Leasehold Improvement
The term leasehold improvement refers to any changes made to customize a rental property to satisfy the particular needs of a specific tenant. These changes and alterations may include painting, installing partitions, changing the flooring, or putting in customized light fixtures. Improvements may be undertaken by the landlord or the tenant and may be paid by the tenant.While the useful economic life of most leasehold improvements is anywhere between five and 10 years, the Internal Revenue Code (IRC) requires that depreciation for such improvements to occur over the economic life of the building.
Definition: Leasehold improvements refer to various changes made to a rental property to meet the specific needs of a particular tenant. These changes and improvements may include painting, installing partitions, changing flooring, or installing custom lighting fixtures. Improvements can be made by either the landlord or the tenant and can be paid for by the tenant.
Origin: The concept of leasehold improvements originated in the commercial leasing market. As commercial real estate developed, tenants' demands for office environments increased, making leasehold improvements a common practice. The demand for leasehold improvements significantly increased during the mid-20th century with the boom in commercial real estate.
Categories and Characteristics: Leasehold improvements can be categorized into structural and non-structural improvements. Structural improvements involve changes to the building's structure, such as adding partition walls or renovating elevators. Non-structural improvements include painting walls, installing carpets, and custom lighting. Structural improvements usually require more time and higher costs, while non-structural improvements are relatively simple and inexpensive.
Specific Cases: Case 1: A tech company leased a floor in an office building. To meet its open office needs, the company removed existing partitions and redesigned the office layout, installing new lighting systems and carpets. Case 2: A retail store leased a shop space. To attract customers, the store owner undertook a complete renovation, including painting walls, installing new display cabinets, and lighting fixtures.
Common Questions: 1. Who bears the cost of leasehold improvements? Typically, the lease agreement specifies who bears the cost of improvements, which could be the landlord, the tenant, or both. 2. How is the depreciation of leasehold improvements calculated? According to the International Revenue Code, the depreciation of leasehold improvements should be calculated based on the economic life of the building, usually between five to ten years.
