Capital expenditure is defined as an improvement or betterment to a property that extends its useful life. All building systems have a useful life and will need to be replaced at some point in time. Some examples are:
- Improvements to a property that update its appearance, such a renovating a office building lobby
- Replacement of major mechanical equipment, such as boiler
- Replacement of a major building system component, such as a roof
- Renovating a space, such as building offices for a new tenant
- Replacing old appliances in an apartment.
Capital expenditures differ from operating expenses in the following ways.
- Capital expenditures are not recurring. They typically occur every 5 to 20 years, or more.
- Operating expenses occur at regular, short intervals (i.e. daily, weekly, monthly).
- Capital expenditures are treated differently under the tax code than operating expenses. Typically, capital expenditures are depreciated, while operating expenses are deducted for tax purposes.
Since capital expenditures do not occur at regular intervals and involve significant amounts of money, it is prudent to develop a multi-year plan to account for the replacement of all major building equipment and systems. This assists both the owner and the property manager in developing priorities, helping to prevent an unplanned equipment or system failure, and improving overall tenant satisfaction.
