Leasehold

A leasehold is an interest in property granted by a property owner (lessor) to a tenant (lessee) under a lease agreement. The lessee acquires the right to possess and use the property for a specified period in exchange for scheduled payments. Leaseholds are common in both commercial and residential real estate.

Key takeaways

• A leasehold gives a tenant the contractual right to use property for a set time in return for payments to the owner.
• Commercial leaseholds often include complex provisions covering payments, responsibilities, renewals, and improvements.
• Leasehold improvements are capitalized as fixed assets and are generally depreciated rather than immediately deducted for tax purposes.

How leaseholds work

Lease agreements define the rights and obligations of landlord and tenant, including:
* Lease term and renewal options (commercial leases commonly run from 1 to 10 years; ground leases can be much longer).
Payment structure, security deposits, and escalation or contingent rent clauses.
Responsibilities for maintenance, repairs, and improvements.
Larger tenants or longer commitments often yield more favorable lease terms.

Types of leaseholds

• Tenancy for years: A fixed-term lease with specified start and end dates (can be days to years).
• Periodic tenancy: Automatically renews for successive periods (e.g., month-to-month) until notice to terminate is given.
• Tenancy at sufferance: The tenant remains after the lease expires without landlord consent; the landlord may evict or accept rent and convert the arrangement into a new tenancy.
• Tenancy at will: Can be terminated at any time by either party; typically informal and governed by state law.

Leasehold improvements

Leasehold improvements are alterations made to the interior of leased space to suit the tenant’s needs (examples: walls, partitions, lighting, shelving, cabinetry). Key points:
* Improvements are recorded as fixed assets on the tenant’s balance sheet when the tenant pays for them.
Responsibility for funding improvements depends on the lease; landlords may pay, share costs, or provide tenant improvement allowances to attract tenants.
Permanently affixed improvements often remain with the building at lease end unless the lease specifies removal or restoration.
* For accounting and tax purposes, improvements are generally depreciated over their useful life (many jurisdictions and practices apply a multi-year recovery period rather than immediate deduction—confirm current tax rules for specifics).

Leasehold interest and ground leases

A leasehold interest gives the lessee exclusive possession and use of property for the lease term. Ground leases, where a tenant leases land for long periods (often decades) and may build improvements on it, are a common form of long-term leasehold. Leasehold interests differ from freehold (fee simple) ownership, where the owner has complete and indefinite ownership rights.

FAQs

What is a leasehold estate?
A leasehold estate is a contractual right for a tenant to use an owner’s property for a defined time under agreed terms and conditions.

How are leasehold improvements depreciated?
Leasehold improvements are capitalized and depreciated over an applicable recovery period rather than deducted immediately. The specific depreciation schedule depends on accounting standards and tax rules in effect.

Which leasehold type has a definite beginning and end?
Tenancy for years has a definite start and end date specified in the lease.

Bottom line

A leasehold is a contractual property interest that grants a tenant the right to use real estate for a set period. Commercial leases often include detailed provisions about payments, responsibilities, and improvements. Tenants and landlords should clearly document who finances and owns improvements and should confirm applicable accounting and tax treatments for those expenditures.