RRA changes affect leases.

• Author: O'Connor, John
• Position: Revenue Reconciliation Act of 1993 - Brief Article

Two significant changes in the Revenue Reconciliation Act of 1993 (RRA) have an impact on the leasing of real estatc. The first change extends the recovery life of commercial real estate from 31.5 years to 39 years. This change may affect lease negotiations by further decreasing the desire of tenants to take payments from landlords for tenant improvements instead of rent abatements. Normally, landlords and tenants have different preferences as to lease incentives, with landlords first preferring free rent, second, allowances and third, improvements, while tenants prefer first, improvements, second, free rent and third, allowances.

Because of the extended life of certain improvements, the "tax penalty" for owning these improvements has increased. The increase in rccovery period also reinforces the need to identify who owns any tenant 1mprovements in the leasc document. The allocation of improvements between Sec. 1245 property, which may have a seven-year life, and Sec. 1250 property, which, as noted, has a new 39-year life, is important to the party who takes title to the improvements. Hence, the necessity to perform a thorough cost segregation study is apparent.

The second change has an impact on the recovery period of premiums paid on...