Educational content only. This post explains how financial concepts and published data apply generally to healthcare practices — it does not constitute advice for your specific situation. Consult your accountant, lender, and relevant advisors before making any significant business or financial decisions.
Leasehold improvements sit at an uncomfortable intersection for clinic operators: they're usually the largest startup cost, they have limited collateral value from a lender's perspective, and they're also what makes the space clinically functional. Understanding how they're financed, how they're treated for tax purposes, and how the lease negotiation shapes the economics is worth getting clear on before you're in the middle of it.
Why Leasehold Improvements Are a Financing Challenge
Published commercial lending literature describes leasehold improvements as collateral-challenged compared to most other business assets. Equipment can be repossessed and resold if a borrower defaults. Real property can be realised on. Leasehold improvements — walls, plumbing, electrical, cabinetry — are physically attached to a space the borrower doesn't own. Their standalone realisation value in a default scenario is limited.
This is exactly why government-backed loan guarantee programs play the role they do. Published CSBFP documentation in Canada and SBA 7(a) documentation in the US both describe leasehold improvements as eligible assets specifically because the guarantee structure compensates for the collateral challenge — it partially mitigates the lender's downside risk, enabling financing that the lender might not otherwise extend.
TI Allowances: The Negotiation Most Operators Under-Use
Published commercial real estate literature in both Canada and the US describes Tenant Improvement (TI) allowances — funds provided by the landlord to offset the cost of leasehold improvements — as a common component of commercial lease negotiations, particularly in markets where vacancy rates are elevated and landlords are competing for stable, long-term tenants.
For a healthcare practice, there's a reasonably strong case to make to a landlord: healthcare tenants typically sign longer leases, have low default rates, and are difficult to relocate (because the fit-out investment makes it expensive to leave). Published real estate resources describe this as a negotiating position — not a guarantee, but a genuine leverage point in markets where landlords have alternatives to fill.
TI allowances in published Canadian and US commercial real estate data range from a few months of base rent in standard commercial markets to several hundred thousand dollars in major metro markets for anchor tenants or long-term healthcare leases. The availability and quantum depend on the specific market, landlord, lease term, and the tenant's creditworthiness. It's a negotiation, not a formula.
Published accounting resources in both Canada (ASPE) and the US (US GAAP) describe TI allowances received from landlords as lease incentives with specific accounting treatment — affecting how improvements are measured and amortised on the financial statements. The accounting treatment is a detail for your accountant; the negotiation is something to pursue before signing the lease, not after.
What many operators don't fully appreciate until they've signed a lease is that TI allowances are not free money — landlords recover their contribution through the lease rate over the term, at an implied financing rate that published commercial leasing data suggests is typically 6–10%. Part of what appears as monthly rent is effectively a financing payment on the build-out. Understanding how this recovery is structured matters both for evaluating lease offers accurately and for comparing a lease against buying the space. For a detailed breakdown of how TI recovery is calculated and what it means for the true cost of your lease, see: What Is a Tenant Improvement Allowance — And What It's Actually Costing You.
Depreciation and Tax Treatment by Market
Canada (CRA): Published CRA guidance describes leasehold improvements as depreciating under Capital Cost Allowance (CCA) Class 13 — over the lesser of the remaining lease term (plus one renewal period, to a published maximum) or the useful life of the improvements. This means a 5-year lease with a 5-year renewal option results in a 10-year CCA amortisation period for the improvements, regardless of their physical useful life.
US (IRS): Published IRS guidance describes leasehold improvements as Qualified Improvement Property (QIP) with a 15-year recovery period under MACRS and eligibility for bonus depreciation. Bonus depreciation — allowing immediate deduction of a large percentage of the improvement cost in the year of acquisition — is described in published US tax resources as a significant planning consideration for practices making large leasehold investments in eligible tax years. The specific availability and percentage of bonus depreciation is subject to annual legislative changes and requires current tax advice.
In both markets, leasehold improvement amortisation/depreciation is a non-cash expense — it reduces reported income but does not affect cash flow directly. Published accounting resources note this characteristic is relevant to DSCR calculations, which typically add back non-cash charges to arrive at operating cash flow.
The Lease Term Variable
Published lending resources describe lease term as affecting both the financing and the economics of leasehold improvements. SBA program documentation in the US describes requirements related to remaining lease term — generally, the lease term needs to extend beyond the loan repayment period. This creates a minimum lease term requirement for leasehold improvement financing that operators need to plan around before signing.
A short lease term also affects the amortisation period for the improvements — which affects reported income in the early years of the practice. And a lease that's too short relative to the break-even timeline creates a scenario where the practice hasn't fully recouped its fit-out investment before a lease renewal or relocation decision needs to be made.
Published commercial real estate resources describe the lease term negotiation — length, renewal options, rent escalation, TI allowance, and lease-end conditions — as the most consequential document a new clinic operator signs. Everything else in the financial model runs through it.
→ See also: The Four Numbers Every Clinic Startup Needs Before Signing Anything
Model leasehold improvement costs as part of the full startup cost picture — by specialty, market, and build intensity. Canadian and US models with published regional construction data. See how the fit-out affects your equity requirement and break-even.
Model Your Fit-Out Costs →Disclaimer: All figures referenced are from published industry sources and represent general patterns — not estimates for any specific practice. KlinDeck is not a financial advisor, accountant, lender, or lawyer. Tools are educational references only. Consult qualified professionals before making significant decisions.