Leasehold

Leasehold is an accounting term for an asset being leased. The asset is typically property such as a building or space in a building. The lessee contracts with the lessor for the right to use the property in exchange for a series of scheduled payments over the term of the lease.

After a lease agreement has been finalized, the lessee, or tenant, begins to build out the space for its purposes to the extent allowed by the contract. Work on walls, ceilings, floor space, lighting fixtures, additional plumbing fixtures, shelving and cabinets represent leasehold improvements that are recorded as fixed assets on a company's balance sheet. The lessee amortizes leasehold improvements over the life of the initial lease term or estimated useful life, whichever is shorter, if the amount of leasehold improvements exceed $50,000, the threshold of capitalization. (Improvements of $50,000 and less are expensed, while improvements of over $50,000 are capitalized according to standard accounting rules.) At the expiration of the lease, the leasehold improvements belong to the lessor.

Leaseholds are most common for brick-and-mortar retailers. Best Buy Co., Inc. is an example. The company leases a majority of their buildings and makes leasehold improvements that suit its standardized interior functional and aesthetic design. Most of the company's leases contain renewal options and escalation clauses, as well as contingent rents based on specified percentages of revenue, which is a common clause in lease agreements for retailers.

Rent expense is recognized on a straight-line basis to the end of the initial lease term, and any difference between straight-line expense amounts and rent payable is booked as deferred rent. Leasehold improvements are a significant portion of gross property and equipment (before deduction of accumulated depreciation) for Best Buy, accounting for approximately 27% in its fiscal year 2017.