There have been many disappointed businesses owners when finding how much out of pocket, non-reimbursable money they spent to relocate their business due to a public project taking their property. The federal relocation guidelines don’t automatically guide the business to the best relocation results. To achieve the best results, each business relocation small and large, must have some level of analysis performed to distinguish between personal property and real property, as well as, to determine the proper amounts and best methods for receiving relocation payments from the public agency while following the relocation guidelines.

To emphasize this, recently while planning a business relocation, our personal property analysis determined that a refrigeration unit was improperly classified by the public agency’s appraiser as a non-moveable fixture. The appraiser also determined that it added no value to the property so it contributed no funds to the just compensation, so it had zero value. Furthermore, because the unit was classified as real property, there were no relocation benefits available for it.

We analyzed the refrigeration unit and were able to successfully demonstrate to the public agency that the unit was actually a moveable trade fixture, therefore considered personal property and entitled to relocation benefits. Further analysis demonstrated the cost to substitute the unit with a new unit was slightly less than the estimated $1 million to move and reinstall the existing unit.

This analysis resulted in the business receiving a new refrigeration unit at the replacement property with no out of pocket costs for the business, and very importantly, no downtime for the business, which would have occurred had they relocated the existing unit.

There are four possible methods of receiving compensation for a piece of equipment or personal property depending on its classification and the needs for the item, they are:

As Real Property
1. Payment within just compensation when the item is classified as real property because it’s a non-movable fixture

As Personal Property within the relocation benefits when the item is classified as a movable fixture or personal property, which includes choices of payments as follows:
2. As abandoned personal property
3. As relocated personal property
4. As substituted personal property

A basic comparison of how acquisition and relocation proceeds related to fixtures and personal property are described and calculated as follows:

As Real Property (non-movable fixture):

Let’s say an air compressor was determined to be a non-movable fixture, therefore it is real property, and it has an appraised value of $5,000. (Often, the value can be zero when the item does not contribute to the value of the property)

Non-movable fixtures are purchased as real property by condemning agencies. Within the real property acquisition payment the property owner would receive the $5,000 for the air compressor in our example. Payments for real property are subject to capital gains tax, although the tax can be deferred with a 1033 exchange. Currently the capital gains tax rate for most businesses is at 15%. If the tax is not deferred and the compressor has been fully depreciated, the property owner would be subject to capital gains tax of $750, for a net of $4,250. (This should be reviewed by your tax advisor.)

Side notes:
• Non-movable fixture payments typically are paid to the real property owner, not the tenant, which may have purchased and installed the fixture.
• Fixtures on occasion will include foundations, electrical and plumbing infrastructure. Receiving additional compensation for these items as non-movable fixtures will eliminate the ability to receive cost reimbursements for these items when reinstalling the personal property that the foundations or infrastructure serve.

As Personal Property and/or Movable Fixture:

Let’s say the same air compressor described above was determined to be a movable trade fixture, therefore personal property. The business has three choices in dealing with the air compressor:

• Abandon
• Relocate/Move
• Substitute

Abandon
When the item of personal property is not needed at their replacement location, or the business does not relocate, the business may want to receive a payment for abandonment of the personal property.

The federal relocation guidelines’ payment formula for abandoning personal property is the lessor of the value-in-use or the estimated cost to relocate the item.

If the cost to relocate the air compressor is estimated at $10,000 then the lessor value is the value-in-use of $5,000. The business would then receive the $5,000 as part of their relocation benefits which is non-taxable.

Relocate/Move
When the personal property item is needed at the replacement location, then an analysis should include the costs for relocating the item including disconnecting, moving, foundations, reconnecting, and modification if necessary. The actual cost to relocate the compressor will be paid to the business, which in this case is $10,000. This payment is non-taxable.

Substitute
When the function of the personal property is needed at the replacement location, there may be a desire to analyze the substitution costs for the item.

The federal relocation guidelines’ payment formula for substituting personal property is the lessor of the estimated cost to move/relocate the item or the actual cost to substitute the item.

Let’s say the relocation cost of $10,000 includes costs to disconnect and modify the compressor to fit the location which will not be incurred when substituting the unit, and we find we can buy and install a new compressor that will fit the new location without modification for $9,000. The owner can then receive a substitution payment of $9,000 and enjoy the benefits of a new compressor at the replacement location. This payment is non-taxable.

Conclusion
This information will clarify the dollars at stake and emphasize the need to analyze the best method to receive payments for an asset. Based on our example of the air compressor are the following results:

• Non-Movable Fixture – Payment resulting in $4,250, or $0 if the item does not contribute value
• This payment will likely be paid to the real property owner.
• If the compressor is needed at the replacement location the business will have to spend $5,999 to replace it
• Abandonment of Personal Property  – Payment of $5,000 (non-taxable)
• The business receives value for an item no longer needed.
• Relocation/moving  – Payment of $10,000 (non-taxable)
• The compressor continues to function as it did at the acquired property with no out of pocket expenses for the business.
• Substitution – Payment of $9,000 (non-taxable)
• The function of the compressor is replaced with a new compressor with no out of pocket expenses for the business.

Each business relocation and its payments are different because of the different types of personal property the business has and the future plans of the business, requiring separate analysis for each business.

This explanation should clarify an often overlooked and important monetary issue that will occur during relocation of the business and the acquisition of the property.

If you wish to discuss this further or should you have any questions, or comments, please contact me…..

Martyn Daniel