Depreciation of Specialized Properties and Buildings

Syndication is not confined to real estate and lease-holds any more. True, there are usually one or more build¬ings involved. But when you buy a bowling alley, a motel, a hotel, or a sanatorium, you are really investing in a bus¬iness. If you are not convinced, just think of what you would do with an empty bowling alley 5 miles from the center of a small city if people for one reason or another stopped bowling or stopped coming to your bowling alley.

There are other special situations. If you buy a build¬ing which is used as a factory by a manufacturer of pretz els or machinery or which was built to specifications, your building is worth its rent as long as your tenant stays in it. But let him move out, and it may take you a long time to find some other tenant to whom the especially built-in features are worth the rent which you need in order to make money or even in order to break even. Remember taxes will have to be paid and installments on the mortgage will have to be met. During all that time the building may be empty.
There is really an endless variety of situations. Each one requires a different depreciation set-up. In fact, very frequently in one deal two different percentages of de¬preciation are used. Just think of a motel. If you depre¬ciate the furniture over a period of 5 years, that is if you deduct 20% every year for depreciation, you may do yourself an injustice. That furniture may wear out much faster, and long before your depreciation reserve is big enough to replace the furniture, it may be "shot". But try to depreciate the building over 5 years. Uncle Sam won't permit it. He will say that the building has a longer useful life. Let us hope for your sake, if you have made an investment in a motel, that Uncle Sam is right.

So what must you look for? You must look for the depreciation rate. It is or should be in the brochure. Then you must decide whether it is a reasonable one con¬sidering the type and nature of the venture. Specifically

—and this is very important, because it really affects your ultimate profit—you must ask yourself the following questions.
First, is the estimated depreciation too small to offset the true yearly diminution in value of the property? If your answer to this question is yes, your return on your investment will be smaller than you anticipate.

Second, is the depreciation claimed just about right to offset the anticipated diminution in value of the property? If the answer is yes, you should realize that the tax-free portion of the distribution which you are going to receive represents really nothing but a partial reimburse¬ment of your investment.

Third, is it probable that the property will keep its value or even increase in value over the years, so that the depreciation claimed results in a tax shelter for you, while in fact no real decrease in value will take place? If the answer to this question is yes, you have probably a good deal, at least as far as depreciation is concerned.

Next: The Importance of Growth —A Word About Inflation