What Qualifies as Building Improvements?
Building improvements are defined as capital events that substantially extend the life of a building. These improvements may also increase the value of the building and are recorded as an addition of value to the existing building. This occurs if the expenditure meets the capitalization threshold. Simply put, a building improvement is an investment in the building that increases its value or extends its useful life. While building improvements can radically change the functionality or value of a property, a leasehold improvement is an investment in a property that is undertaken to profit a tenant. Examples of building improvements include installing a new roof, renovating a kitchen or common lobby, or improving the existing pipelines underneath a building.
Energy Audits and Improvements for Commercial Buildings
Improvement for commercial buildings and energy efficiency are tied, hand-in-hand. A commercial energy audit identifies the places where buildings are using or losing significant energy. The best improvements to commercial buildings are the ones that are both cost-effective and beneficial for the long-term. One of the improvements that building owners may overlook is upgrading their plumbing. Plumbing tunneling should be considered if the pipes beneath the building are experiencing clogs or plumbing problems. Please consult the following list to preview a few simple ways to improve a commercial building.
- Improve lighting. According to a leading study, installing better light fixtures in more areas is one of the most cost-effective and dramatic ways to enhance a space.
- Replace doors. The doors of a building can add a uniquely appealing dimension to space. This approach is usually applied to multi-family buildings, but can also be used to great effect in upscale office buildings.
- Updating appliances. One of the ways to both produce a positive improvement and increase the energy efficiency of a building is to update the appliances. Stainless steel refrigerators, microwaves, and dishwashers are considered more alluring than dated counterparts.
- Roof coating. Responsibly applied roof coatings are one of the affordable ways for improvements to be made.
Leasehold Improvements Examples
Leasehold improvements are generally understood to be an improvement that is made to a leased building for the express purpose of benefitting the tenant. Leasehold improvements are commonly used in commercial real estate to retain a particular tenant or to appeal to a certain type of business. An example of a leasehold improvement is an architectural modification or replacement of a permanent fixture in the tenant’s space. Changes made to the ceilings, or updating the flooring and walls can be considered leasehold improvements. If an alteration is made for the benefit of multiple tenants in the building it is not a leasehold improvement.
Who Pays for Commercial Tenant Improvements?
Modifications or additions to commercial property to make it suitable for a tenant are a natural part of the leasing process. There are four ways that a landlord can go about paying for commercial leasehold improvements. The first way is a tenant improvement allowance. In this scenario, the landlord gives the tenant a specified allowance for the work needed. Another way is through rent discounts. This route is fairly straightforward, and utilizes free rent, or a rent discount, to the tenant, who will oversee the improvements. In the building standard allowance, or “build out” process, the landlord offers a package of improvements for every tenant. Each improvement not included in the standard build-out must be paid for by the tenant. Finally, the turn key is the final way to pay for improvements. The tenant must submit a design plan to the landlord, showing the improvements and cost estimates. In this scenario, the landlord pays for and oversees all the work.
Types of Leasehold Improvements
There are many different types of leasehold improvements. It is important to remember that particular leasehold improvements will have a wide range depending on who the tenant is. For example, a normal leasehold improvement in a retail space would be to partition a large, open space into smaller, more streamlined areas. This specifically designed space could be used for purposes such as for dressing rooms or cashier counters. Perhaps the installation of retail shelving is part of the equation. Replacing an old parquet floor with marble or tile is an example of a leasehold improvement. As long as the tenant and landlord equitably agree to terms that are firmly defined, the leasehold improvements are endless.
Commercial Building Depreciation
Owners of commercial real estate may not realize the full potential of tax deductions through depreciation. If you are an owner of a piece of commercial real estate, you can reduce your tax bill by depreciating the value of the property over a specific period of time. The internal revenue service depreciates residential rental buildings over 27.5 years. For retail and other commercial structures, the number is 39. What does this mean? It means that every year that a property owner owns a commercial or residential rental property, they deduct the depreciation from their income tax.
Do Building Improvements Qualify for Bonus Depreciation?
In the last several years, there have been some changes in the tax laws. With the Tax Cuts and Jobs Act (TCJA), bonus depreciation under Sec. 168(k) was dramatically modified to allow businesses to deduct 100% of the cost of the acceptable property when placed in service. It is subject to annual 20% phasedowns beginning in the year 2023. Congress may change this in the future, however at the time this article was written, this is the current law of the land.
What is the Difference Between Leasehold Improvements and Building Improvements?
There are some basic differences between leasehold improvements and building improvements. Leasehold improvements are all conducted within the parameters of the tenant’s space. They are designed to benefit the tenant. Building improvements occur outside of the tenant’s space – not exclusively, but with the provision that they are not for the sole benefit of the tenant. For example, if three kitchens on a floor are renovated for the benefit of different tenants, that would be considered a building improvement.
Building Improvements Depreciation
The internal revenue service requires commercial property owners to depreciate a building improvement over the same time frame that a building is depreciated. Usually, commercial real estate buildings have a 39-year-life, so it can take some measure of time to earn back the original investment. If it is at all possible to classify an improvement as a repair or as a leasehold improvement, more tax savings can be established sooner.
Your building improvements must be handled with professionalism. Our staff at Foam Tech are ready to assist. Please call us at 214.205.1200. Discover more about how building improvements in Dallas, TX can increase the value of your property.