Tax Strategies Make Life Sciences a Strong Real Estate Investment

By Darya Shneyder  |  October 22, 2021

Tax Incentives in Life Sciences Real Estate: What Investors Need to Know

The life sciences industry is expanding at an unprecedented rate, and the development of related technologies requires a great deal of commercial real estate space. This presents an opportunity for investors to capitalize on the development of spaces for the evergreen life sciences industry.

Life sciences companies were once found primarily in New England. Newer companies are currently exploring other locations on the east coast, particularly New York City and the Tri-State area. Life sciences companies seek locations with robust active infrastructure, academic institutions and hospitals that support life sciences and, of course, the necessary capital resources. New York City’s planners envision 3 million square feet of new life sciences space over the next decade.

As with any transaction, investing in life sciences real estate calls for a number of considerations. For example, there are certainly large capital expenditures involved in equipping life sciences facilities. However, there are also significant opportunities for tax benefits.

We at Marks Paneth have connected with Terri S. Johnson, CRE, and Ziv Carmel, CCSP, founding partners at Capstan Tax Strategies. With decades of commercial real estate experience, they are uniquely suited to discuss maximizing tax savings on life sciences properties.

Q. What is the biggest challenge you see for an investor in the life sciences industry?

A. Simply stated, the biggest challenge is the fit-out cost. These types of properties – such as labs and R&D spaces – require property improvements that are extremely specialized and extremely expensive. The cost per square foot associated with finishing a life sciences property is higher than that associated with fitting out any other type of commercial real estate. The cost burden can be shared between landlord and tenant, though often tenants pick up the lion’s share of the costs.

Q. What are some of the typical improvements you are seeing? What amenities are landlords trying to provide?

A. Specific improvements depend on the type of life sciences property, but we consistently see specialty hookups such as plumbing connections, electrical distribution and mechanical infrastructure. Waste and drainage systems often must be specialized, often incorporating grease interceptors that separate biohazardous waste from routine drainage. Other biohazard-related improvements include flush devices, hoods for process exhaust and specialty air filtering systems to meet rigid standards. Enhanced HVAC is a must, in general, as strict climate control must be maintained. Most facilities have backup generators to ensure uninterrupted power supply to their process equipment and walk-in coolers/freezers. Finally, properties often have enhanced access control and surveillance monitoring systems, as process and product must often be confidential.

Life sciences firms are excellent, high-end tenants who are in it for the long term – after an involved and expensive fit-out, they aren’t going anywhere. Landlords are trying to attract these tenants with upgraded building amenities that speak to the nature of their industry. Many facilities are open around the clock, with multiple shifts and long hours. Landlords are trying to make their buildings more comfortable for these busy employees by providing on-site fitness centers and cafes, as well as outdoor landscaping and picnic areas.

Q. Are there tax benefits that might offset some of the capital expenditures required for a life sciences property?

A. There are many favorable tax strategies that can boost a project’s bottom line, and often the key to employing them most successfully is simply good planning. Cost segregation is one of these powerful strategies, and it is primarily used to accelerate depreciation deductions, though it has myriad applications. The benefits of cost segregation on acquisitions, new construction and renovation projects include significant tax deferrals and improved cash flow.

Cost segregation is a tax strategy in which specific components of a building or improvement project are identified and reallocated into modified cost recovery system class lives for federal tax purposes. Treating the assets as personal property or land improvements allows depreciation of these assets to be accelerated. Personal property – which includes virtually all the specialty items mentioned above– depreciates over five or seven years. This is significantly quicker than a conventional 39-year depreciation period. The taxpayer is not creating new deductions but is shifting the deductions toward the earlier years of ownership. This front-loading of depreciation offsets income and lowers the tax burden. This accelerated depreciation can create $30,000 to $200,000 in federal tax benefits for every $1 million invested into a life sciences property.

Year

Bonus Value

9/28/2017 – 12/31/2017

100% (50% election)

1/1/2018 – 12/31/2022

100%

2023

80%

2024

60%

2025

40%

2026

20%

Bonus Depreciation is an additional tax incentive. It permits the immediate write-off of the full purchase price of eligible assets in addition to other depreciation. New and used assets with class lives of 20 years or less are eligible for this “bonus,” which significantly boosts tax savings. Again, virtually all the specialty life sciences assets discussed would be eligible for bonus depreciation. Cost segregation is the primary vehicle used to determine and document which assets are eligible for this powerful incentive. The table lists the established bonus depreciation rates through 2026. The rate for eligible assets placed in service through 2022 is 100%, followed by a subsequent decline. Additionally, improvements made to an existing property may also be eligible for 100% bonus depreciation, if they fall into a category known as Qualified Improvement Property.

Another relevant tax strategy is EPAct 179D, a one-time deduction that permits the accelerated depreciation of newly constructed or renovated energy-efficient property that meets a certain standard. If you are constructing a new facility or renovating a space for life sciences use, consider incorporating energy-efficient improvements in lighting, HVAC, or building envelope. These improvements may qualify for a depreciation deduction of up to $1.80/improved square foot.

If you are renovating a property for life sciences use, you’ll probably dispose of a number of assets that are no longer needed. If an asset no longer exists, the remaining depreciable basis of that asset may be written off in the year the asset is removed. This powerful tax strategy is called Partial Asset Disposition. Again, a cost segregation study is required to provide the data that supports this write-off.

Q. Your company, Capstan Tax Strategies, is a cost segregation firm. What does the Capstan cost segregation study process look like? What kind of timeframe is involved?

A. Any quality cost segregation study begins with a discussion of the taxpayer’s goals and the specific facts and circumstances surrounding the property. The cost segregation provider will create a tailored, comprehensive plan to maximize tax savings, including strategies in tandem when appropriate. We provide a no-cost estimate of benefits. An engineer will visit your property to take detailed notes and photos to quantify and document all relevant assets. Our general turnaround time is 30 days, but the Capstan team works collaboratively with the CPA to provide a report that meets your deadline. Your report will include all data and analysis required to justify tax deductions and expensing decisions. 

About Capstan Tax Strategies:
Capstan Tax Strategies delivers engineering-driven specialty tax solutions that maximize the valuable tax benefits of real estate holdings. By complementing and collaborating with accounting firms, we arm commercial real estate owners, executives, and tenants with the data and analysis required to accelerate depreciation, maximize deductions, and capture tax credits.


About Darya Shneyder

Darya Shneyder Linkedin Icon

Darya Shneyder, CPA, is a Partner in the Real Estate Group at Marks Paneth LLP.  Ms. Shneyder specializes in providing accounting, auditing, tax and advisory services to commercial and residential real estate owners, developers, and co-ops and condominiums. She also specializes in securing real estate tax reduction via certiorari audit filings. Ms. Shneyder works closely with client’s officers and directors to establish a personalized audit approach to efficiently execute an attestation engagement. She has in-depth... READ MORE +


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