How are leasehold improvements valued?

Key facts

What counts as a leasehold improvement in a dental office?

The build-out you paid for inside someone else's building: interior walls, plumbing to chairs and sterilization, electrical and data wiring, x-ray shielding, built-in cabinetry, flooring, ceilings, lighting, and HVAC changes. Cohen Law Firm lists plumbing, chair electrical, compressor and vacuum lines, lead-lined x-ray walls and dedicated HVAC among the typical dental tenant improvements (Cohen Law Firm). Freestanding chairs, sensors and computers are equipment, not improvements; see how to appraise dental equipment.

How do appraisers value them?

Most start with cost. Baker Tilly's asset method includes leasehold improvements among the appraised tangible assets (Baker Tilly). SVA describes using a method similar to equipment (straight-line depreciation) with an approximate 15-year life (SVA).

Illustration only, using a 15-year straight-line life with no salvage (your appraiser's method may differ):

Then the appraiser adjusts for things cost can't see: condition, how dated the finishes are, and above all how long the practice can keep using the space.

Why does the lease term change the value?

Because improvements in a leased space are only useful while you have the right to occupy it. If the lease ends in two years with no renewal, a buyer gets two years of use, whatever the build-out cost. Cohen Law Firm says that with only two years left and no extension option, a practice's sale price will drop by 10–25% (Cohen Law Firm); that's one firm's estimate, not a rule. Mostofi Law Group likewise says buyers and lenders want secure long-term occupancy, typically 10 years including renewals (Mostofi Law Group).

A practical check: value the improvements over the shorter of their useful life or the remaining lease term including renewal options you can actually exercise. Extend or renew the lease before you sell; see the lease negotiation checklist.

Can improvements be worth more than book value?

Sometimes. A well-built dental space with plumbed operatories, shielding and a mechanical room saves a buyer months of construction and permits, and a long lease lets them use it. In that case the appraiser may look at what it would cost to build the space today, less wear, rather than the depreciated historical cost. That's the logic behind replacement cost, which the ASA defines for equipment as the current cost of similar new property with the nearest equivalent utility (ASA).

Who owns the improvements at lease end?

Read the lease. Leases usually address this in surrender or restoration clauses: some make improvements the landlord's property at the end of the term, and some require the tenant to remove them and restore the space. Ask four questions: Who owns the improvements during the term? Who owns them at the end? Must anything be removed? Does a sale and lease assignment change any of that? Either way, the lease decides whether an improvement is something a buyer is really getting. Watch for a demolition or relocation clause, which lets the landlord end or move the lease; Mostofi calls it potentially devastating for a practice with hundreds of thousands of dollars in fixed improvements (Mostofi Law Group).

How are leasehold improvements treated for tax?

Interior improvements to nonresidential buildings placed in service after 2017 generally qualify as qualified improvement property, which is 15-year property (26 U.S.C. §168). QIP excludes costs for enlarging the building, elevators and escalators, and the internal structural framework (IRS Pub 946). Other building improvements may fall under the 39-year nonresidential real property period (IRS Pub 946). Bonus depreciation can apply to qualified property acquired and placed in service after January 19, 2025 (IRS Topic 704). As with equipment, tax basis isn't market value; a fully expensed build-out can still be worth a lot to a buyer with a long lease.

In a sale, improvements are tangible assets allocated on Form 8594 along with equipment, and no asset can be allocated more than its fair market value (IRS Form 8594 instructions).

What records support the value?

• Contractor invoices and final pay application, broken out by trade.
• The date the space was placed in service (certificate of occupancy).
• Landlord TI allowance received, so you value only what the practice paid.
• Permit drawings and as-builts.
• The lease, all amendments and renewal options. For current build-out costs, see dental office build-out cost.

Which free tools help with this?

The equipment inventory & appraisal report (free tool, coming soon) is planned to turn your equipment list into an appraisal-ready report. The free equipment inventory CSV (coming soon) will give you the columns to start the list in a spreadsheet. The build-out cost & timeline calculator (free tool, coming soon) is planned to estimate build-out cost and timeline from square footage and operatory count.

How FloorStack helps

FloorStack is a dental build-out platform that keeps build-out records with the practice. The free Build-out cost & timeline calculator (coming soon) estimates what it would cost to build the space new, a useful check on the value. The free Equipment inventory & appraisal prep tool (coming soon) will separate equipment from improvements so nothing is double-counted. Floor Stack ($39/mo, billed yearly) keeps specs, serials and warranty dates on file (FloorStack). Start with the inventory template (CSV). See the Dental Practice Appraisal hub and how practices are valued.

Free tools for this step

• Build-out cost & timeline calculator: replacement cost of the build-out (free tool, coming soon).
• Equipment inventory & appraisal prep tool: separate equipment from improvements (free tool, coming soon).
• Dental equipment inventory template (CSV) (free download, coming soon): the equipment side of the list.