🏗️ What Is a Leasehold Improvement in Real Estate? Definition & Examples

Leasehold improvements are upgrades or modifications made by a tenant to a rented property to support their business or living needs. These improvements typically remain with the property and may become the landlord’s property when the lease ends.

How Leasehold Improvements Work

Leasehold improvements are changes made to leased commercial or residential space to customize it for a tenant’s use. These improvements are usually permanent and cannot be removed without damaging the property.

Examples of leasehold improvements include:

  • Interior walls, partitions, and room buildouts
  • Built-in cabinets, counters, and shelving
  • Flooring upgrades and carpeting
  • Lighting installations and electrical improvements
  • HVAC modifications and plumbing upgrades

While tenants typically pay for these improvements, ownership often transfers to the landlord once installed.

Why Leasehold Improvements Matter

Leasehold improvements affect:

  • Who owns the improvements at the end of the lease
  • Property value and tax treatment
  • Responsibilities for maintenance and repairs
  • Tenant incentives and negotiation strategies

Leasehold improvements vs. trade fixtures:

  • Leasehold improvements: Permanent additions that stay with the property
  • Trade fixtures: Business-specific items the tenant can remove

Understanding the difference prevents disagreements between landlords and tenants during move-out or property sales.

Example of a Leasehold Improvement in Action

A dental office tenant installs custom-built cabinets, sinks, and exam room partitions. These upgrades are considered leasehold improvements because they are permanently attached and enhance the space for long-term use. When the lease ends, the improvements stay with the property unless the lease specifically states otherwise.

Why Leasehold Improvements Matter for FSBO Sellers

  • Influence the property’s value during a sale
  • Determine what the seller can legally remove
  • Affect tenant rights if the property is occupied
  • Impact negotiations with buyers purchasing investment property

FSBO sellers should review leases and improvement agreements to avoid disputes about ownership and removal.

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