I was presented with a problem the other day for a conversion of an older industrial building to creative office space. The problem was complicated because of the costs to renovate a building today with the new Title 24 energy provisions increased the improvement costs substantially. Not only were the costs substantially higher but the time delay was much longer.
As a developer, longer hold time and higher costs equal potential for higher risk. Our banker and our investors are looking for less risk and better returns for our capital. We needed a way to increase our cash flow and construct a better building that conforms to more energy efficient cost savings.
Today, cost segregation is a partnership between CPA's and industrial engineers to provide methods to accelerate depreciation for improvements to your real estate which conform to IRS regulations. I am no expert when it comes to cost segregation or IRS rules but I am a sophisticated developer looking at maximizing my cash flow. In 1997 the United States Tax Court approved provisions in their codes to allow for accelerated depreciation under certain circumstances. It is my understanding that accelerated depreciation can reduce your amortization of improvements from as long as 39 years to as little as 5 years depending upon the type of improvement.
Of course, you must first employ a reputable cost segregation firm and have them provide an analysis of your plan. A number of cost segregation firms can provide you with a cursory estimate of your tax savings at no cost or very little cost to get you into the front door.
I suggest that anyone making major investments in renovation to your commercial real estate should consider this avenue.
The work environment is changing in California; as a result, commercial office space is changing In Los Angeles. Industrial buildings are being transformed into creative office space in small once obsolete pockets of beach cities like the historical area called Smoky Hollow in El Segundo.
In 1911 when there were only farms around Standard Oil built their second California oil refinery (now called Chevron Oil Refinery) in El Segundo. After the area was developed in the 1950s, the steam spewing from the refinery pipes caused smoke to billow in the industrial area thus the name Smoky Hollow.
The refinery no longer emits steam today, however, the city decided to keep the Smoky Hollow nickname. Located a half mile away from Dockweiler Beach, Smoky Hollow has small industrial buildings rented by technology companies like Beyond Meat a food tech start-up.
Historical areas in Los Angeles with the small downtown area, outdoor green spaces and beaches like Venice, Santa Monica and El Segundo attract these creative companies.
Today’s generation has changed President Obama said; “you have the opportunity in ways that previous generations did not have to create something yourself, to be your own boss, to have flexibility with respect to your hours, to pursue your dreams, to raise capital in creative ways, to bust down some of the barriers that -- and gatekeepers that traditionally existed in every industry.”
Collaboration, games and fun have been introduced into the workspace. For example Google has transformed three adjacent industrial office buildings in Venice to a 100,000-square-foot beach house playground.
The Venice location has a climbing wall, an outdoor theater to show movies and have conferences, a pool table, a rooftop deck with ocean views and surfboards and wetsuits for their employees to use for surfing two blocks away at Venice Beach.
The older brick and concrete industrial buildings built in the mid- 20th century or before are in high demand now due to their unique characteristics.
Creative office space is the new commercial office. These older buildings converted to creative space are commanding higher rents that El Segundo has not seen in their industrial areas.
These urban pockets are creating a profit and keeping pace with newer lucrative business districts in Los Angeles. In addition, they are revitalizing the downtown city areas.