Revised July 2001 CAPITALIZATION OF TENANT IMPROVEMENTS

Transcription

1 Revised July 2001 CAPITALIZATION OF TENANT IMPROVEMENTS

2 Capitalization of Tenant Improvements 1.0 What is a Tenant Improvement (TI)? Capitalization Guidelines Approval Levels Budgeting for TIs Disposals Related Amortization... 5 Appendix A: Examples of Tenant Improvements... 6 Appendix B: Accounting Entries... 7 Appendix C: Commonly Asked Questions and Answers... 8 Appendix D: Glossary of Terms

3 1.0 What is a Tenant Improvement (TI)? A tenant improvement (TI) is any construction requested by tenants to accommodate their particular work function or aesthetic needs over and above that which is provided within the base building envelope. Refer to Appendix A for examples of TIs. These improvements must be made to "leased" buildings, not buildings owned by the ministries. A TI does not include the following: ½ temporary or portable partitions/screens (e.g., systems furniture), cubicle dividers, etc. (these are considered to be office furniture) ½ pre-feasibility studies (includes review of project options) and feasibility studies (i.e., preparation of the project brief and any project planning) ½ lease negotiation/renewal fees ½ costs of moving staff into new space ½ salary costs of ministry staff ½ betterments (structural improvements to the building) ½ re-arrangement of office furniture. 2.0 Capitalization Guidelines Only TIs to leased buildings may be capitalized. Qualifying improvements to ministry owned buildings would be capitalized as a betterment to the asset. Please refer to Core Policy and Procedures Manual (CPPM) Chapter 1.3. TIs with a project cost greater than $50,000 1 and a useful life greater than one year shall be capitalized. External contributions of less than $50,000 towards the project cost of a TI are effectively netted against the gross acquisition cost, but two STOBs must be used (refer to CPPM I.10). If the gross acquisition cost of the asset exceeds the required TI capitalization threshold of $50,000, the gross cost of the asset must be set up and amortized over the lesser of the life of the lease term or 5 years. The contribution must be set up as a deferred revenue and amortized over the same period. TIs with a project cost of less than $50,000 shall be expensed. The useful life of a TI has been set at the lesser of five years or the lease term. 3

4 For capitalization purposes, TIs do not include: ½ embedded TIs ½ special tenant improvements (formerly known as special feature premiums) ½ mandatory operating equipment, as defined by British Columbia Buildings Corporation (BCBC) ½ mandatory and discretionary institutional projects (recovered as an adjustment to base rent versus an amortized tenant improvement (limited to items such as lock-downs in jails.) ½ costs associated with land/sites ½ planning costs for cancelled TIs (these are required to be paid out). 3.0 Approval Levels Please refer to the Treasury Board approval levels as stated in Treasury Board Directive 5/04. ( 4.0 Budgeting for TIs Ministries are required to budget for the number of TI projects planned for each fiscal year. TIs with a useful life greater than one year and a project cost in excess of $50,000 should be included as part of the capital budget. TIs with a useful life of less than one year and/or a project cost less than $50,000 will be expensed and included in the operating budget. Work-in-progress may be used in instances where capitalized TI projects which are approved for completion in one fiscal year, but are not completed by the fiscal year end due to project delays. Ministries may encounter unanticipated project delays near the end of a fiscal year that result in the deferral of TIs into the following year for which there is no budget. In this case, ministries must exhaust all internal resources prior to requesting access to capital contingencies. Ministries should routinely inform their Treasury Board Staff analyst of any TI projects that are significantly delayed or subsequently deferred to another year. In some cases, ministries may incur unanticipated TIs for which there is no budget. If the TI has a useful life of more than one year and a project cost in excess of $50,000, the ministry must exhaust all internal resources 2 (i.e., budget room within its overall capital budget) before it may request approval, via a Treasury Board Submission, for access to capital contingencies. If the TI has a useful life of less than one year and/or a project cost of less than $50,000, the same process applies to access to operating contingencies. The ministry is still required to obtain Treasury Board approval for all projects greater than $150,000. 4

5 5.0 Disposals Early Termination/Voluntary Moves Ministries which voluntarily vacate or cancel a commitment to occupy accommodation before the end of the agreed upon term will be required to recognize a disposal of any TIs. The resulting loss will be treated as an expense in a ministry s operating budget. This will include any costs to return the building to a condition suitable for future tenants. Forced Moves Forced moves permit BCBC and ministries to force move other ministries. Normally, TIs being used by the ministry initiating a move would be transferred at net book value to the subsequent lessee but this is subject to negotiation. However, if the subsequent lessee does not agree, costs associated with the forced move (i.e., loss on disposal of TIs) should be expensed by the ministry initiating the move. Where a TI is transferred at less than net book value, the donating ministry must immediately record (against its operating budget) the loss on disposal generated from the transfer. Strategic Relocation BCBC is required to strategically manage the accommodation costs across government through a series of measures. In the event that BCBC implements a relocation in a strategic initiative (e.g., accommodation cost reduction), BCBC must compensate the affected ministry for any loss arising on the disposal of TIs. 6.0 Related Amortization TIs qualifying for capitalization will be amortized over the lesser of five years or the lease term using the mid-month rule (not pooled). The amortization cost will become part of a ministry s operating budget. 5

