The Chairman's Quarterly - Q2 2025

Executive Summary‍

The One Big, Beautiful Bill (OBBBA) introduces several provisions that directly enhance our investment strategy in commercial real estate. These updates create long-term tax efficiencies and open new opportunities for structuring projects that deliver predictable, favorable outcomes for our partners.

Key Points:

• ‍Permanent 100% Bonus Depreciation – Restored indefinitely, enabling accelerated depreciation strategies that provide immediate tax benefits to investors while exploring methods to mitigate recapture on exit.
• ‍Opportunity Zones Made Permanent – With redesigned rules and expanded eligibility, OZs remain a powerful vehicle for deferring and excluding capital gains, with added benefits for rural areas.
• ‍Interest Deduction Eased – Returning to EBITDA as the base for deductibility allows greater interest expense deductions, improving after-tax cash flow in debt-financed acquisitions.

Letter from the Chairman

How would I characterize the provisions of the One Big, Beautiful Bill (the “OBBBA”) that relate to commercial investment real estate? Beautiful! Here is my take on what some of the recent changes mean and how they could positively impact our investment strategy.

100% Bonus Depreciation (Fully Restored & Permanent)

First, a little background...

The Tax Cuts and Jobs Act (TCJA) of 2017 provided for businesses to immediately deduct 100% of the cost of “qualified property” acquired and placed in service after September 27, 2017, and before January 1, 2023. This provision was scheduled to be reduced by 20% per year starting in 2023, with rates going down to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and expiring entirely in 2027. In the world of self-storage conversions or development, what counts as “qualified property” must be determined through a Cost Segregation Study, usually performed by an accounting firm or other specialist in this area.

The building improvements (excluding land) are allocated between improvements that would use 1) the “Modified Accelerated Cost Recovery System (MACRS)” for depreciation and improvements, or 2) the “Alternative Depreciation System (ADS)”. Any improvements classified as MACRS constitute “qualified property” and a taxpayer could then elect to take accelerated depreciation (“bonus depreciation”) in the tax year the election was made, with the percentage of “bonus depreciation” based on the year the improvements were put into service.

The OBBBA made the “bonus depreciation” provision of the TCJA permanent starting on January 19, 2025, at the 100% accelerated depreciation level. We had a cost segregation study prepared for our Dearborn, Michigan project and, as an example of how the bonus depreciation works, the following are the results of the allocation of depreciation between MACRS and ADS:

Because Dearborn was put into service in 2023, we would be allowed 80% bonus depreciation should we elect to choose it. This bonus depreciation equals $3,599,024 (80% of $4,498,781). The losses that would flow through to our investors could be used to offset other passive income, for instance income from rental real estate, limited partnerships, or businesses in which the taxpayer does not materially participate. Further, if you sell a passive activity (like a rental property), you may be able to use suspended prior years passive losses to offset the gain from the sale. To the extent the losses can’t be used in any given year, they can be carried forward in perpetuity.

The bonus depreciation tax benefits could be a great tax benefit for our partners, and we are strategizing ways to provide our partners with ways to mitigate recapture issues for projects where we elect to take the bonus depreciation. Although the bonus depreciation has to be recaptured as ordinary income when a project is sold, the value of assets classified as equipment will often depreciate, while the real estate assets appreciate resulting in the overall gains being taxed at a lower rate than the original deductions.  

Additionally, we are exploring strategies that can provide a means to hold the assets in an investment vehicle that can provide predictable cash-flow to investors while delaying depreciation recapture until a later divestiture date.

Opportunity Zones (OZs)

The Tax Cuts and Jobs Act (TCJA) of 2017 also provided for the creation of opportunity zones in every state in the US. These zones, chosen by the governor of each state, were designated by zip code and included lower income areas in the state (where the median income was 80% or lower in the zip code than in the general area). The TCJA provided a phase-out of the program by December 31, 2026 (which was modified to 2028 with the OBBBA). There were several benefits of the program that included:

• The ability to transfer gains from the sale of certain assets and deferring, or in some cases (explained below) excluding some of these gains from taxation, provided these gains were short-term or long-term capital gains from:
  • Sale of stocks or other securities
  • Sale of real estate
  • Sale of business assets
  • Sale of partnership interests
• If these gains were reinvested into an investment in property, a business or an infrastructure project located in an opportunity zone (a Qualified Opportunity Fund “QOF”) within 180 days from the time they were incurred , then the taxpayer would not need to recognize the gains until the earlier of 1) the sale of the QOF, or 2) December 31, 2026.

• Additionally, if the taxpayer held a QOF investment for:
  
  • 5 years, they received a 10% exclusion (effectively the basis would go up)
    
  • 7 years, they received a 15% exclusion
  • Finally, if one held their QOF investment for at least 10 years, any gains on that investment would be completely tax-free when the gain was recognized.

With the impending 2026 expiration of the TCJA, unless an investment was made earlier in the program, the benefits diminished with the passage of time since 2017.

The OBBBA makes OZ’s permanent with a few changes:

• The zones will now be redesignated every ten years and the median income level for zip codes included for a state was lowered to 70% (down from 80%).
• The gains from the sale of qualified assets are to be recognized within five years from the original investment or at the time the OZ investment is sold, whichever comes first.
• The 10% step-up in basis occurs in five years (there is no longer a 15% step at seven years)
• The OBBBA maintains the tax exclusion on new capital gains generated by a qualifying investment held at least 10 years, but if the investment is held longer than 30 years, the stepped-up basis will be frozen at the fair market value of the 30th anniversary of the investment.
• The OBBBA also creates a new Rural Opportunity Zone designated zones that adds more tax benefits than the non-rural zones.

As we continue to look for new self-storage conversion opportunities, we will be exploring ways in which we may be able to utilize the OZ investment vehicle strategy to bolster the benefits to our partners.

Interest Deduction Eased (Return to EBITDA Base)

A third provision of the OBBBA that will likely be beneficial for our projects is the reinstatement of the use of EBITDA (earnings before interest, taxes, depreciation, and amortization), versus EBIT as the base for calculating adjusted taxable income, which determines the 30% limit on deductible business interest expense. The OBBBA permanently reinstates the use of EBITDA effective for tax years beginning after December 31, 2024. This reversion to method used before TCJA makes the base amount larger and thus allows for a greater deduction of interest compared to the more restrictive EBIT calculation used after 2022. Since we regularly use debt in our real estate acquisitions, this could lead to a favorable change in the amount of reported taxable income to our partners beginning in the 2025 tax year.‍

Conclusion

While there are a few other positive changes in the OBBBA that have an impact on our business tax reporting, these three represent the changes that will, or could, have more meaningful impacts. We are exploring how we can more effectively utilize bonus depreciation and opportunity zones in our investment strategy to maximize the potential tax benefits to our partners.