Leasehold improvement definition
/What is a Leasehold Improvement?
A leasehold improvement is a customization of rental property. A tenant may want to invest in leasehold improvements in order to adjust the characteristics of office or production space to its specific needs. The landlord may pay for these improvements in order to improve future lease rates for the rental property, or to attract a good tenant.
Characteristics of a Leasehold Improvement
The key characteristics of a leasehold improvement are as follows:
Improvements made to leased property. Leasehold improvements are physical changes or upgrades made to rental premises by tenants. Examples include interior walls, ceilings, flooring, partitions, lighting fixtures, built-in cabinetry, and plumbing systems.
Not removable without damage. In most cases, leasehold improvements cannot be removed without damaging the premises or significantly reducing the property's value.
Permanent or semi-permanent nature. Leasehold improvements typically become an integral part of the leased property, meaning they're often permanent or fixed assets that can't be easily moved or removed without damaging the property.
Owned by tenant during lease. During the lease period, leasehold improvements are usually treated as the tenant's assets for accounting and depreciation purposes, even though they are permanently attached to the property.
Revert to lessor at end of lease. Upon expiration or termination of the lease, leasehold improvements generally remain with the property owner (lessor). Unless explicitly stated otherwise in the lease agreement, tenants typically cannot remove or retain these improvements.
Enhance functionality and aesthetics. Leasehold improvements are generally intended to make a leased property more functional, attractive, or suitable for the specific needs of the tenant's business operations.
Accounting for a Leasehold Improvement
In accounting, a leasehold improvement is considered an asset of the tenant if the tenant paid for it, the investment exceeds the capitalization limit of the tenant, and the improvements will be usable for more than one reporting period. If so, the tenant records the investment as a fixed asset and amortizes it over the lesser of the remaining term of the lease or the useful life of the improvement. An example of the monthly amortization entry for a leasehold improvement appears in the following journal entry.
Upon termination of a lease, all leasehold improvements become the property of the landlord.
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Examples of Leasehold Improvements
Examples of leasehold improvements are new carpeting, cabinetry, countertops, lighting, and walls. These improvements may also include any wiring or plumbing that is added to leased space by the tenant. Any removeable assets are not considered to be leasehold improvements, since the tenant can take them when a lease term is over.