What is a Leasehold Improvement?

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What is a Leasehold Improvement?
What is a Leasehold Improvement? (Image: http://www.foundlocally.com/Graphics/General/LeaseholdImprovements.jpg)

Leasehold improvements are, more or less, a bridge between leasing and owning commercial property. They can provide you with the office or retail look and feel you want without the burden and responsibilities of owning the real estate. Understanding what leasehold improvements are and are not should help you make better decisions regarding leasing or owning real property.

Function

When someone leases (rents) a commercial property, he often has to accept the property as is, with its current layout and condition. Many times the current condition or design of the property is unacceptable to the vision of the business owner. An agreement to allow leasehold improvements often provides a good solution to this problem. The landlord may allow the lessee (renter) to improve the property and build, repair or redesign the space to suit the lessee's needs.

Benefits

The benefits to a lessee of completing leasehold improvements are many. She can design, change and finish the building or space she is leasing in a manner that matches her vision of efficient work or retail space. The owner of the property (landlord) also receives the benefit of improved real estate without having to spend his own money. The lessee, using her funds, improves the property for herself and, ultimately, for the owner. Everyone wins.

Misconceptions

Why would someone want to spend her money to improve someone else's property? Leasehold improvements are often misunderstood by those asking this question. Whether a residential or commercial property, the lessee will occupy the space being leased. If she wants to improve this space to further her enjoyment (residential) or business success (commercial), this may be a financially smart decision. Without tying up valuable capital (money) to purchase the property, she spends less money to create the space the way she wants it. It makes great sense in many renting situations.

Warning

Never embark on a leasehold improvement without the express permission of the landlord. While some extra care (a little paint, thorough cleaning or a rug shampoo) is typically welcomed by landlord and tenant alike, there are numerous "horror stories" of tenants making expensive leasehold improvements that infuriated landlords and drove them to legal action. Some tenants have had to tear down or remove all improvements. Sometimes, landlords have successfully sued for breach of contract (lease) and evicted tenants, while keeping and enjoying their leasehold improvements. Make sure both tenant and landlord are in agreement that leasehold improvements are acceptable.

Effects

Leasehold improvements typically deliver a beneficial effect to both landlord and tenant. Spending money to improve a leased property can have a positive effect on the tenant's business success (or a home renter's lifestyle). The funds used to make a leasehold improvement are typically much less than the tenant would need to purchase, maintain and improve the property. Landlords receive property improvements that cost them nothing and cement a favorable relationship with their tenant, who has displayed a high dedication to meet the agreements and commitments made to the landlord.

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