What is "CapEx" in commercial real estate?
Capital expenditure or "CapEx" are the funds used to acquire, upgrade or repair the property. It also includes the acquisition of equipment for said property. An expenditure is considered a CapEx if it is a new purchase or extends the life of the property. For example, fixing the roof, installing a furnace or painting the building.
When CapEx is incurred it needs to be capitalized, in accounting that means it must be added to the balance sheet as an asset, then it is expensed by spreading the fixed costs over the useful life of the property using depreciation. However, if the CapEx maintains the property in its current condition, the cost is deducted in the year of the expense.
It is important to calculate and account for current and future CapEx when calculating property value. Understanding this is also important for when a property owner calculates rent. If CapEx is not accounted for or miscalculated, the rent charged could end up being too low. This can lead to losses and negative cash flows for a property owner.