If you're looking to start a business and need to rent a space, you may find that the perfect venue is hard to find. Whether you need an industrial suite, a small office or a retail store, you can customize the space you lease to better suit the needs of your new business. Those customizations are called leasehold improvements.
Typical Leasehold Improvements
A leasehold improvement is anything done to a commercial property for the benefit of a specific tenant. Leasehold improvements occur within the walls of the tenant's space. Although they can be built using the same methods and materials as the building, which the Internal Revenue Service assumes has a 39-year life, leasehold improvements are expected to last only as long as the tenant's occupancy of the building.
In many cases, you can get your landlord to pay for your leasehold improvements, which are also known as tenant improvements, or TIs, as an inducement to get you to sign a lease. While this is more common in new buildings, you can also frequently negotiate a TI allowance when you sign existing space. Your ability to get a generous TI allowance will be tied to how much the landlord wants you as a tenant and to how long of a lease you're willing to sign.
Paying for Tenant Improvements
If your landlord won't pay for your leasehold improvements, you'll have to bear the cost yourself. If this is the case, you might be able to have the cost of your tenant improvements built into your lease. Doing this saves you from going to a lender, although it will increase your monthly lease payment. Alternately, if your lease will allow you to, you may be able to do some of your own TIs yourself. This can be a good option if all you need is paint, carpet and other simple improvements.
Leasehold Improvement Depreciation
For the 2012 and 2013 tax years, the IRS allows your landlord to depreciate the leasehold improvements that she provides for you over a 15-year period instead of a 39-year period. This means that they get extra tax savings if they do TIs for you before the end of 2013. You may be able to use this as a negotiating ploy to get a larger TI allowance from her.
- University of Michigan Finance: Leasehold Improvements
- NAIOP: Leasehold Improvements
- The Tenant Advisor: Negotiating the Tenant Improvement Allowance
- Pepper Hamilton LLP: Real Estate Update - Tenant Improvements: Who’s Doing, Who’s Paying, What Are the Remedies?
- JH Cohn LLP: Understanding Changes to Bonus Depreciation and Section 179 for the Real Estate Industry
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.