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Commercial Real Estate Glossary
Last updated on Feb 19, 2023
2 min read

CapEx: Capital Expenditure 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.

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In this article:
  1. What is CapEx in Commercial Real Estate?
  2. Types of CapEx
  3. Want to learn more? Fill out the form below to speak with a commercial real estate loan specialist.
  4. Related Questions
  5. Get Financing

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.

Unlike operational expenditure, or "OpEx," which is fully tax deductible in the year it is incurred, CapEx needs to be capitalized when it's incurred. In accounting, that means it must be added to the balance sheet as an asset, then 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 when a property owner calculates rent. If CapEx is not accounted for or is miscalculated, the rent charged could end up being too low. This can lead to losses and negative cash flows for a property owner.

Types of CapEx

CapEx includes the costs of many different types of assets that provide long-term value to an asset. Common CapEx purchases include:

  • Buildings

  • Land

  • Equipment and machinery

  • Computers/servers

  • Software

  • Furniture

  • Vehicles

  • Patents

Want to learn more? Fill out the form below to speak with a commercial real estate loan specialist.

Related Questions

What is a capital expenditure 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.

Unlike operational expenditure, or OpEx, which is fully tax deductible in the year it is incurred, CapEx needs to be capitalized when it's incurred. In accounting, that means it must be added to the balance sheet as an asset, then 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 when a property owner calculates rent. If CapEx is not accounted for or is miscalculated, the rent charged could end up being too low. This can lead to losses and negative cash flows for a property owner.

Some common capital expenditures include spending money to replace or significantly repair flooring, electrical systems, plumbing systems, and ductwork. Funds that are put towards upgrading the property to make it more valuable also count under CapEx. These kinds of investments include expenses like adding new equipment to an industrial facility in order to make it more attractive to potential tenants or to induce current tenants to extend their lease.

What are the benefits of investing in capital expenditure for commercial real estate?

Investing in capital expenditure for commercial real estate can provide a number of benefits, including increased cash flow, improved property value, and tax advantages. Capital expenditure can be used to purchase new equipment, upgrade existing equipment, or make improvements to the property. These investments can help to increase the value of the property, as well as improve the cash flow generated by the property. Additionally, capital expenditure can be used to take advantage of tax deductions, such as accelerated depreciation, which can help to reduce the amount of taxes owed on the property.

What are the risks associated with capital expenditure in commercial real estate?

The risks associated with capital expenditure in commercial real estate include tenant default, longer lease terms, and slower leasing velocity. Tenant default can occur if the tenant is unable to make payments on the lease, resulting in the owner having to pay back the entire loan prematurely. Longer lease terms can also be a risk, as it may take longer to fill a vacant building than a residential property. Slower leasing velocity can also be a risk, as it may take longer to fill a vacant building than a residential property.

What are the most common capital expenditure investments in commercial real estate?

The most common capital expenditure investments in commercial real estate include buildings, land, equipment and machinery, computers/servers, software, furniture, vehicles, and patents. (www.multifamily.loans/capex, www.commercialrealestate.loans/commercial-real-estate-glossary/capital-expenditure)

What are the tax implications of capital expenditure in commercial real estate?

Capital expenditure in commercial real estate can have a variety of tax implications depending on the type of expenditure. According to Commercial Real Estate Loans, investors should create an exit strategy and begin the tax planning process before they make an commercial real estate investment-- not after. Additionally, according to Commercial Real Estate Loans, larger changes to the property could qualify as capital improvements, and these would have to be depreciated over the course of several years. It is a good idea to take all of the various projects that fall into this category and itemize your expenses. It will be easier for you or your tax specialist when it comes time to file.

In this article:
  1. What is CapEx in Commercial Real Estate?
  2. Types of CapEx
  3. Want to learn more? Fill out the form below to speak with a commercial real estate loan specialist.
  4. Related questions
  5. Get Financing
Categories
  • Commercial Property Loans
  • CRE Loans
  • Commercial Mortgages
Tags
  • CapEx
  • Capital
  • Capital Expenditure
  • Expenses
  • Property Management
  • Commercial Real Estate
  • Commercial Real Estate Finance

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