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The cost of leasehold improvements over the capitalization threshold of $50k should be capitalized. Examples of costs that would be included as parts of a leasehold improvement include: Interior partitions made up of drywall, glass and metal. Miscellaneous millwork, carpentry, lumber, metals, steel, and paint.
The cash allowance for tenant improvements would be treated as a lease acquisition cost to the landlord, who would amortize this cost, along with other lease acquisition costs, ratably over the term of the lease.
What isn't included in operating expenses? Operating expenses should not include debt service, CAPEX, property marketing costs, capital reserves for future large repair projects, leasing commissions or tenant improvements allowances.
If the landlord makes tenant improvements, the capital expenditure is recorded as an asset on the landlord's balance sheet. Then the expense is recorded on the landlord's income statements using depreciation over the useful life of the asset.
As discussed above, a tenant improvement allowance is recorded as a liability which is amortized (as a reduction to rent expense) over the life of the lease.