Leasehold Improvement Financing

Leasehold improvements are improvements made by the lessee (for example, new buildings or improvements to existing structures, etc.). These improvements will revert to the lessor at the expiration of the lease. Moveable equipment or office furniture not attached to the leased property is not considered a leasehold improvement. Leasehold improvements do not have a residual value.

Leasehold improvements are capitalized by the lessee and are amortized over the shorter of either:

  • The remaining lease term
  • – OR –
  • The useful life of the improvement

Improvements made in lieu of rent are expensed in the period incurred. If the lease contains an option to renew and the likelihood of renewal is uncertain, the leasehold improvement is written off over the life of the initial lease term or useful life of the improvement, whichever is shorter.

Technically, you are amortizing leasehold improvements rather than depreciating them. The reason is that the landlord owns the improvements, so you are only exercising an intangible right to use the improvements during the term of the lease - and intangible assets are amortized, not depreciated.

For example, ABC Company has a five-year lease on an office building, as well as an option to renew the lease for an additional five years at the then-prevailing market rate. ABC pays $150,000 to build offices in the building immediately after it leases the space. The useful life of these offices is 20 years. Since there is no bargain purchase option to renew the lease, it is not reasonably assured that ABC will renew the lease. Consequently, it should amortize the $150,000 over the five years of the existing lease, which is the shorter of the useful life of the improvements or the lease term. ABC will recognize $30,000 of amortization in each of the five years of the lease with the following entry:

Debit Credit
Amortization expense 30,000
Accumulated amortization 30,000

Once a leasehold improvement is fully amortized, the improvement must be removed from the financial records.

Leasehold improvement financing is also just what you need for start up or expansion

Leasehold improvement financing can be simply defined as all alterations, renovations, and repairs to leased facilities that increase the value of the property, make it more useful, or lengthen its life. Leasehold improvements are often considered a necessary component for an efficient business operation. There is a wide variety of leasehold improvements that can be performed.

  • Start-up funding is usually used for exterior and/or interior renovation to accommodate a business move-in.
  • Expansion funding needs are usually, but not necessarily limited to when your business is growing and it’s time to expand your operations.

A common term for a leasehold improvement loan is 5 to 7 years, depending on the improvements. In addition, interest rates are usually fixed and depend entirely on current market factors and the overall risk of the business and/or project.

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