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Glossary

Leasehold Improvements (LHI)

Leasehold Improvements (LHI) are enhancements or modifications made to a leased property by the tenant, typically to customize the space to their specific needs, with the costs often amortized over the lease term.

Understanding leasehold improvements

Leasehold improvements refer to alterations made by a tenant to a property, becoming the landlord's asset after the lease ends. These modifications may qualify for tax deductions.

Purpose of enhancing leased properties

The purpose of leasehold improvements is to adapt a leased space for the tenant's business, often focusing on interior upgrades like fixtures, equipment, and furniture. Tenants generally cover these costs, sometimes integrated into their rent payments.

Calculating the value of leasehold improvements

To assess the value of leasehold improvements, you'd compute their depreciation using the straight-line method, considering the improvement's cost, installation date, and expected useful life.

Documentation of leasehold enhancements

Documenting these improvements involves creating a detailed list outlining the alterations and their corresponding expenses. This documentation aids in calculating depreciation expenses for financial models.

Advantages and disadvantages of leasehold improvements

Advantages:

  1. Enhancing property value
  2. Making the space more appealing to potential tenants
  3. Improving the property's functionality for the tenant's business
  4. Potentially extending a tenant's stay, increasing rental revenue for landlords

Disadvantages:

  1. Higher costs compared to alternative financing methods
  2. More challenging to obtain
  3. Entails higher risk than other financing options