[Congressional Record Volume 141, Number 43 (Wednesday, March 8, 1995)]
[Extensions of Remarks]
[Pages E552-E553]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                            TAX LEGISLATION

                                 ______


                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                        Wednesday, March 8, 1995
  Mr. SHAW. Mr. Speaker, I am pleased to introduce, along with my Ways 
and Means Committee colleague Mr. Rangel, long overdue tax legislation 
to reform the cost recovery rules associated with leasehold 
improvements. Simply stated, our legislation would enable building 
owners to more closely match the expenses incurred to construct these 
improvements with the income the improvements generate under the lease.
  Office, retail, or other commercial rental real estate is typically 
reconfigured, changed or somehow improved on a regular basis to meet 
the needs of new and existing tenants. Internal walls, ceilings, 
partitions, plumbing, lighting and finish each are elements that might 
be the type of improvement made within a building to accommodate a 
tenant's requirements, and thereby ensure that the work or shopping 
space is as modern, efficient, and environmentally responsible as 
possible.
  Logically, the time period during which the costs associated with 
constructing leasehold improvements are recovered, through depreciation 
deductions, should match the time period during which the improvement 
is useful. Unfortunately, today's depreciation rules do not 
differentiate between the economic useful life of a building 
improvement--which typically corresponds with a tenant's lease-term--
and the life of the overall building structure. The result is that 
current tax law dictates a depreciable life for leasehold improvements 
of 39 years--the depreciable life for the entire building--even though 
most commercial leases typically run for a period of 7 to 10 years. 
Correcting this mismatch between income and expense is the goal of our 
legislation.
  Compounding this problem is confusion in the marketplace today 
concerning whether a building owner may close out and deduct currently 
any unrecovered costs remaining at the time a leasehold improvement is 
destroyed. It seems almost absurd, but the current rules are in some 
cases being interpreted to deny the ability of a building owner to 
``close out'' its investment for tax purposes even though the 
improvement has been scrapped, demolished or otherwise permanently 
retired from service. Theoretically, in 30 years a building owner could 
have had 6 different 5-year tenants, each requiring different 
improvements to accommodate their individual business needs. Because of 
the current confusion, the owner may be required to depreciate 
improvements that in fact no longer exist. In addition to more closely 
recovering the costs of the improvements with the income generated by 
them, this close out issue needs to be addressed.
  As a result of today's flawed depreciation rules in this area, the 
after-tax cost of reconfiguring, or building out, office, retail, or 
other commercial space to accommodate new tenants or modernizing work 
places is artificially high. This is because building owners are unable 
to fully deduct the economic costs expended on leasehold improvements 
over the period in which the improvements actually generate income.
  In addition, the current policy hinders urban reinvestment and 
construction job opportunities as improvements are delayed or not 
undertaken at all. Especially given the absence of new building 
construction in many markets, opportunities for the Nation's seven 
million construction and building trades workers in the remainder of 
the decade will largely be tied to the renovation and rehabilitation of 
existing commercial space.
  Moreover, a widespread shift to more energy-efficient, 
environmentally sound building elements is discouraged by the current 
tax system because of their typically higher expense. For example, the 
Natural Resources Defense Council notes that commercial lighting alone 
consumes more than one-third of the electrical energy produced in the 
United States. If a greater conservation potential of energy-efficient 
lighting were to be realized, the demand for the equivalent of one 
hundred 1,000-mega-watt power plants could be eliminated, with 
corresponding reductions in air pollution and global warming.
  To address this issue, our legislation would establish a new 
depreciation recovery period of 10 years for a carefully defined 
category of interior building improvements. In general, to qualify 
under the legislation the improvement must be constructed by a lessor 
or lessee in the tenant-occupied space. In an effort to ensure that the 
legislation is as cost efficient as 
 [[Page E553]] possible, improvements constructed in common areas of a 
building, such as elevators, escalators, and lobbies, would not 
qualify; nor would improvements made to new buildings.
  Equally important, our legislation would clarify that building owners 
are permitted to fully deduct and close out any unrecovered leasehold 
improvement expenses remaining at the time a lease expires and the 
improvement is demolished.
  Our legislation should be enacted this year. This would acknowledge 
the fact that improvements constructed for one tenant are rarely 
suitable for another, and that when a tenant leaves, the space is 
typically built-out all over again for a new tenant. It is important to 
note that prior to 1981 our tax laws allowed these improvement costs to 
be deducted over the life of the lease. Subsequent legislation, 
however, abandoned this policy as part of a move to simplify and 
shorten building depreciation rules in general to 15 years. Given that 
buildings are now required to be depreciated over 39 years, it is time 
to face economic reality and reinstate a separate depreciation period 
for building improvements to tenant occupied space.
  I am pleased that several members of the Ways and Means Committee 
have joined me today in introducing this legislation. I urge all 
members of the House to review and support this important job 
producing, urban revitalization legislation, and I look forward to 
working with the Ways and Means Committee to enact this bill.


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