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What is Leasehold Improvement?

A leasehold improvement is a change to a leased asset.

How Does Leasehold Improvement Work?

For example, let's say Company XYZ is a restaurant company. It leases some space from a landlord who owns a strip mall. In order to make the space into a restaurant, Company XYZ has to add a few walls to the leased space, paint the place, install custom light fixtures, install a bar, install some changes to the plumbing, and install a walk-in freezer in the back. These changes are leasehold improvements.

Leasehold improvements, as you can imagine, span a wide range. They can be new walls and windows, new flooring, additional parts or features on a machine, paint, or equipment that is attached to the structure. Landscaping can even count. If the item can easily be removed from the premises, however, it usually doesn't count as a leasehold improvement.

Why Does Leasehold Improvement Matter?

Leasehold improvements make assets more useable and, in many cases, more marketable. Sometimes, landlords will pay for leasehold improvements in order to entice a tenant to rent a space for a long period of time.

Leasehold improvements are often assets that the landlord records on its balance sheet. Because they are assets, leasehold improvements usually depreciate. Usually, the lessee is responsible for maintaining leasehold improvements once they are in place.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.