Dear Clients and Friends:

On Oct. 22, 2004, the President signed into law the "American Jobs Creation Act of 2004 (The Act)", which Congress had earlier passed after months of debate.

Among the many provisions in the Act is one that will have direct impact on many building owners and tenants:

For qualified leasehold improvement property and qualified restaurant property placed in service after October 22, 2004 and before January 1, 2006, the Act provides a 15 year recovery period instead of the 39 year period required under prior law. The property must be recovered using the straight line method.

Congress has come to the realization that lease terms for commercial real estate typically are far shorter than the period-law 39 year recovery period. The Act therefore shortens the recovery period for leasehold improvement and restaurant property to more realistic 15 years.

Example: In February, 2005, ABC Co. plans to move into a commercial building occupying 75,000 square feet, under a ten year lease. The qualified leasehold improvement of ABC will cost $10,000,000. Under prior law, the annual depreciation deduction for improvements would be $256,410. Under the new law, the annual depreciation deduction is $666,667, an increase of $410,256 per year.

Bonus depreciation of 50% will also apply to property placed in service after October 22, 2004 and prior to January 1, 2005.

Qualified leasehold improvement property is defined as an improvement to an interior portion of nonresidential real property by a lessor or lessee under or pursuant to the lease. The improvement must be placed in service more than three years after the building was placed in service. The lessor and lessee may not be related persons. Expenditures for (1) the enlargement of a building, (2) any elevator or escalator, (3) any structural component that benefits a common area, or (4) the internal structural framework of the building do not qualify. In addition, if a lessor makes an improvement that qualifies as qualified leasehold improvement property, it can't be qualified leasehold improvement property to any subsequent owner of the improvement subject to exceptions for non-recognition and death transfers.

Qualified restaurant property is defined as any improvement to a building if the improvement is placed in service more than three years after the date the building was first placed in service and more than 50% of the building's square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals.

The change to a shorter recovery period will benefit building and restaurant owners that pay for tenant leasehold improvements as well as to tenants that pay for their own improvements.

Please contact us @ 916-929-1006 if we can provide any additional information.