Tenant Improvements & Tax Consequences

Tenant Improvements & Tax Consequences

April 21, 2011 Off By Chris

Have you ever negotiated a real estate lease, only to find later that the incentives the landlord gave to induce you to lease became taxable as income to your company? Whether you’ve experienced this in the past or would like to avoid it in the future, this post is for you.

The CCIM Institute has published an article entitled Before the Build-Out focused on possible tax implications arising from tenant improvements made in connection with a lease. Depending on where your company is located, terms considered standard in that market or even presented as incentives to lease may end up causing a taxable event.

According to the article, tax consequences mainly depend on the method used to fund the improvements. Additionally, the specific language used in the lease actually works for or against you and determines your exposure. There are three different types of tenant improvement funding:

  • Direct Investment – Landlord pays for improvements directly (in turn a “turnkey deal”);
  • Tenant Payment – Landlord makes a payment to the tenant who pays for the improvements; and
  • Rent Holiday – Tenant receives free rent specifically to pay for its improvements.

The largest area of exposure to you as the tenant occurs in the Tenant Payment category if the landlord pays a cash incentive for signing the lease or if the improvements you make with the payment you received are characterized as personal property and not qualified long-term real property improvements.

For the complete article, click on the link below. If you have any questions or would like to discuss how using our services can reduce your risk of these types of tax consequences while still realizing monetary incentives to lease, please get in touch with me.

Before the Build-Out CCIM Article