6 Appendix A: Examples of Tenant Improvements Tenant improvements are improvements performed in a leased building over and above the provision of basic space requirements. Keeping in mind the $50,000 threshold, some examples of normal tenant improvements, as described by BCBC, are as follows: Keyed switches to elevators to restrict after hours access and special location indicators and controllers. All initial wall finishes on tenant improvement partitions. Floor finishes beyond defined standard requirements in tenant areas. All fittings and fixtures within the designated rentable areas, such as millwork and tenant signage counters. Additional work for heating, ventilation, air-conditioning and rebalancing systems to suit tenant floor layouts and usage, including re-arrangement of existing zones and adding new zones and controls. This includes diffusers and branch duct reallocations and/or alterations. This also includes systems or equipment required for areas with very high thermal loads or stringent process-related environmental criteria as well as special exhaust and air make-up systems to laboratories or industrial spaces. Upgrade to fire protection systems (e.g., specialized applications such as systems or laboratory protection) to comply with specialized tenant requirements. All plumbing for additional refreshment areas and additional washrooms, showers to support job function, and plumbing required for laboratory or special areas, other than those required by the building code for operation and maintenance of the building. All electrical power distribution in tenant s partitions and within tenant areas, such as service poles, power and controls for all tenant improvement equipment, and specialized power such as isolated grounds, dedicated power, power conditioners and uninterrupted power supplies. Additional lighting and controls to suit tenant space layout and usage. Upgrade of light fixtures and diffusers in excess of those provided in base building, as well as specialty lighting such as pot lights, track lighting. Adjustment to the location of EXIT and emergency lights to suit tenant layouts and exit routes. Office tenant security, communication, public address and wiring systems, excluding removal and replacement and new mandatory operating equipment which are intrinsic to the building. Data cabling other than defined standard provided in the base building. 6

7 Appendix B: Accounting Entries 2000/01+ After Tenant Improvements Class has been capitalized Acquisitions of new capitalizable tenant improvements DR Asset (full cost of the TI) CR Cash (full cost of the TI) Amortization of the TI asset cost DR Amortization Expense CR Accumulated Amortization Note: Refer to CPPM Chapter I for general rules. 7

8 Appendix C: Commonly Asked Questions and Answers 1. What is the budgeting and approval process (both for annual budgets and new projects identified) and how will it be linked to the ministry s capital and operating budgets. Ministries are required to budget for the number of TI projects planned for each fiscal year. TIs with a useful life of more than one year and a project cost in excess of $50,000 should be included as part of the capital budget. TIs with a useful life of less than one year and/or a project cost less than $50,000 will be expensed and included in the operating budget. In some cases, ministries may incur unanticipated TIs for which there is no budget. If the TI has a useful life of more than one year and a project cost in excess of $50,000, the ministry must exhaust all internal resources before it may request approval for access to capital contingencies. If the TI has a useful life of less than one year and/or a project cost of less than $50,000, the same process applies to access to operating contingencies. 2. Who is responsible for tracking and reporting? Ministries will be responsible for tracking and reporting all new and preexisting TIs acquisitions greater than $50,000 as well as the related amortization. Ministries are also required to track transfers, write-downs, write-offs and disposals of TI assets. Ministries should routinely inform their Treasury Board Staff analyst of any TI projects that are significantly delayed or subsequently deferred to another year. 3. What happens to a TI under a forced move situation? Forced moves permit BCBC and ministries to force move other ministries. The costs associated with a forced move (including loss on disposal of TIs) are normally borne by the initiator of the move, but may be subject to negotiation among the affected parties. 4. If a five year term is to be maintained across all TIs, how will ministries be funded to accommodate shorter term, higher amortization on larger TIs? For capitalization purposes, the useful life of a TI has been set at the lesser of five years or the lease term. The value of the TI at acquisition will be amortized over no greater than five years. 8

9 5. How will the various thresholds be reconciled? Please refer to the Treasury Board approval levels as stated in Treasury Board Directive 5/04. Effective 2000/01, ministries will no longer expense TIs with a project cost of less than $50,000 unless the useful life is less than 1 year. TIs with a useful life greater than one year and a project cost equal to or greater than $50,000 will be included as part of the capital budget. TIs with a useful life of less than one year and/or a project cost less than $50,000 will be expensed and included in the operating budget. Ministries must be consistent in their treatment of TI thresholds. For example, ministries are strongly discouraged from splitting TIs into parcels that fall below the $50,000 capitalization threshold when they have operating budget room or, alternatively, combining the same type of improvements to exceed the $50,000 threshold when they have capital budget room. 9

10 Appendix D: Glossary of Terms Betterments improvements made to ministry owned buildings which qualify to be capitalized as a "betterment" to the building. See CPPM Chapter I. Embedded TIs costs that raise the building to the "base building" occupancy standard of the province and are included in the lease agreement and lease payment schedule. Special TIs also known as special feature premiums. Tenant Improvements improvements performed in a leased building over and above the provision of basic space requirements. These improvements are performed at the request of the ministry occupying the space and are only capitalized when the ministry has the risks and rewards of ownership (i.e., the ministry is responsible for paying for the improvement). 10