[Congressional Record Volume 145, Number 57 (Monday, April 26, 1999)]
[Senate]
[Pages S4190-S4191]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. CONRAD (for himself, Mr. Mack, Mr. Nickles, Mr. Robb, and 
        Mr. Baucus):
  S. 879. A bill to amend the Internal Revenue Code of 1986 to provide 
a shorter recovery period for the depreciation of certain leasehold 
improvements; to the Committee on Finance.


              ten-year leasehold improvement depreciation

  Mr. CONRAD. Mr. President, I rise today, joined by my colleagues Mr. 
Nickles, Mr. Mack, Mr. Robb, and Mr. Baucus, to introduce important 
legislation to provide for a 10-year depreciation life for leasehold 
improvements. Leasehold improvements are the alterations to leased 
space made by a building owner as part of the lease agreement with a 
tenant.
  These improvements can include interior walls, partitions, flooring, 
lighting, wiring and plumbing--essentially any fixture that an owner 
provides in space leased to a tenant. They keep a building modern, 
upgraded, and energy efficient. In actual commercial use, leasehold 
improvements typically last as long as the lease--an average of 5 to 10 
years. However, the Internal Revenue Code requires leasehold 
improvements to be depreciated over 39 years--the life of the building.
  Economically, this makes no sense. The owner receives taxable income 
over the life of the lease (i.e., 10 years), yet can only recover the 
costs of the improvements associated with the lease over 39 years--a 
rate nearly four times slower. This wild mismatch of income and 
expenses causes the owner to incur an artificially high tax cost on 
these improvements.
  The bill we introduce today will correct this irrational and 
uneconomic tax treatment by shortening the cost recovery period for 
certain leasehold improvements from 39 years to a more realistic 10 
years. If enacted, this legislation would more closely align the 
expenses incurred to construct these improvements with the income they 
generate during the lease term.
  For example, a building owner who makes a $100,000 leasehold 
improvement for a 10-year, $1 million lease would be able to recover 
this entire investment by the end of that lease at a rate of $10,000 
per year. Under current law, this $100,000 improvement is recovered at 
a rate of $2,564 per year over 39 years.
  By reducing this cost recovery period, the expense of making these 
improvements would fall more into line with the economics of a 
commercial lease transaction, and more property owners would be able to 
adapt their buildings to fit the demanding needs of today's modern 
business tenant. Small business should find this bill particularly 
helpful, because small businesses turn over their rental space more 
frequently than larger businesses. And we cannot forget that over 80 
percent of building owners who provide space to small businesses are 
themselves small businesses.
  We have an interest in keeping existing buildings commercially 
viable. When older buildings can serve tenants who need modern, 
efficient commercial space, there is less pressure for developing 
greenfields in outlying areas. Americans are concerned about preserving 
open space, natural resources and a sense of neighborhood. The current 
law 39-year cost recovery for leasehold improvements is an impediment 
to reinvesting in existing properties and communities.
  This legislation has the strong backing of six major real estate 
organizations, including the National Realty Committee, the national 
Association of Realtors, the International Council of Shopping Centers, 
the national Association of Industrial and Office Properties, the 
national Association of Real Estate Investment Trusts, and the Building 
and Office Managers Association, International.
  I urge all Senators to join us in supporting this legislation to 
provide rational depreciation treatment for leasehold improvements.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 879

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN 
                   LEASEHOLD IMPROVEMENTS.

       (a) 10-Year Recovery Period.--Subparagraph (D) of section 
     168(e)(3) of the Internal Revenue Code of 1986 (relating to 
     10-year property) is amended by striking ``and'' at the end 
     of clause (i), by striking the period at the end of clause 
     (ii) and inserting ``, and'', and by adding at the end the 
     following new clause:
       ``(iii) any qualified leasehold improvement property.''.
       (b) Qualified Leasehold Improvement Property.--Subsection 
     (e) of section 168 of such Code is amended by adding at the 
     end the following new paragraph:
       ``(6) Qualified leasehold improvement property.--
       ``(A) In general.--The term `qualified leasehold 
     improvement property' means any improvement to an interior 
     portion of a building which is nonresidential real property 
     if--
       ``(i) such improvement is made under or pursuant to a lease 
     (as defined in subsection (h)(7))--

       ``(I) by the lessee (or any sublessee) of such portion, or
       ``(II) by the lessor of such portion,

       ``(ii) such portion is to be occupied exclusively by the 
     lessee (or any sublessee) of such portion, and
       ``(iii) such improvement is placed in service more than 3 
     years after the date the building was first placed in 
     service.
       ``(B) Certain improvements not included.--Such term shall 
     not include any

[[Page S4191]]

     improvement for which the expenditure is attributable to--
       ``(i) the enlargement of the building,
       ``(ii) any elevator or escalator,
       ``(iii) any structural component benefiting a common area, 
     and
       ``(iv) the internal structural framework of the building.
       ``(C) Definitions and special rules.--For purposes of this 
     paragraph--
       ``(i) Commitment to lease treated as lease.--A commitment 
     to enter into a lease shall be treated as a lease, and the 
     parties to such commitment shall be treated as lessor and 
     lessee, respectively.
       ``(ii) Related persons.--A lease between related persons 
     shall not be considered a lease. For purposes of the 
     preceding sentence, the term `related persons' means--

       ``(I) members of an affiliated group (as defined in section 
     1504), and
       ``(II) persons having a relationship described in 
     subsection (b) of section 267; except that, for purposes of 
     this clause, the phrase `80 percent or more' shall be 
     substituted for the phrase `more than 50 percent' each place 
     it appears in such subsection.''

       (c) Requirement To Use Straight Line Method.--Paragraph (3) 
     of section 168(b) of such Code is amended by adding at the 
     end the following new subparagraph:
       ``(G) Qualified leasehold improvement property described in 
     subsection (e)(6).''.
       (d) Alternative System.--The table contained in section 
     168(g)(3)(B) of such Code is amended by inserting after the 
     item relating to subparagraph (D)(ii) the following new item:

  ``(D)(iii).................................................10 ''.    
       (e) Effective Date.--The amendments made by this section 
     shall apply to qualified leasehold improvement property 
     placed in service after the date of the enactment of this 
     Act.

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