If there’s one thing the military world and the commercial real estate world have in common, it’s a love for acronyms. MREs. DTIs. ROTC. RTOs. What do all of these mean? The outside world may never know (and some on the inside might not either).
But just as they are with the military, some acronyms in commercial real estate are more important than others. Today, we’ll be covering one you may not have thought about enough: leasehold improvements (LHI). LHIs must be top of mind during initial lease negotiations. Let’s take a closer look at this, as well as how CRE software can protect you from LHI pitfalls.
What Are Leasehold Improvements?
Often provided as part of a new lease negotiation, LHIs are improvements or modifications to spaces occupied by tenants. Their goal is to make the tenant’s space more usable, comfortable and convenient—basically, more desirable for the long term. According to Investopedia, examples of leasehold improvements include:
- Painting the ceiling
- Installing partitions
- Changing the flooring
- Putting in customized light fixtures
Common LHI Mistakes
Unfortunately, many CRE pros can make mistakes when it comes to LHIs. New FASB leasing standards have thrown an extra wrench in this situation and related requirements have changed as a result (e.g. no three-year requirement for improvements, parties don’t need to be unrelated, etc.). Here are some common LHI mistakes:
- Not carefully documenting all aspects of the LHI
- Failing to consider ASC 842/IFRS 16 standards
- Completing an LHI without tenant agreement
- Treating non-LHIs as LHIs (e.g. HVAC improvements, alarm installs, etc.)
- Not leveraging LHIs in the lease negotiation
How CRE Software Helps
Commercial real estate software can help you account for leasehold improvements in several ways. With the software, you can fully abstract your leases so that you have a solid understanding of the boundaries of the LHIs. You can easily create a project timeline connected to any lease so that you can thoroughly document the LHI process, collaborate with the necessary vendors, and store all of the related documents. The best part is that everything is centralized in one easy-to-access location.
If you’re interested in learning more about accounting for leasehold improvement with commercial real estate software, schedule a demo of Quarem today.