure1 that provides for a safe harbor in determining the tax treatment of the expenditures
to remodel or refresh a restaurant or retail
store. A project can qualify for the safe harbor
if it is intended to alter the physical appearance and/or layout of a restaurant or retail
space. The safe harbor is designed to simplify
and reduce the compliance costs for the tax
treatment of remodel-refresh projects.
The safe harbor can also apply to the
remodel-refresh expenditures of landlords
that lease real property to restaurant and
retail businesses. However, the safe harbor
does not apply to the initial build-out for a
Background
The tangible property regulations that
generally came into effect in 2014 changed
many of the factors and rules for determining whether costs should be capitalized or
deducted. The restaurant and retail industries have been especially impacted by the
complexity of the rules regarding the costs of
remodeling and refreshing their businesses.
The regulations contain examples illustrating the correct treatment. Many actual remodel-refresh projects have involved
complicated factual situations and the IRS
received frequent inquiries as to the correct treatment. Industry taxpayers were
performing detailed factual analyses to determine whether the costs for each remodel-refresh project qualified as a repair and
maintenance cost (deductible) or as an improvement (capitalized). The IRS issued the
safe harbor in the hopes that it would reduce
disputes and minimize the need for taxpayers to perform detailed factual analysis on a
project-by-project basis.
Change for the Better
The new safe harbor rules only apply to
taxpayers who have an applicable financial
statement. Financial statements generally
meet the requirements for the safe harbor if
they are (i) audited by an independent CPA
firm, (ii) filed with the SEC, or (iii) provided
to a federal or state regulator.
The refresh-remodel safe harbor is a
method of tax accounting that can be elected
by qualifying taxpayers for 2014 and later
tax years. The safe harbor itself is very complicated. Below is a summary of some of the
significant features:
•75 percent of the costs are deductible
and 25 percent of the costs are capitalized
as a building improvement;
•The capitalized portion is depreciated
as well as other capitalized costs of the
building under the rules for general asset
accounts;and
•Taxpayers are not permitted to take
partial disposition deductions and need to
revoke prior year elections.
One additional benefit of the safe harbor
is that it applies for purposes of Section 263A,
the Uniform Capitalization (UNICAP) rules,
which requires taxpayers to capitalize the
direct and indirect costs of producing, improving, and acquiring business property. The
tangible property regulations do not apply
for purposes of Section 263A. The regulations
specifically provide that items that would otherwise be deductible under the tangible property regulations may need to be capitalized
under Section 263A. Adopting the refresh-remodel safe harbor avoids having to perform a
separate Section 263A analysis.
Revenue Procedure 2015-56, 2015-49 IRB 1
See more at: http://www.berdonllp.com/resources/
alerts-evisors/new-safe-harbor-for-remodeling-refreshingrestaurants-and-retail-stores/#sthash.hFpWxAJX.dpuf
30 I LONG ISLAND BUSINESS NEWS I May 6-12, 2016 I LIBN.COM