Leasehold Improvements

Leasehold improvements, also known as tenant improvements (TI), are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant. These include changes to walls, floors, ceilings, and lighting, among others. In actual practice, these customized tenant improvements usually have a useful economic life of 5 to 10 years, which spans the average commercial lease term.


Until 2004, the Internal Revenue Code required that depreciation for qualified leasehold improvements occur over the economic life of the building structure itself — 39 years — rather than over the economic life of the improvements. In 2004, tax legislation was enacted that temporarily reduced this 39-year depreciation period to 15 years — a period more reflective of the true economic life of Ieasehold improvements in the modern commercial real estate market. From 2004 until December 2015, 15-year qualified leasehold improvement depreciation was subject to expiration, depending on annual or biannual renewals by Congress in so-called “tax extenders” legislation. This lack of permanency contributed to unpredictability for developers, owners, and those who would invest in commercial real estate. Finally, with the enactment of the "Protecting Americans from Tax Hikes Act of 2015" in December 2016, NAIOP achieved a long-sought goal of making 15-year leasehold improvement depreciation a permanent fixture of the tax code.

The length of time over which assets may be depreciated is important for real estate development and investment. Longer depreciation periods result in higher capital costs to building owners, creating disincentives for them to upgrade and modernize space for their tenants. An owner of a building making qualified leasehold improvements valued at $100,000 as part of a lease agreement, for example, would recover that investment over 15 years by expensing nearly $6,700 annually (1/15th of $100,000). However, if depreciation is spread out over 39-years, then the owner can only recover approximately $2,600 annually of the amount spent on these improvements (1/39th of $100,000) — a cash flow decrease of $4,100 in one year. In other words, an owner recovers his $100,000 investment in qualified leasehold improvements at a rate 2.5 times faster under the 15-year depreciation rules when compared to a 39-year depreciation schedule.


How businesses depreciate assets will be a control element of tax reform discussions. NAIOP strongly supports the principle that depreciation periods for assets should never exceed the true economic life of the asset. 


The 15-year leasehold improvement depreciation provision was made permanent by the "Protecting Americans from Tax Hikes Act of 2015". Depreciation schedules are expected to become issues in tax reform discussions in 2017. 


  • Leasehold improvement depreciation of 15-years reflects much more closely the economic reality of the modern commercial real estate market.
  • Lengthening depreciation periods for leasehold improvements to longer than their economic usefulness results in higher capital costs for these improvements, and would create a disincentive for building owners to upgrade and modernize the space for their tenants.
  • Increased investment in leasehold improvements has substantial positive impacts upon economic growth.
  • Congress should maintain the permanency of depreciation provisions in the tax code. This ensures predictability for owners, investors, and developers of commercial real estate properties, and removes barriers to needed upgrades of tenant space.


"Protecting Americans from Tax Hikes Act of 2015"

Tax Increase Prevention Act of 2014 (H.R. 5771)

Economic Impacts of Commercial Real Estate, 2014 Edition , Submitted by: Stephen S. Fuller, PhD Dwight Schar Faculty Chair and University Professor; Director, Center for Regional Analysis, George Mason University, Arlington, Virginia


Aquiles Suarez
Vice President for Government Affairs
703-904-7100, ext. 115