[Congressional Record Volume 149, Number 37 (Friday, March 7, 2003)]
[Senate]
[Pages S3371-S3372]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. CONRAD (for himself, Mr. Nickles, Mr. Breaux, Mr. Hatch, 
        Mr. Dorgan, Mr. Kyl, Mrs. Lincoln, Mr. Cochran, Ms. Stabenow, 
        Mr. Fitzgerald, Mrs. Clinton, Mr. Reid, and Mr. Sununu):
  S. 576. 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.
  Mr. CONRAD. Mr. President, I rise today, joined again by my colleague 
Mr. Nickles and many others, to introduce important legislation to 
provide 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.
  This is a common sense move that will help bring economic development 
to cities and towns around the country that want to revitalize their 
business districts. It will allow owners of commercial property to 
remodel their buildings to better meet the business needs of their 
communities--whether for new computer ports and data lines for high-
tech entrepreneurs, or better lighting and sales space for retailers.
  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 itself.
  Economically, this makes no sense. The owner receives taxable income 
over the life of the lease, yet can only recover the costs of the 
improvements associated with that lease over 39 years--a rate nearly 
four times slower. This preposterous mismatch of income and expenses 
causes the owner to incur an artificially high tax cost on these 
improvements.
  The bill we are introducing 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. The proposal being offered today would apply to property placed 
in service after September 10, 2004, in order to provide a smooth 
transition from the temporary bonus depreciation system enacted as part 
of the Job Creation and Worker Assistance Act of 2002.
  This legislation would more closely align the expenses incurred to 
construct improvements with the income they generate over the term of 
the lease. By reducing the cost recovery period, the expense of making 
these improvements could fall more into line with the economics of a 
commercial lease transaction, and more building owners would be able to 
adapt their buildings to fit the needs of today's business tenant.
  It is good for the economy to keep 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 period for leasehold improvements is an 
impediment to reinvesting in existing properties and communities.
  Shortening the recovery period will make renovation and 
revitalization of business properties more attractive. That will be 
good not just for property owners, but also for the economic 
development professionals who are working hard every day to attract new 
businesses to empty downtown storefronts or aging strip malls. And it 
will be good for the architects and contractors who carry out the 
renovations.
  I urge all Senators to join us in supporting this legislation to 
provide rational depreciation treatment for leasehold improvements.
  Mr. NICKLES. Mr. President, today I am joining my colleague from 
North Dakota, Mr. Conrad, in introducing legislation to provide that 
leasehold improvements are depreciated over 10 years instead of the 
current-law 39 years. Leasehold improvements are modifications to the 
interior of rental space, either office or retail space, not 
residential real estate, made by a building owner as part of a lease 
agreement with a tenant. These improvements include electrical and 
communications outlets, data ports, floor coverings, fire and security 
systems, and internal walls.
  Under the current depreciation system, leasehold improvements to 
rental property are depreciated over the same time period as the 
building itself--39 years. However, this 39 year depreciable life does 
not reflect the actual

[[Page S3372]]

life of these improvements. Lease terms average 7 to 10 years for 
office space and 3 to 5 years for retail space. Building owners 
typically must remove any leasehold improvements they have made to a 
property at the end of the lease term. Or, in the case of a lease 
renewal, tenants frequently demand that owners make improvements to the 
property as a condition of renewing the lease. Requiring business 
owners to depreciate these improvements over 39 years leads to a 
mismatch of income and expenses, thereby increasing the tax consequence 
of making such improvements. The long depreciation period simply makes 
no economic sense.
  I believe that our tax laws should be updated to treat leasehold 
improvements in a more rational manner. That is why my colleague and I 
are introducing legislation to reduce the depreciable life of these 
improvements from 39 years to 10 years. By reducing the time period 
over which leasehold improvements are depreciated, our bill will more 
accurately align income and expenses related to rental property, and 
will mitigate the tax disincentives to modernizing commercial 
buildings.
  In last year's economic stimulus bill Congress provided some relief 
to owners of rental property by allowing a 30 percent depreciation 
bonus for qualified leasehold improvements. However, this relief is 
only partial and is temporary. I look forward to working with my 
colleagues to enact my legislation that will provide more rational tax-
treatment of leasehold improvements on a permanent basis. By so doing, 
we will take an incremental step toward modernizing the tax code's 
outdated depreciation rules.
                                 ______