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When you own a business, there may come a time when you require an office space to facilitate and grow your operation. The process of finding a new office space can be an exciting, yet daunting, experience, especially when you factor in leasehold improvements. Leasehold improvements are what make the space uniquely yours, for example, paint colour, furnishings, or specialized equipment.

To learn more about leasehold improvements, their pros and cons, and how to finance them, continue reading below.

What Are Leasehold Improvements?

When a business leases an office or facility, they will likely want to customize the area for their unique needs. These customizations are better known as leasehold improvements. Leasehold improvements can be as small as changing the lighting or as large as installing specialized equipment.

Leasehold Improvements vs Building Improvements

Keep in mind that leasehold improvements are not the same as building improvements. 

  • A building improvement is something that generally benefits everyone occupying the building or shared rented space. 
  • A leasehold improvement is something that only benefits the tenant of a particular space. 

Types Of Leasehold Improvements

Below are several examples of improvements particular companies might want.

  • An marketing firm may want meeting rooms and private offices to discuss client plans.
  • An graphic design firm would want rooms for show casing.
  • A restaurant would want specialized spaces for food storage.

What Aren’t Considered Improvements?

Leasehold improvements are alterations that benefit one tenant. Modifications that also benefit your neighbours are not considered leasehold improvements, including:

  • Changes to a building’s structure (extensions, elevators, etc.) 
  • Addition of security alarms, fire protection, or HVAC systems for a whole building
  • Landscaping or parking lot improvements

Remember that commercial improvements are a one-time, non-refundable cost. So, before you sign a lease, find commercial rental space that matches your tastes closely.

How Do You Make Improvements To Your Leased Property?

Commonly referred to as tenant improvements or build-outs, leasehold improvements are usually given to new or existing tenants by landlords of commercial properties. Alterations are tailored toward specific tenants to make their spaces more appealing.

Once a lease ends and the tenant moves out, the landlord still owns the improvements, unless the lease agreement states otherwise. If the tenant is able to remove the modifications, they must do so without damaging the property.         

How To Make Leasehold Improvements?

If you don’t plan accordingly, these improvements can become a hassle. You may run into delays or your landlord may deny the renovations. You never know what can happen, follow these steps before you make leasehold improvements:

Step 1. Ensure You And Your Landlord Are On The Same Page

If you’d like to make leasehold improvements, don’t forget to discuss them with your landlord, because they must officially approve them, then offer you a lease that indicates the current work and future renovations involved. 

Keep your expectations realistic, because they might deny your request if the modifications compromise the structural support or value of the building. If you and your landlord have a conflict over future work, you may want to find a clause stating that such disagreements must go to mediation before legal action is pursued.      

Step 2. Find Out What You Can Keep

When negotiating your lease, make sure there’s a lease or addendum to the lease that states which assets you can keep if you move out. In most cases, you can only take removable items, like furniture and computers (often called trade fixtures). Assets that are part of the building will usually be excluded from the lease, including:

If you want to keep any eligible assets, ask your landlord to include them in your lease. A lender may also want to see this clause in your lease if it finances your improvements.             

Step 3. Find Out How You Will Finance The Improvements

Before you hire anyone to make any improvements, it’s important to understand how you plan to finance it. Generally, either you or the landlord will pay for the improvements. 

Will The Landlord Pay?

A good landlord understands that quality tenants help raise the real estate value of commercial property. So, if you have a respectful discussion with them about the potential renovations, your landlord may give you several options, like a:

  • Tenant Improvement Allowance – A certain amount of cash (usually per foot of rented space) to cover part of your leasehold improvements.
  • Tenant Inducement – Several months of free or discounted rent (to offset renovation costs).
  • Turnkey Improvement or Build-Out – This is where the landlord manages and finances the leasehold improvements on your behalf.            

