Operating equipment or operating buildings – that is the question

Why is a precise differentiation between operating equipment and operating buildings important?

For many reasons, it is important to know exactly what counts as a building and what counts as operating equipment or apparatus.

Speaking of operating facilities vs. equipment, different terms are used depending on the context: In an accounting context, we speak of operating equipment. In other contexts – including our valuation practice – we usually speak of equipment (“technical and commercial operating equipment”). In many cases, the term “inventory” is also used, for example when talking to a hotelier or a nursing home operator.

As far as possible, we will use the terms as they are customary in the respective context.

However, before we go into detail, we need to do some “expectation management”. By no means will we succeed in clarifying individual classifications exactly (nor will we attempt to do so). Rather, we would like to draw your attention to the issue and encourage you to think carefully about attribution in the context of an assessment assignment.

But, let’s come back to the reasons for a clean differentiation:

2. Allocation to buildings or operating facilities has tax consequences.

We often prepare market value appraisals in connection with the sale or restructuring of companies. Whether an asset is an operating facility or an operating building in such transactions can have significant tax consequences – as can the amount of the asset’s valuation.

4. Valuation of operator real estate

When valuing so-called operator properties (for example hotels or nursing homes), rents are often agreed which apply to both the use of the building and the inventory. Market and mortgage lending value appraisals, however, are to be determined without the inventory portion, so that here, too, a precise demarcation should ideally be made.

Business premises vs. business equipment and the tax consequences

If it is a matter of tax questions or questions of accounting, the decisive “instructions” are to be found in the “Gleich lautenden Erlasse der Obersten Finanzbehörden der Länder zur Abgrenzung des Grundvermögens von den Betriebsvorrichtungen vom 5.6.2013”.

According to this, the following is to be examined in 2 steps:

1.Is the structure in question a building?

Note: If it is a building, it is not an operating device!

A building exists if

• people or things are protected against the weather by a spatial enclosure;
• people can stay there;
• it is firmly connected to the ground
• and a certain degree of durability and stability are given.

An open hall, for example, is also protection against the weather! And also the possibility for people to stay can be given, even if the stay turns out to be highly uncomfortable, dark or even harmful to health.

2. Is it a component part of a building, an operating device or an outdoor installation ?

According to § 94 para. 2 BGB (German Civil Code), essential components of a building are the things inserted for the construction of the building.

If you look at the paragraph via the dejure.org link, you will find 1,776 case law decisions on the specific interpretation.

The above-mentioned decrees, i.e. the tax, explicitly disregard this definition and define it differently for the purpose of taxation.

To wit:

The decision as to whether essential components are to be classified as operating facilities is based on whether they are so closely related to the business carried out on the property that it is directly operated with them.

This may also include independent structures or parts thereof, such as chimneys.

If the building components in question serve the use of the building, then they are considered building components.

Our favourite example is lifts: goods lifts are usually operating equipment, while passenger lifts are part of the building.

Outdoor facilities include structures that serve the use of the property and have no special relationship to the commercial enterprise – roads, paths, fences, for example.

Interim conclusion: Only if the structure in question is not a building in the above sense could it be an operating device. (Sounds quite logical, doesn’t it?). It is an operating device if it directly serves the operation of the trade. Is that clear?

Practical tip: The above-mentioned decrees contain very nice tables and even drawings for practical application.

Now that we have correctly delimited or allocated, there are nevertheless considerable financial consequences due to the different treatment in the tax legislation. For example:

• Operating equipment is a movable asset and therefore to be depreciated independently of the building like other movable fixed assets.
• As a rule, the depreciation period for operational buildings is longer and the depreciation rate lower than for operational equipment.
• In contrast to land and buildings, the transfer of hidden reserves is not permitted for operating equipment under section 6b EStG.
• Section 7g EStG allows the use of investment deductions and special depreciation for depreciable movable fixed assets to promote small and medium-sized enterprises.
• According to section 2 GrStG, business equipment is exempt from land tax.
• Pursuant to section 2, paragraph 1, sentence 2, no. 1, GrEStG, business fixtures are excluded from the basis of assessment for land transfer tax.
• Pursuant to section 4 no. 12 sentence 2 UStG, rentals of business equipment are exempt from VAT.
• Section 2 InvZulG 2010 contains different regulations for the subsidisation of business equipment and business buildings

Of course, the following applies: We do not provide tax advice or legal advice here, but rather want to give you a feeling for the problem and the consequences!

Within the framework of a valuation assignment, we offer to develop a common understanding of the allocation together with the real estate valuer and your tax advisor. We then take care of the correct implementation.

Business premises vs. business equipment and the consequences for business property insurance

The allocation of assets to the building or to the fixtures and fittings has a considerable influence on the sum insured: If certain components are allocated to both the building and the fixtures and fittings, this results in overinsurance and, in case of doubt, in high premium payments.  If certain components are wrongly attributed to the building although they are business equipment, this can quickly lead to underinsurance for contents insurance. This is dangerous, because in case of doubt, the building insurance only covers parts of the building in the event of damage.

You can find out more about overinsurance and underinsurance in this article.

The item explanations for the property insurance of your insurer are decisive for the allocation.

The insurers follow a certain standardisation, but in case of doubt, always check the respective policy!

In the following, we have selected some differences in the tax allocation and the underwriting allocation on the basis of the item explanations of HDI in order to illustrate how decisive it is to obtain clarity depending on the purpose of the valuation. (The examples are by no means complete and are always subject to a case-by-case examination).

Fiscally Operating facility, actuarially Buildings

Small “buildings” with a floor area of less than 30 m² that are not intended for the permanent residence of people (pump houses etc.), exception: transformer houses!

Fiscally Buildings, from an insurance point of view, operating equipment

• Foreman’s offices, material stores etc. (buildings within buildings)
• Lighting systems
• Fire alarm systems in storage buildings
• Office containers
• Greenhouses
• Manual high-bay warehouses
• Light signage
• Air curtain systems
• Emergency power generators

Valuation of inventory in operator real estate

There is no legal definition for the term inventory (i.e. the fixtures and fittings of an operator’s property). Therefore, in practice, the regulations on the differentiation of inventory and real estate are usually contractually agreed.

On the transaction market, both sales of operating real estate including and excluding the inventory can be observed. The reasons for different arrangements can be of a fiscal, economic or legal nature.

However, this means that in the case of a valuation it must be identified whether the relevant lease is inclusive (lease in the strict sense) or exclusive of the inventory (rent in the strict sense).

The real estate appraiser usually derives the sustainable rent from the rental value procedure and refers to the fully functional condition of the property. However, market value appraisals and mortgage lending value appraisals are to be determined without the inventory share.

The inventory share can be taken from project calculations, it can be determined approximately by means of ratios and approaches from the specialist literature or by an appraisal by an expert.

In the opposite case, where the inventory belongs to the tenant (i.e. the operator), it is not unusual for the inventory to be taken over by the owner of the property at the end of the lease term. The transfer can be made by a suitably qualified surveyor.

Here too, however, a common understanding of the allocation to the inventory is necessary before a valuation can be carried out (very happily by us).

Our conclusion on the subject

1. Make sure that all persons involved in the valuation are clear about the purpose of the valuation.

2. Make sure that all persons involved are in agreement about the exact allocation to operational buildings and equipment – depending on the purpose of the valuation. Ideally, this should also include your tax advisor or auditor, for example.

3. Make sure that you have the right expert on board, depending on the object of the valuation.

And if all this is too much work for you, simply delegate it to us!