Leasehold improvements is a term that you see in both commercial and residential leasing situations, though it is more common in commercial applications. Whenever a new tenant moves into a rental space, he has the right to remodel that space to suit his needs. Although the definition of a leasehold improvement is simple, what classifies as a leasehold improvement can sometimes be unclear unless it is stipulated by both the lessee and the landlord in writing.
Definition
A leasehold improvement, also known as a build-out, is an improvement made by the renter to that space. This includes both new construction and improvements to existing units. The leasehold improvement is something that becomes a permanent part of the structure, such as walls, rooms, electrical or plumbing.
Use
The lessee has the right to use and the obligation to maintain the leasehold improvements as long as she continues the lease of the original space. After the lease is terminated by either the lessee or the landlord, the leasehold improvements become the property of the landlord, who may do what he wants with the improvements.
Types
There are many types of , especially in commercial applications. This can include lighting, heating and other utilities. This can also include new construction such as rooms, additions, partitions, entrances or additions to the outside appearance of a structure. This also includes landscaping installed by the lessee.
Depreciation
Leasehold improvements, by definition of the IRS, can be depreciated by the lessee over the course of the lease agreement. As long as the agreement is renewed, the depreciation can continue. After the lease is terminated, by either party, the right of the lessee to use the depreciation value for the improvements is void. Although the landlord cannot use depreciated value because he did not own the improvements until the lease ended, he can use the improvements as added property value.
Disallowed Improvements
When you are leasing a unit, there are some items that cannot be claimed as leasehold improvements. These items are the ones that you can move or take out of the building. Examples of this would be half walls, mobile partitions, phone lines, appliances, office furniture and equipment, signs that can be easily removed and carpeting that is not attached to the floor. If these items are left behind, they are still the property of the landlord because they are considered abandoned. Buildings such as trailers or mobile homes are not considered leasehold improvements to a property.
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