Everything You Need to Know About Leasehold Improvements

When you own a business, there may come a time when you require an office space to facilitate and grow your operation. While it’s awesome to work from the comfort of your home, it can feel even more amazing to have a customized, professional space to call your own.

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 what to consider when proceeding with leasehold improvements, continue reading below. 

Leasehold Improvements Explained

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 a small as changing the lighting or as large as installing specialized equipment. Below are several examples of leasehold improvements particular companies might want.

• An accounting firm would want private offices or meeting rooms to discuss confidential matters with clients.
• An interior design firm would want extensive shelving to store carpet, tile, paint and other samples.
• A restaurant would want hardware for cooking installed and food storage space.

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. 

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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 interruption 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.

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Are Leasehold Improvements a Good Idea for Me?

As with every major financial decision, its 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!

Leasehold Improvement FAQs

If you’re in the process of obtaining a lease, you likely have lots of questions, as you should. To answer all your leasehold improvement questions, below is a list of frequently asked questions along with their responses. 

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. 

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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 electrical wiring, plumbing and drywalling before you even consider furniture, lighting and painting costs among others.

Finally, remember that leasehold improvements can’t usually be taken with you unless it’s something movable like furniture. Even if you have a big budget for your space, it’s wise to keep costs low and preserve your cash for other things since the costs can’t ever be taken back. 

Final Thoughts

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.