Why Leasehold Improvements Are a Bigger Deal Than You Think

June 30, 2025 | Posted in: Lease Accounting

In today’s evolving commercial landscape — where tenants are rethinking space needs, pushing for flexibility, and upgrading aesthetics to reflect brand identity — leasehold improvements have taken center stage in both real estate strategy and financial reporting.

When a company leases a new space, it often needs to make improvements to suit its business needs. Whether installing collaborative office zones, upgrading lighting systems, or customizing high-end finishes to complement the brand and corporate culture, the accounting for those improvements matters— and may have ripple effects across the balance sheet, financial statements, and lease obligations.

Understanding Leasehold Improvements

Leasehold improvements are enhancements a tenant or landlord makes to a leased space to prepare it for business operations. Think cubicles, partitions, built-in counters, HVAC improvements, or even custom flooring.

While these updates bring functional and aesthetic value, they also represent significant capital expenditures. Under current accounting rules, they must be capitalized and amortized — typically over the shorter of either the lease term or the asset’s useful life.

Why the Accounting Gets Complicated

While companies are taking advantage of current market trends for economic advantage and leveraging conditions to negotiate more meaningful tenant improvement allowances, a critical issue is determining the ownership of assets. Under the lease accounting standard, ASC 842, the stakes around leasehold improvements have grown.

Remember, a single improvement cannot be split across both sets of books. For example, a shared carpet is a financial impossibility under GAAP. Only one party can claim ownership — and the accounting flows from that decision.

Whether the improvements are lessee or lessor assets may affect:

Who recognizes the asset
Whether there is a lease incentive or a reimbursement of costs
Which accounting standard to use
When the lease technically “starts”
Whether the improvement triggers a sale-leaseback analysis
How (and whether) costs are reimbursed

A Real-World Example

Looking at it by the numbers, for example, a landlord offers $50,000 to build out your space. You also upgrade to premium finishes and contribute another $30,000. Therefore, the total build-out amounts to $80,000.

If the tenant owns the improvements: The full $80,000 is on the tenant’s books. The $50,000 from the landlord is a lease incentive.
If the landlord owns the improvements: The full $80,000 stays with the landlord. The $30,000 from the tenant becomes a lease payment.

That ownership determination also defines when your lease begins — which can affect financial ratios and compliance if tied to earnings covenants or investor reporting.

Avoiding Mistakes

With so many factors to consider, leasehold improvements are a complex and often misunderstood aspect of accounting. Failure to accurately record and depreciate improvements can cause financial reporting ramifications — that can trigger:

Restatements
Audit complications
Misstated liabilities or depreciation
Missed tax and compliance opportunities

With hybrid work models, reconfigurations, and shorter lease terms on the rise, this topic isn’t just relevant — it’s urgent.

With careful consideration and analysis, however, you can ensure that you comply with the relevant accounting guidance. It is advisable to work with a qualified accounting provider to ensure accuracy and compliance for your leasehold accounting.

How CBIZ Gibraltar Can Help

Leasehold improvements live at the intersection of accounting, real estate, and strategy. Our team, in collaboration with colleagues at CBIZ helps clients:

Determine asset ownership
Align lease and tax treatment
Accurately recognize lease incentives or payments
Navigate ASC 842 and related guidance with confidence

Our team of real estate experts is structured to manage the details, navigate the market, and align your real estate strategy with your long-term business goals.

CBIZ Gibraltar is the leading provider of integrated real estate services with a 100% commitment to advocating the interests and needs of tenants. If you’re entering, modifying, or exiting a lease — and especially if you’re investing in a buildout — we can help you get the accounting right from day one.

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