Business Loan

Like a personal loan, a business loan is capital that companies borrow to cover costs they can’t afford alone. To qualify for the best loan terms and interest rates, you’ll need a good personal credit score and business credit score. You should also have healthy finances and an outline to show the lender your plans for the money.

Government Loan

The Canada Small Business Financing Act (CSBF) offers financing to help with the expansion and modernization of Canadian small businesses. With a CSBF loan, you can finance leasehold improvements to a maximum loan amount of:

  • $1,000,000 (a maximum amount of $500,000 must be used to cover something other than the purchase and improvement of the property).
  • $150,000 of that $500,000 limit can be used to finance intangible assets and working capital costs. 

Step 4. Sign The Lease And Start The Improvements

Once you’ve taken care of the steps above, all that’s left to do is read your lease carefully, sign it, then hire the right people to install your leasehold improvements.    

Pros & Cons of Leasehold Improvements

Leasehold improvements are helpful for many aspects of a business, but they also have some drawbacks. Let’s explore the affiliated pros and cons further below. 

Pros

  • Customize the space for your needs. Every business has unique needs. Implementing leasehold improvements is the only way to customize the rented space to meet your needs.
  • Improve the quality of your business. When your office space is well-designed, comfortable and practical, your employees and clients will be happier thereby improving the quality of your business.

Cons

  • Unexpected delays and interruptions to operations. Leasehold improvements aren’t possible to implement overnight. There can be unexpected delays that can interrupt planned operations. In addition, leasehold improvement decisions take time away from operations too.
  • Financing. Depending on your leasehold improvement plans and related budget, you might need financing which could be difficult to obtain and maintain depending on your situation.
  • Improvements are often permanent. Generally speaking, leasehold improvements should be considered a one-time, non-refundable cost. After you’ve spent the money, the improvements are there to stay and can’t be taken with you when you leave the leased space.

Are Leasehold Improvements A Good Idea for Me?

As with every major financial decision, it’s best to consider your current financial position, budget and goals before finalizing anything. It can help to write down all of your needs and goals, plus the affiliated cost, to paint a picture of the situation. Once you visualize and conceptualize what’s going on, it can be easier to make a final decision. Whether or not leasehold improvements are a good idea for you depends on your situation entirely. Remember, what’s best for your business might not be best for another!

Final Thoughts On Leasehold Improvements

Leasehold improvements can better the quality of your business and create a space that’s best for you, but it comes with a price and usually, none of the improvements can be taken with you. Before making any final choices, be sure to consider your needs, goals, and budget. If you’re interested in learning more about your business financing options, including financing to help with leasehold improvements, Loans Canada can help.

Leasehold Improvement FAQs

Who Pays For Leasehold Improvements?

The answer to this question is not black and white, unfortunately. When you’re getting ready to sign a lease, negotiating who pays for leasehold improvements is one topic you’ll cover with the landlord. Often, landlords will provide a ‘leasehold improvement allowance’ for their tenants which is merely a set amount they agree to pay for. If the improvements you want cost more than the allowance, you will be responsible for those extra costs.

What Is The Tax Treatment of Leasehold Improvement Costs?

In the eyes of the Canadian Revenue Agency (CRA), leasehold improvements are seen as an asset. The majority of assets are eligible for a corresponding expense known as depreciation or capital cost allowance (CCA). The good thing about depreciation is that it’s deductible for tax purposes. The more depreciation you deduct, the lower your taxes will be. Be sure to keep detailed records and receipts of all leasehold improvements you incur for tax purposes. When it comes to filing taxes, use your records to calculate CCA. Keep in mind that the CRA has special rules surrounding depreciation and CCA. For more information, visit this website and this website.

How can I keep my leasehold improvement costs low?

Naturally, the more alterations a space needs, the more you will spend on leasehold improvements. To keep your leasehold improvement costs low, try to find a space that requires as little changes as possible. Start by looking for spaces that were used for a similar purpose as your own. Also, do your best to steer clear of new builds because they can require basic work such as plumbing and electric wiring.
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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