What are leasehold improvements?
Capitalized upgrades made to a rented space. The cost sits with long-lived assets and spreads over the remaining lease, not as rent in the month you pay the contractor.
Definition
Leasehold improvements are upgrades a tenant pays for in a rented space and then capitalizes. On the books, they are assets, not rent, and not the landlord's building.
The cost sits on the Balance Sheet while the improved space is in use. Depreciation later moves a slice of that cost to the profit and loss statement over the remaining lease.
A coworking operator uses this account for walls, glass offices, and flooring built into a suite it does not own. Desks that could roll out the door are usually a different asset; paint the landlord required as ordinary upkeep is usually rent-related expense.
Where it shows up
Balance Sheet: Located with the long-lived assets, below current assets.
P&L: Related to depreciation over the remaining lease.
Cash flow: Increases in this account, reported cash from investing activities decreases.
See also: Fixed Assets · Property Plant And Equipment · Depreciation Schedule
When you look at your Balance Sheet, this account sits with the long-lived items, below current assets. Many packs group it with property, plant, and equipment inside non-current assets.
A high balance can mean a recent buildout. A low or zero balance can mean the space was taken as-is, or that older improvements are mostly charged off.
The profit and loss statement does not list this account as a line. Depreciation over the remaining lease is the related charge while the improvements stay on the Balance Sheet.
On the Statement of Cash Flows, paying for the buildout is an investing outflow. Cash falls, this account rises, and the P&L does not take the full cost that day.
How it works
A typical path starts when you pay to change a rented space in a way that will serve more than a year. You debit this account and credit cash, or accounts payable if the contractor billed you.
The improvement has to be attached to the space. A feature wall, a new HVAC run, or flooring that stays when you leave belongs here; a lamp you will take with you does not.
Stay with this account: it holds the tenant's capitalized cost. It is not the rent bill, and it is not the landlord's building on someone else's books.
The cost spreads over the remaining lease, or over the improvement's own life if that life is shorter. You do not keep charging this account after you have moved out.
Each period you debit depreciation expense and credit accumulated depreciation. The original cost stays here until the improvements are fully charged off or you leave the space.
If you leave before the cost is gone, remaining book value comes off at exit. That is when the leftover amount hits the P&L, rather than lingering on a space you no longer occupy.
A renewal that extends the lease can change how fast later periods charge off what is still here. You do not rewrite the periods already recorded.
Keep the buildout on a depreciation schedule so the remaining lease and the remaining cost stay visible. A suite that was returned to the landlord should not still be on that list.
Example
A coworking space spends $24,000 in cash to add glass offices and new flooring in a leased suite. Four years remain on the lease, and the improvements will stay with the building.
The operator records:
Debit: Leasehold improvements $24,000
Credit: Cash $24,000
This account goes up by $24,000, and cash goes down by $24,000. The P&L does not show a $24,000 expense that day.
The Balance Sheet is the same size, with a different mix of assets. On the Statement of Cash Flows, the $24,000 is an investing outflow.
If the remaining lease is 48 months, later months take $500 of depreciation each. Those later entries do not change the $24,000 of original cost sitting here.
Common mix-ups
Leasehold improvements are not rent. Rent is the periodic cost of occupying the space; this account is the capitalized buildout you paid for on top of that.
Leasehold improvements are not the landlord's building. You do not own the suite; you own the cost of the upgrades you put into it.
Leasehold improvements are not the right to use the leased space. That right, if recorded, is a separate asset; this account is only the physical work the tenant paid to install.
Related terms
- Fixed Assets: Long-lived physical assets used to run the business rather than resold.
- Property Plant And Equipment: The balance-sheet grouping for land, buildings, machinery, vehicles, and equipment.
- Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.
- Useful Life: The number of periods a fixed asset is expected to serve the business.
- Rent Expense: The periodic cost of occupying leased space.
- Capital Expenditures: Spending to buy or improve long-lived assets.
- Right Of Use Asset: The asset recorded for the right to use leased property over the lease term.
- Depreciation Schedule: The supporting schedule listing each asset, its cost, life, and depreciation to date.