An open letter to every manufacturer planning new capacity before 2029, and especially to those about to sign a build-to-suit lease.

To the CFO with a build-to-suit proposal on your desk,

You have probably heard the pitch. A developer builds your new plant to your specifications, you sign a long-term lease, and you preserve your capital for equipment and working capital. It is fast, it is familiar, and for twenty years it has been the default answer for middle-market manufacturers expanding capacity.

For the next three years, it is very likely the wrong answer. Nobody in that transaction has a reason to tell you why.

What Changed

The One Big Beautiful Bill Act created a new provision, Section 168(n), that lets a company elect to deduct 100% of the cost of qualified production property in the year it goes into service. In plain terms, the production portion of a factory, the part where raw materials are substantially transformed into finished products, can be expensed immediately instead of depreciated over 39 years. Construction has to begin after January 19, 2025 and before January 1, 2029, and the building has to be in service before 2031.

Nothing in the tax code is this generous relative to the size of the asset. A building that used to produce a deduction of about 2.5% a year can now produce a deduction of 100% in year one.

The Catch Your Developer Will Not Mention

The deduction belongs only to a taxpayer who uses the property in production. Interim guidance issued by the IRS in February 2026 is explicit: when a building is leased, the lessee’s production activity generally does not count as the lessor’s use. The lessor cannot claim the deduction.

Neither can you, because you do not own the building.

So in a build-to-suit with an unrelated developer, the deduction does not move from you to the landlord. It disappears. The developer depreciates the building over 39 years, as it always has, and sets your rent based on those 39-year economics. You pay rent calibrated to the slowest cost recovery in the code on a building that, had you owned it, could have been written off in a single year.

Consider what that means in dollars. A $48 million expansion might include $30 million of space used directly in production and raw material storage. Owned and elected as qualified production property, that $30 million generates a year-one federal deduction worth about $6.3 million. Compared with 39-year straight-line recovery, the election is worth close to $4 million in present value at an 8% discount rate. That is the value you are giving up, on one project, by letting someone else own the building.

Ask your developer to model the after-tax comparison for you. Most cannot, because they have never had to. The deduction they cannot capture is not on their spreadsheet, so it is not on yours.

The Plant Sale-Leaseback Has the Same Problem

The same logic applies to selling a newly built facility and leasing it back, a strategy many manufacturers have used to recycle capital into growth. If you build the plant, claim the production property deduction, and then sell it, you recognize gain on a building with little or no remaining tax basis. The buyer, as a lessor, cannot claim the deduction on its purchase price. You will have sold a tax attribute no one can use and paid tax to do it.

Real estate sale-leasebacks still have a role for older facilities and non-production buildings. For new production space placed in service under this regime, they deserve a much harder look than they usually get.

Flip Your Capital Stack

Here is our recommendation, and it runs against the conventional wisdom. For the next three years, own the building and finance the equipment flexibly.

The conventional approach has been to lease real estate and own the machines. That made sense when buildings and equipment were taxed roughly the way they always had been. Today the incentives point the other way. The production property deduction lives only with the owner-operator and cannot be transferred through a lease. Bonus depreciation on equipment, by contrast, can be claimed by a lessor that has the tax capacity to use it and reflected back to you in lower payments through a properly structured residual-based lease.

So put your balance sheet against the building, where only you can capture the benefit, and use structured equipment finance for the CNC cells, presses, robotics, and automation inside it, where a capital partner can capture the benefit on your behalf. The total capital you deploy may be similar. The after-tax cost can be dramatically lower.

One honest caveat: the deduction is only as valuable as your ability to use it. If your company is carrying significant losses, run the numbers carefully before assuming ownership is the right call.

But What About Our Capital?

The strongest argument for the build-to-suit is capital preservation, and it deserves a direct answer. Owning a $48 million building ties up capital that a lease would not. But the production property deduction returns roughly 21 cents of every qualifying dollar in reduced federal tax in the first year, which on our example is $6.3 million of cash that the lease structure never produces. And the capital you might have spent on equipment does not have to come from your balance sheet at all. Structured equipment finance for the machinery, automation, and material handling inside the plant can preserve the liquidity the build-to-suit was supposed to protect, while placing the equipment depreciation with a party that can use it.

The developer will also argue speed. That one is real, and it cuts both ways. Construction must begin before 2029 to qualify. A build-to-suit that gets you into a building six months faster but forfeits the deduction is not faster in any way that matters to your cost of capital. Owners who line up construction and equipment financing in parallel, rather than sequentially, can match most of the timeline advantage without giving up the benefit.

If You Use a Related Real Estate Entity

Many manufacturers hold their real estate in a separate company owned by the same shareholders or the same sponsor. The IRS guidance offers exceptions for consolidated groups and commonly controlled entities that can allow the property-owning entity to claim the deduction based on the operating company’s production activity. That structure can work well.

Before relying on it, confirm one thing. Many real estate entities elected to be treated as a real property trade or business between 2018 and 2022 to escape the interest deduction limits in effect at the time. That election is irrevocable, and it requires slower alternative depreciation that disqualifies the building from the production property deduction entirely. If your real estate company made that election, the new plant may need a different home.

Document It While You Build It

The deduction applies only to the portion of the building that is an integral part of production. Offices, labs, showrooms, and finished goods warehousing do not qualify. Raw material receiving and storage can. The allocation has to be supported, and the property must stay in production use for ten years or the benefit is recaptured.

All of that is far easier to establish from construction drawings, equipment layouts, and contemporaneous records than to reconstruct after the general contractor has moved on. Make the cost segregation study and space allocation a construction deliverable, not a tax-season project.

Through 2028, deciding whether to own or lease your factory is not a real estate decision. It is a tax decision with a building attached. Make it before you sign.