Also known as tenant improvements or build-outs, leasehold improvements are the customized modifications that a property owner or the commercial tenant makes to a leased space for the benefit of the tenant. A leasehold improvement is commonly used in commercial real estate practices to attract a certain type of business or retain an existing tenant; they may also be provided as part of a new lease negotiation. Leasehold improvements are tailored to the needs of the particular tenant, and they are made according to that tenant's operational needs or preferences.
What Is and Is Not a Leasehold Improvement
Leasehold improvements, which usually are made by the owner, are structural modifications or permanent fixtures placed in the interior space that is rented to a tenant. Examples include changes that are made to the ceilings, flooring and inner walls. Alterations to the exterior of the building or modifications that benefit other tenants in the building are not considered leasehold improvements. Examples of non-leasehold improvements include roof construction, building elevator upgrades and paving of walkways.
Particular leasehold improvements are more likely to be found in certain industries, such as retail, but all leasehold improvements are specific to the lessee, since the purpose of such alterations is to make the leased space more usable to the occupying tenant. Typical leasehold improvements in retail include partitioning a large, open space into smaller, more structured areas such as dressing rooms, installation of retail shelving or reception counters, floor replacement, additional or specialized lighting, and upgraded technology systems.