Leasehold Modifications
Leasehold improvements are also known as tenant improvements or build-outs. These modifications are made by the property owner or the leaseholder to render the space more useful or appealing for the tenant. Leasehold improvements are a common practice in commercial real estate spaces. The building owners improve spaces to attract and retain tenants.
Key Takeaways
- Leasehold improvements are also called tenant improvements or buildouts.
- The property owner typically modifies commercial real estate space to accommodate the tenant.
- Leasehold improvements are applied to the interior space, such as the ceilings, walls, and floors.
- Exterior modifications are not considered leasehold improvements.
Types of Improvements
Interior spaces are modified according to the tenant’s operation. Changes may include new ceilings, flooring, and inner walls. A company with a call center might need small cubicles and telephones installed.
A doctor’s office might need consulting rooms with more open spaces for nurses and administrators. The retail industry commonly requires a specific layout and design for dressing rooms, retail shelving, specialized lighting, and technology systems.
Important
Exterior changes that benefit all tenants in the building are not considered leasehold improvements. Examples of non-leasehold improvements include roof construction and the paving of walkways.
Paying for Changes
- Tenant Improvement Allowance (TIA): The landlord gives the tenant a certain amount of money to cover the improvements, and the tenant oversees the work. The amount received varies based on several factors, such as a building’s square footage.
- Rent Discounts: A landlord may offer free rent or a discount on rent. The renter uses the savings to pay for improvements and oversees the work.
- Building Standard Allowance: This allowance is a “build-out” allowance. The landlord may offer an improvement package composed of types of flooring, fixtures, and fittings at a certain price. The renter selects items from the package but must pay for any improvements not offered in the standard package.
- Turnkey Projects: The renter submits an improvement plan with cost estimates and the landlord pays and oversees all work.
What Are the Tax Implications of Leasehold Improvements?
Leasehold improvements are considered capital and amortized over the length of the lease. The 2018 Tax Cuts and Jobs Act (TCJA) defined all leasehold improvements as qualified improvement property (QIP).
Who Oversees Leasehold Improvements?
For tenant improvement allowances and rent discounts, the renter oversees the work. In a building standard allowance or a turnkey project, the landlord oversees the project.
What Is Commercial Real Estate?
Commercial real estate is property used for business-related purposes or to provide workspace rather than living space. Commercial real estate is commonly leased by business tenants that conduct activities in stores, offices, or factories.
The Bottom Line
Leasehold improvements are changes to commercial real estate space to accommodate the tenant. The modifications may be overseen by either the owner or the tenant. Improvements may include interior walls, floors, or the installation of cubicles.
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