Leasehold Improvements

Leasehold Improvements appear as a line on our Balance Sheet under Capital Assets, and typically have a note attached identifying accumulated depreciation. They include all improvements a coffee business makes to a rented building that typically remain with the landlord or next renter after your lease expires. Things like cabinetry, countertops, washroom fixtures, lighting, flooring, anything that is attached to the building and not easily removed. Sometimes a coffee business may choose to identify items they consider proprietary and therefore specifically identified with the business, (ie logo signs )and may wish to have them excluded in the signed lease document. If not identified within the lease as exempt, all of the money a business spends to get a building to operational condition is considered a leasehold improvement.
It is very important to consider how much leasehold improvements cost a new business when preparing a business plan. These expenses are likely the most significant any business faces when opening a new location, and servicing any debt needed to pay for them cause a huge obstacle to profitability and positive cash flow. Like all capital costs, we are expected to depreciate the value over a period of time, most likely matching the period over which any associated loan is to be repaid. For example, if a company borrows 200k to build out a new cafe, and has arranged to repay the bank over 5 years, we would choose to depreciate the value 40k per year over 5 years. In some cases, you and your accountant may choose to depreciate the leaseholds over the period defined in the lease, 10 years for example.

The important thing to remember is leasehold improvements only are useful to a company if they still occupy the building. Therefore, when negotiating a lease it is useful to obtain a 5 years initial lease period, with an optional 5 year period to follow. That way the company can continue to use the assets past the point that they are paid for.

The last point I want to bring up when considering leaseholds is how to take advantage of someone else's mistakes. When a poorly run or struggling coffee shop closes, the money spent on fixtures and improvements remain within the building. This is an opportunity for the right operator to benefit from the huge savings to be had. Even the cost of installing mechanical, plumbing, and electrical in a cafe can be significant, and if all a building needs is some new paint, counter tops and lighting, you have given yourself a minimum 100k head start towards profitability.