Senate bill would make leasehold improvements easier, cheaper.

A bipartisan group of Senate lawmakers introduced legislation (S. 879) on April 26th to reduce the depreciation period for leasehold improvements from 39 years to 10 years, a step that would allow leasehold improvements' construction costs to more closely match the actual economic life of such improvements.

The bill's Senate co-sponsors include Max Baucus (D-MT), Kent Conrad (D-ND), Connie Mack (R-FL), Don Nickles (R-OK) and Charles S. Robb (D-VA). All are members of the tax-writing Senate Finance Committee.

S.879 is the companion bill to H.R. 844, introduced in February by House Ways and Means Committee member E. Clay, Jr. (RFL) and other lawmakers. H.R. 844, which enjoys strong bipartisan support, currently has 38 House co-sponsors, many of whom are Ways and Means Committee members.

"This action in the Senate reflects a growing recognition in Congress that the current tax treatment of leasehold improvements is inefficient and out of sync with the realities of the real estate marketplace," said NRC President and Chief Operating Officer Jeffery D. DeBoer. "By more closely aligning the costs of constructing leasehold improvements with the income these improvements generate during the typical lease term, this legislation will make it easier for commercial property owners to keep pace with the changing needs of their tenants. The longer an existing building remains viable for tenants who need modern, efficient commercial space, the less pressure on property owners to develop 'greenfields' in outlying suburban areas, and the less growth impact on communities."

Under current law, tenant improvements must be depreciated over 39 years (the recovery period for all the overall building structure), even though most commercial leases average less than 10 years, and improvements for one tenant typically are demolished or modified to meet the needs of new tenants.

"Current law creates a mismatch of revenue to expense, which artificially increase the tax cost of leasehold improvements and discourages reinvestment in existing buildings and communities," DeBoer said.

By providing for a 10-year cost recovery period, H.R. 844 and S.879 would more closely match improvement costs incurred by building owners to the actual life of the improvements themselves. This, in turn, would reduce the after-tax costs of constructing leasehold improvements and lead to more modern, efficient and environmentally responsible work, shopping and recreation space across America.

By removing a disincentive to reinvestment in existing buildings and communities, the legislation would also encourage federal, state and local efforts in promoting "smart growth" initiatives and addressing urban sprawl.

The legislation would particularly benefit small business, which tend to turn over their rental space frequently. Many real estate owners are small businesses themselves.

H.R. 844 and S.879 are backed by National Realty Committee and five other major real estate organizations, including the Building Owners and Managers Association, International Council of Shopping Centers, National Association of Industrial and Office Properties, National Association of Real Estate Investment Trusts, and the National Association of Realtors.