The same question comes up regarding tenant improvements allowance. How does the Landlord calculate the capital / tenant improvement? Improvement allowances are calculated into the lease rate and term.
Amortizing capital costs into a lease involves spreading out the cost of an asset over the term of a lease. This is typically done by adding a portion of the capital cost to each monthly payment. The following steps can be taken to amortize capital costs into a lease:
- Determine the capital cost: The first step is to determine the total capital cost of the asset that will be leased.
- Determine the lease term: Next, determine the length of the lease term. This will be the number of payments over which the capital cost will be amortized.
- Calculate the amortization amount: Divide the capital cost by the number of lease payments to determine the amount of capital cost that will be added to each lease payment.
- Adjust the lease payment: Add the calculated amortization amount to each lease payment.
For example, let’s say a company is leasing office space with an improvement capital cost of $100,000 over a 5-year lease term. The amortization amount would be calculated as follows:
Amortization amount = Capital cost / Number of lease payments Amortization amount = $100,000 / 60 (12 payments per year x 5 years) Amortization amount = $1,666.67 per payment
To adjust the lease payment, the company would add $1,666.67 to each payment. For instance, if the lease payment without amortization was $2,000 per month, the adjusted lease payment with amortization would be $3,666.67 per month ($2,000 + $1,666.67).
Amortization amount = Capital cost / Cost square feet of lease building Amortization amount = $100,000 / 10,000 sf ($10 sf / 5 years = $2.00 sf per year) Amortization amount $10 / 60 months = $0.1666 per sf per month.
To adjust the sf cost, the company would add $2 to the annual square footage cost. For instance, if the lease per square foot without amortization was $20 per year, the adjusted lease payment with amortization would be $22 per year ($20 + $2) or $22 / 12 months = $1.83 per sf per month.
Moving in to a new leased property is an exciting time for improvements and change. Make sure you understand your tenant improvement clause and to get the most out of it. Contact us for any questions you might have.