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One of the key components of the capital improvement test is the requirement that an addition or alteration be intended as permanent. The installation may have a substantial price tag, it may add value to the real property and it may be permanently affixed to the real property, but if the intent that it be permanently installed cannot be found, the capital improvement test is not satisfied.

The intent that the Department looks for is not an owner or contractor’s subjective belief that an installation is permanent or not. Telling an auditor that you thought it was a permanent installation is not going to satisfy the test. What the Department will look for is the intent that can be objectively deduced from the facts and circumstances existing at the time the installation is made. Those facts and circumstances can include the nature of the item being installed, the method of installation, the uses for the item being installed, and whether the item is being installed by a property owner or tenant.

The Department’s position regarding intent is that owner installations are presumed permanent and tenant installations are presumed temporary. This blanket presumption effectively makes it impossible for tenants to satisfy the capital improvement test. The law considers tenant improvements to be for their sole use and enjoyment during the period of the lease and not for the purpose of enhancing the owner’s real property. There is, however, a method to overcome this presumption.

The method for overcoming the tenant presumption is to show the existence of lease agreement language stating that title to improvements will vest with the owner immediately upon installation, and that the tenant reserves no rights of removal. If this language is included in the lease agreement, the Department will recognize the improvement as one intended to be permanent.

Recently, the Department issued an Advisory Opinion to a business operating a retail store in the City of New York. The tenant made various improvements to the store and asked the Department whether they could be classified as capital improvements. Because the business occupied the premises as a tenant, the Department looked to the lease agreement. The lease included language stating all fixtures and all paneling, partitions, railings and like installations, installed on the premises at any time shall become the property of the owner and remain upon and be surrendered with the premises at the termination of the lease. The tenant reserved no rights to remove the installations. The Departments stated that the lease language was evidence that the additions and alterations were intended to be permanent and therefore satisfied the capital improvement test.