Leasehold improvements, also known as tenant improvements, are alterations made to a rental property to suit the needs of a tenant. Within the real estate investment industry, these are specific changes or additions that a tenant may need in a leased space, often related to commercial properties.
These improvements can include changes to the walls, floors, ceilings, lighting, plumbing, and other parts of the interior space that are tailored to the tenant’s business or operational needs. The cost of these improvements is usually negotiated as part of the lease agreement and can be borne by the tenant, landlord, or shared between both parties.
In terms of accounting and taxation, leasehold improvements are often considered a depreciable asset over the life of the lease. They often do not increase the value of the property itself, as the improvements are specific to the tenant’s unique requirements. Once the lease term is over, the improvements typically revert to the landlord, and the cost may be written off, depending on the jurisdiction and specific agreements in place.
For real estate investors, understanding the potential cost and benefits of leasehold improvements is essential, as they can influence both the attractiveness of a property to potential tenants and the ongoing expenses related to property maintenance and management.