Leasehold improvements
Leasehold improvements are permanent alterations made to leased premises — a commercial kitchen, a build-out, flooring, electrical or plumbing work. They are frequently a large part of what a buyer is paying for, and under most leases they become the landlord’s property at the end of the term.
This catches buyers of restaurants and clinics in particular. A tenant may have spent several hundred thousand dollars on a fit-out, and that investment is real value while the lease runs — but if the lease ends and is not renewed, the improvements generally stay with the premises rather than coming out.
Why the lease term drives their value
Improvements are worth what the remaining term and renewal options allow you to use them for. Paying full value for a fit-out on a lease with two years left and no renewal is paying for an asset that is about to be surrendered. That is why the lease and the improvements have to be valued together rather than separately.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryLeasehold Improvements and Security Deposits on Lease Assignment in Ontario
- 03Treadstone LawLegal commentaryLease Red Flags to Watch For Before Buying a Business in Ontario
- 04Treadstone LawLegal commentaryEquipment and Asset Condition Checks Before Buying a Business in Ontario
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