Is a Leasehold an Intangible Asset?

by Tiffany C. Wright Google

    A leasehold differs from a regular lease in that it gives the tenant the right to exclusively possess and use real property for a fixed time period. The landlord gives up this right for that time period, retaining the title or deed to the property but few other rights. This long-term exclusivity makes the leasehold an asset. Since the leasehold serves as a contractually provided interest, not the actual building, it is an intangible asset.

    Leasehold Defined

    A leasehold is the right to use a property that the leaseholder does not own for a specified, extended period of time for a specified price. A written, long-term lease contract that the leaseholder possesses typically outlines the terms and conveys these rights. A leasehold also often refers to real property improvements made or property built by one entity on land owned by another. This type of leasehold is called a "leasehold improvement." As with a regular leasehold, the leaseholder -- the building's owner -- holds a long-term lease on the land on which the improvement sits.

    Intangible Asset Defined

    Intangible assets do not have any physical characteristics or substance, and they have useful lives of more than one year. Intangible assets provide businesses that possess them with rights, privileges and advantages that offer the future benefit of increasing the firm's earning power. Intangible assets include copyrights and trademarks which help brand companies, providing market power as well as patents, which often result from significant investment in research and development. These assets also include royalty streams, software, licenses, franchise arrangements, goodwill and leaseholds.

    Explanation

    The actual structure or property that a business uses or built does not constitute a leasehold or leasehold improvement; the interest in that structure or property does. The property or land owner conveys that interest by written documentation through a written lease agreement. Although the actual property is a physical asset, the leasehold is only an interest, and therefore it is not a physical asset. A company has the contractual right to use the property for its long-term future benefit. Therefore, a leasehold meets the specifications of an intangible asset.

    Balance Sheet

    A leasehold appears on corporate balance sheets as long-term assets, with the initial value reflecting the leasehold's original cost. As intangible assets, companies amortize leaseholds instead of depreciating them. As with other long-term assets, the leasehold's book value will reflect the reduction in value from its accumulated amortization.

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    About the Author

    Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

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