Tenant Inducements for Commercial Property
October 7, 2009
Prospective tenants of commercial property have many alternatives when choosing commercial space these days. In order to attract new tenants to available commercial space, landlords frequently provide cash payments to new tenants (for example, so many dollars per square foot leased) as an incentive for new tenants to enter the lease. Generally, these inducements allow for tenant improvements to the space. Rather than the inducement being treated as part of the tenant′s taxable income, often in such circumstances, the receipt reduces the tenant′s tax cost of leasehold improvements. For the tenant, it is the actual receipt and not, merely, the signing of the lease, which results in the inducement becoming relevant for income tax purposes.
However, there can also be tax advantages for the landlord as well. Case law indicates that specific tenant inducements are deductible as current expenses to the landlord. These are known as "running expenses".
An immediate tax write-off as a running expense appears to be available under two conditions:
1. the money is paid as an incentive to have the tenant enter the lease; and
2. the funds are directed to be paid solely for building alterations which are specific to the tenant′s needs during the lease (such as the specific partitioning of the space into those offices required by the tenant).
In many instances, the landlord retains a right, which is written into the lease, to approve the standard of such work before payment is made. This tax deduction position is bolstered if the tenant uses the funds to make alterations which would have minimal value once the tenant vacates the leased space.
If instead, the landlord made a capital expenditure such as lasting structural improvements, this tax deduction will not be available. This includes payment for an enduring capital improvement to the landlord′s building.
When structuring or negotiating tenant inducements, professional advice can be advantageous.
Gary is the Senior Partner in the Tax Group at Soberman LLP and has over 25 years experience consulting with owner-managed businesses. Gary is primarily involved with corporate strategic planning including acquisitions and reorganizations.
You can contact Gary at 416 963 7113 or firstname.lastname@example.org.For more information contact
Senior Tax Partner
Soberman LLP, Chartered Accountants
Phone: 416 963 7113