Assessing Leasehold Improvements


October 2002

This can sometimes be a confusing area within the assessment function. Keeping track of whether a leasehold improvement is properly taxed, not double assessed, or incorrectly assessed to the wrong taxpayer can be a challenge.

What is a Leasehold Improvement?

Simply stated, leasehold improvements are alterations, improvements, or additions made to leased property by or for a lessee/tenant. There is an entire array of possibilities that may be regarded as leasehold improvements. The most common leasehold improvements are the alterations made to leased office or retail space where the tenant completes all or part of the interior of a building. However, these alteration/additions and improvements tend to range from relatively short-lived trade fixtures and décor to entire buildings.

Should Leasehold Improvements be assessed as Real Property or Personal Property?

All leasehold improvements should be assessed as personal property unless the taxpayer or assessor can confirm that property has been assessed and valued with the real property. Merely assuming that a leasehold improvement has been assessed as real property can result in permanent omissions.

To determine whether personal or real, the Uniform Standards of Professional Appraisal Practice “Guide Note 7” provides some direction relating to appraising and identifying leasehold improvements. This note states in pertinent part:

Leasehold items differ physically from trade/domestic fixtures in that they are constructed on site rather than merely installed (or modified and installed). For example, a tavern’s bar might be constructed on the premises whereas the barstools would merely be installed as delivered. Such distinctions are not useful in the appraisal analysis, although a client may have some other justification for differentiation. Most single-family dwellings, factories, amusement facilities, farms, and ecclesiastical properties, and many office and retail buildings are appraised to include some affixed tangible personalty (e.g., bookshelves, carpet). But, often, some items of affixed personalty are to be removed (or separately sold) by the grantor and should be excluded from the appraisal opinion. In all such cases, specificity is necessary. It is of great importance to the appraiser whether, for example, the gas range, the leaded stained glass window, and the dining room light fixtures are to be included in, or excluded from, the appraisal opinion. On the other hand, the contributory value of these items in no way depends upon whether each or any of the items is legally realty or personalty.

What Valuation Table/Column Should Be Used For Leasehold Improvements?

The appropriate table is the one that is appropriate for the specific asset. That is, the appraiser should consult the Department’s Index to Personal Property Valuation Indicators (Index), and use the indicated table/column for the type of property being assessed. However, there are occasions when a taxpayer lists the property simply as “leasehold improvements." When this occurs, the Index may be used by identifying the nature or type of business activity, e.g. the rate for “Office Furniture and Fixtures” could be utilized to value leasehold improvements of an office building tenant.

An alternative method would be to value the assets on the basis of the lease term. Let’s assume a tenant has a 10- year lease with one 5-year option to extend the lease for a total of 15 years. The unidentifiable leasehold improvements could be viewed as having a 15-year life. By consulting the “Combined Table” attached to the Index, the appropriate table/column can be selected. The economic life in years is noted at the top of each column of percent good factors, immediately under the rate. The rate that most closely matches the 15-year lease term is the 10% column.

In either case, the economic life of the leasehold improvements is the primary basis by which the rate should bechosen. There is no way that a single rate or method can be appropriately applied to all situations. The important factor to keep in mind is that leasehold improvements be properly assessed and ensuring that they are neither double assessment nor omitted from assessment.