In the business world, change can come at you pretty quick. When rapid growth happens at the ground level, sometimes productivity and employee efficiency aren’t the first thing your office will need to worry about. Sometimes, the first priority is your office space itself. When an office environment becomes too small, or inefficiently houses your staff and limits the achievability of your company culture and goals, there are a few options.
Most of the time, entrepreneurs and businesses immediately think to jump ship and relocate to an office space that accommodates their needs out of the box. Thing is, the perfect office is hard to find — and gives rise to new potential compound issues revolving around commuting time, renovations, neighbourhood desirability, access to technology and fresh top-tier talent, etc. Sometimes, the answer is right in front of you in the form of your current space; reimagined.
Leasehold improvements refer to any upgrades a business owner may make to a leased office space. Whether it’s upgrading the plumbing or installing custom cabinets, there are a number of ways a business can use these improvements to their advantage — especially if they’re experiencing rapid growth. Learn more about how they work and why an owner should even consider investing in a space they don’t own.
Now let’s start investigating the benefits of leasehold improvements for growing businesses.
How Leasehold Improvements Work
At the time of your lease signing, your landlord will typically lay out specific terms for tenants to follow. It’s the landlord’s job to ensure the property is safe and functional according to the original agreement. But things can change in a heartbeat for a business, especially if they’re going through a major growth spurt.
Let’s imagine your business started off with 15 employees in your office for the first five months, and the landlord was confident the building could support your staff. However, when it soon became clear your office needed to hire an additional 10 people to keep up with growing demand for your products or services, the landlord was unsure if the plumbing and electrical systems could efficiently support the additional usage.
If the landlord is reluctant to pay for the necessary upgrades, your two main options are to move and break the lease, or to complete a leasehold improvement.
A leasehold improvement will typically become the property of the landlord when your lease is up, unless your business can successfully remove the improvements without damaging the rest of the property (or what’s known as a temporary leasehold improvement). In the case of plumbing or electrical systems, this is difficult to do. However, in the case of furnishings or temporary walls, you can structure the improvement for easy dismantling when the time comes – in the meantime, your business benefits from the quick and relatively painless upgrades to its office environment without having to up and leave.
Benefits of a Leasehold Improvement
Leasehold improvements can help your growing office function more efficiently during a very busy time:
- Saves money: If the only other option is moving to a larger or more modern office, leasehold improvements save you the costs of breaking your current lease.
- Saves time: Uprooting and moving an entire office is extremely time-consuming, and the disruption can cause employees to lose their momentum.
- Customized space: Instead of hunting for offices that fit your company culture and future vision, you get to design the space exactly the way you want it to look.
- Smarter attitude: A leasehold improvement can make your office look more professional. This can boost both client and employee confidence in the organization as a whole.
Much of a business’ success comes down to how they prepare for the future. If owners fail to invest in their office space, they send a message to employees that only the bottom line matters. A leasehold improvement is a way to help the office be more comfortable and welcoming to all. If clients come to visit, it helps them form a better impression of the enterprise.
If your business chooses to complete a leasehold improvement, you’ll need to factor in the depreciation of the upgrades according to the length of the lease and the useful life of the items you purchase. This can make it easier to decide if an improvement is worth it in the long run.
Let’s imagine you’re planning to install carpet that’s expected to have a useful life of three years based on current wear and tear, before it needs to be replaced; your depreciation will be three years even if you still have four years on the lease agreement.
If the useful life exceeds that of the lease, then the depreciation should be set for the termination of the lease. So if the carpet in the was expected to last three years and your lease was for two, then the depreciation would be for two years. If you choose to renew the lease, then you can extend the depreciation to three years.
Leasehold improvements can be a great stopgap for businesses that are growing, but they’re not for everyone.
If you’re running out of space to put employees now, then an expensive leasehold improvement may not always be the best answer. You’ll end up paying for upgrades you won’t be able to use because eventually, the only option will be to move to a larger space. And unless your office building has plenty of empty rooms and floors, this may not be a viable option for the foreseeable future.
Business owners need to keep their expectations in line with reality during this time, while also planning for the future. It’s not unusual for an owner to go overboard on their leasehold improvements in anticipation that they’ll end up buying the space, only to find the deal falls through at the last minute, or a more suitable space becomes available elsewhere, prompting an organizational move.
Other owners may not realize the type of stress the extra staff and workload is really putting on their space, meaning their improvements end up depreciating far faster than they thought.