AgdaPkt 2025.10.13 Joint SA PFA - Laserfiche WebLink

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Page 8 • Depreciation and selective expensing. Most building improvements are depreciable over 27.5 years under the Modified Accelerated Cost Recovery System (MACRS), creating recurring, non-cash deductions that reduce taxable income. Some interior work may qualify for accelerated recovery/bonus depreciation or be expensed under tangible property safe harbors (where applicable), improving near-term after-tax yields. • Energy-efficiency incentives. Where scopes include systems (lighting, HVAC, envelope), §179D may provide an additional deduction tied to measured efficiency, functioning as a present-value subsidy without assuming higher rents. • Financing flexibility and equity effects. Post-rehab improvements tend to raise appraised value, supporting refinancing or freeing equity for future work. The pro forma records the cost but not the equity accretion or the ability to realize proceeds earlier via refinance. • Tax deferral at sale. Internal Revenue Code §1031 exchanges permit owners to defer both capital gains and depreciation recapture by rolling equity into a replacement property. Remodel investments that increase depreciable basis can be carried forward through such exchanges. Although not a direct factor in project-level feasibility, the availability of tax-deferred exits can influence owner behavior, making sale and reinvestment more attractive when remodel returns are marginal. • Interest and depreciation elections. Some owners may elect out of §163(j) interest- limitation rules as a real property trade or business—trading bonus depreciation for ADS lives—in exchange for more favorable interest deductibility; depending on leverage and scope, this can further optimize after-tax outcomes. When depreciation shields, targeted expense, potential energy deductions, refinance capacity, and 1031 deferral are considered, the effective after-tax, risk-adjusted return is meaningfully higher than what is reflected in the conservative base case discounted at 5.5 percent. Conclusions Because Redwood City is not a rent control city, under the City’s proposed right to return policy, rent increases after substantial remodels would be governed solely by the TPA. This framework provides landlords with greater capacity to absorb capital improvement costs than in cities with stricter local rent control ordinances. Permit data show that most remodel projects fall well below modeled feasibility thresholds, and historical rent data indicate that realized rent growth has not consistently exceeded inflation. While outlier cases exist, they are rare and can be addressed through capital improvement petitions. Taken together, the analysis suggests that typical reinvestment projects remain financially viable under the TPA framework. When combined with tax advantages, equity effects, and other after- tax benefits not captured in the base modeling, the TPA allowance would appear sufficient to support ongoing reinvestment without the need for a general pass-through provision. 9.A. - Page 82 of 84 187