Leasehold Improvements in an NYC Office: Definition and Examples

One kind of work, three names

Finance teams say leasehold improvements, brokers say tenant improvements or TI, and contractors say buildout or fit-out. The first two name the result: construction fixed to space the company leases and does not own. The third names the project, with its drawings, permits and schedule.

What the term leaves out matters as much. Furniture, computers, phones and anything else that leaves with you are not improvements to the leasehold, and a landlord's allowance usually will not pay for them. The buildout entry covers the project side.

Examples on a larger floor, and who typically pays for each

• Partitions, doors and glass fronts for offices and meeting rooms: allowance first, then the tenant. This line swings a budget more than any other.
• Ceilings and lighting: allowance.
• HVAC distribution, the ductwork that carries air from the building's system to your rooms: allowance.
• Electrical distribution: allowance.
• A pantry and any other plumbing: allowance, and costly for its size.
• Demolition, and a floor handed over level and code compliant: landlord's work, where the delivery condition says so.
• Design fees and permits: depends on how the lease defines a reimbursable cost.
• Cabling, AV and furniture: the tenant, in most deals.

Each line is a drafting point in the work letter, not a market rule, so confirm it on the lease in front of you.

Three sources of money for an established company's floor

Landlord's work is construction the owner performs at its own cost before handing over the space. The allowance is a fixed sum per rentable square foot that the landlord contributes to the tenant's project. Our buildout guide puts a custom job at $50 to $150 a square foot and the allowance on a lease of five to ten years at $30 to $75, so landlord money typically pays for a third to half of the construction.

The rest is the company's own capital. That is the figure a finance lead needs before the lease is signed, and it comes from a contractor's estimate on the actual layout. The buildout cost guide breaks the budget into its lines. The floors below suit a team of about 75, a size at which the gap between allowance and cost is large enough to plan for early.

Ownership when the lease ends, and one line on accounting

Whoever pays, leasehold improvements usually pass to the landlord, at installation under some New York leases and at expiry under others. The lease can also require the tenant to remove some of them, and the items to settle in advance are the specialty ones, such as an internal staircase.

On accounting we will say one thing and stop: how leasehold improvements and the allowance are treated in your financial statements and tax filings is for your accountant to decide. The allowance entry covers the lease side.