Buyer Beware: Permanent Fixtures v. Personal Property and Why it Matters

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Buyer-Beware-Permanent-FixtThe analysis and classification of property plays a critical role in the success of your eminent domain case. An analysis must be performed to define between personal property (including trade fixtures), permanent fixtures, and other forms of property. The real property offer that a displacing public agency makes depends on this analysis, but it’s dangerous to assume that their analysis is, by its nature, automatically accurate. Misclassification can cost a displaced business millions of dollars in out of pocket expenses. A close examination of the analysis should be performed to weigh the benefits and drawbacks of the classifications that have been made.

I recently worked with a business that would have been $4.5m out of pocket had they accepted the offer from the displacing agency. It came down to the issue of permanent fixtures vs. trade fixtures (personal property). The displacing agency made an offer of $4m for items that the agency classified as permanent fixtures. In order for the displaced business to reestablish its operations, the business would, in fact, have had to buy these “fixtures” back from the agency at salvage value, estimated by the agency at $500k. By my estimation, the relocation costs would have cost $8m in reinstallation at the new location. The result would have been $4.5m out of pocket, all because of the acceptance of the property analysis.

Defining Fixtures:

Permanent fixtures are typically equipment that cannot be moved and therefore becomes part of the real property. They will be purchased as real property, and are not eligible for relocation benefits.

Trade fixtures are typically items used in the business trade, which can be easily detached, thereby, converting to personal property when detached, which then are eligible for relocation benefits. The definitions and criteria used for classifying permanent fixtures and trade fixtures will be discussed at another time in the future.

Understanding the Advantages and Disadvantages of Classifying Items as Fixtures

Example 1: Case Study – COMPANY X & AGENCY Z

I was asked to evaluate Agency Z’s real property acquisition offer, which included a personal property and fixture analysis for COMPANY X. There were three areas of concern:

#1: Permanent Fixture v. Personal Property

#2: Installation Classified as Fixture v. Reinstallation of Personal Property

#3: Infrastructure Classified as a Fixture v. Reinstallation of Personal Property

#1: Permanent Fixture v. Personal Property – AGENCY Z classified many items as permanent fixtures, which are typically classified as personal property. It was in COMPANY X’s interest to re-classify some or all items as personal property.

Value: AGENCY Z valued approximately $4.2m of the items as permanent fixtures, which could, or should, have been classified as personal property.

Adverse effects of a permanent fixture classification:

Permanent fixtures are not eligible for relocation benefits; therefore if COMPANY X desired to relocate an item classified as a permanent fixture, the costs for moving, reconnecting, and/or modifying, were not reimbursable and would have been COMPANY X’s responsibility.

The permanent fixture classification of items is not good when:

  • The item will be needed at the replacement property
  • Code upgrades are needed for the item’s reinstallation
  • Significant infrastructure is needed for the item’s reinstallation such as, plumbing, footings, venting, power, etc.

Positive effects of a permanent fixture classification:

Fixtures can be abandoned and paid out for the amount of the fixtures Value in Use, which can potentially be greater than abandoning the same item if it were classified as personal property.

When abandoning an item as personal property, the amount received is the lesser of; the Value in Use, or, the estimated cost to move and reinstall.

When abandoning an item classified as a fixture, the amount received is the appraised “Value in Use”, or also called “Value in Place”.

In other words, reimbursements for abandoning an item as a fixture will always be equal to, or better than, abandoning the same item when it is classified as personal property.

Fixtures are good when:

  • The fixture is not needed at the replacement property
  • The business is closing
  • The item’s Value in Use is greater than the cost to buy it at salvage value plus its reinstallation cost (not common)

Changing items classified as permanent fixtures to a classification of personal property:

In the case of COMPANY X, these items included machinery and equipment, which was installed for the business of treating customer products. These items were not installed for operating the real property, as would a permanent fixture.

#2: Installation Classified as Fixture v. Reinstallation of Personal Property – AGENCY Z classified the installation as a fixture for items they classified as personal property. Typically, the installation of personal property items is not classified as a fixture or personal property. Installation is simply part of relocating and reinstalling the personal property.

Value: AGENCY Z had valued approximately $1m installation of personal property as a fixture.

Negative effects: (same as above)

Positive effects: (same as above)

#3: Infrastructure Classified as a Fixture v. Reinstallation of Personal Property – AGENCY Z had classified the infrastructure items as fixtures, such as: plumbing and electrical.

Value: Electrical $195k; Plumbing $739k

Negative effects of infrastructure as a fixture:

Most replacement buildings would not have had the level of infrastructure needed to support COMPANY X’s equipment needs for plumbing and electrical. If the plumbing and electrical had costs exceeding AGENCY Z’s fixture value, COMPANY X would have have had to pay the extras out of their own pocket.

Positive effects of infrastructure as a fixture:

If COMPANY X happened to locate a replacement building that included most of their needed plumbing and electrical (which was doubtful), then AGENCY Z’s infrastrucure value and payment may have put money in COMPANY X’s pocket.

If COMPANY X chose to go out of busines, then having the infrastructure catagorized as a fixture would have been good for COMPANY X.

Example 2: Heat Treating Furnace

A very specific example of the pitfalls of accepting an offer from the displacing agency can be illustrated with this heat treating furnace as one particular item owned by this business. In this case, the agency offered to purchase this item as a permanent fixture at $66k and made it eligible for purchase by the owner from the agency for $8.5k.

However, permanent fixtures, as this furnace was classified by the agency, are not eligible to receive reimbursements for moving and reinstalling. The cost to move and reinstall a furnace like this is estimated at $140k, as shown in the Relocation Cost Analysis spreadsheet below.

For the business to have opened shop at another location using the agency’s valuation the business would have had to purchase this furnace for $8.5k and then spend $140k to move and reinstall it.  They would have received $66k from the agency but would have been out of pocket $82.5k.

Reclassifying a furnace like this from a permanent fixture to personal property allowed relocation benefits to pay for the full relocation costs of $140k with no out of pocket expenses for the business.

Buyer Beware Permanent Fixtures v Personal Property and Why it Matters

As these examples illustrate, it’s critical to understand the advantages and disadvantages of classifying items as fixtures. It’s potentially extremely expensive and detrimental to a displaced business to assume that an analysis is automatically correct. If you are at risk of having your property taken by eminent domain, scrutinize the analysis of fixtures v. personal property to weigh the benefits and drawbacks of the classifications that have been made in your case. If you have any questions regarding the question of fixtures, personal property, relocation, or other areas of eminent domain, get in touch and I’d be happy to discuss the matter with you.

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