Books AutomatorBefore You Dive In
This guide assumes an understanding of lease agreements and fixed asset accounting. Our focus is to help you properly record tenant improvement allowances from both landlord and tenant perspectives to ensure GAAP compliance.
Overview
What You’ll Learn
- Defining and identifying tenant improvement allowances
- Properly recording TI allowances from the landlord’s perspective
- Accurately accounting for TI allowances as a tenant
- Understanding depreciation rules for leasehold improvements
1. Understanding Tenant Improvement Allowances
A TI allowance is a monetary amount a landlord provides to a tenant to cover the cost of improving the leased space.
Key Concepts
- Cash Allowance: Direct payment from landlord to tenant.
- Construction Allowance: Landlord pays contractors directly.
- Leasehold Improvements: Permanent additions or modifications to the leased space.
Impact on Financials
- Asset Recognition (Tenant)
- Liability/Expense Recognition (Landlord)
- Depreciation Schedule Adjustments
2. Landlord’s Perspective
Landlords must account for TI allowances based on how they are structured.
Method A: Direct Reimbursement to Tenant
The landlord provides cash to the tenant, who manages and pays for the improvements.
- Simple accounting.
- Clear cash outflow.
- Tenant manages project.
- No asset created for landlord.
- Less control over tenant spending.
- Potential for misuse by tenant.
Method B: Construct and Leaseback Arrangement
The landlord constructs the improvements, which are then leased to the tenant as part of the total lease.
Expert Tip: Under ASC 842, if the landlord retains control of the improvements (e.g., they are specific to the building and will be used by future tenants), the landlord capitalizes the improvements and depreciates them. If the tenant controls the improvements and is reimbursed, the landlord treats the allowance as a reduction of lease income over the lease term.
3. Tenant’s Perspective
Tenants generally treat TI allowances as a reduction in the cost of leasehold improvements.
Here is a sample journal entry for a tenant receiving a TI allowance after incurring improvement costs.
// Tenant's books:
// 1. Incurred improvement costs
{
"date": "2025-01-15",
"debit": "Leasehold Improvements (Asset)",
"credit": "Cash / Accounts Payable",
"amount": 50000,
"description": "To record costs of tenant improvements"
}
// 2. Received TI allowance
{
"date": "2025-02-01",
"debit": "Cash",
"credit": "Leasehold Improvements (Asset)", // Reduces cost basis
"amount": 20000,
"description": "To record receipt of tenant improvement allowance"
}4. Step-by-Step: Recording a TI Allowance (Tenant)
- 1
Record Leasehold Improvements
Capitalize all costs incurred for the improvements as a “Leasehold Improvements” asset on your balance sheet.
- 2
Apply TI Allowance
Reduce the cost basis of the “Leasehold Improvements” asset by the amount of the allowance received. This makes the allowance a contra-asset.
- 3
Depreciate the Asset
Depreciate the net cost (original cost minus allowance) of the leasehold improvements over the shorter of their useful life or the lease term (including valid renewal options).
Common Error: Improper Depreciation Period
Ensure your leasehold improvements are depreciated over the shorter of the asset’s useful life or the remaining lease term, including renewal options if reasonably certain. This is a common area for non-compliance.
5. Example Scenario
Scenario Checklist
- Review the lease agreement for TI allowance specifics
- Confirm the total TI allowance amount and payment terms
- Identify eligible vs. ineligible costs for improvements
- Prepare journal entries for initial improvement costs and allowance receipt
- Establish the correct depreciation schedule for the net asset value
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