CRE glossary
Capital expenditure (CapEx)
Capital expenditure (CapEx) is spending on long-lived improvements to a commercial property: roof replacement, HVAC chiller, parking-lot resurfacing, elevator modernization. CapEx is amortized over the useful life of the improvement (10–30 years) rather than expensed in a single year. The classification matters because CapEx hidden in operating expenses can dramatically inflate tenant bills.
The CapEx vs OpEx distinction is the most disputed line in any commercial lease. Bad operating-expense definitions let landlords classify a $500k roof replacement as 'maintenance' and bill it to tenants in a single year. Good definitions exclude CapEx from operating expenses entirely or amortize over the IRS-recognized useful life.
Tenant-friendly lease language amortizes any expense over $25k or any expense with a useful life over 5 years. Under this language, the $500k roof gets amortized over 20 years (its useful life), and the tenant pays $25k per year of CapEx allocation rather than $500k in year 1. The math on a multi-tenant building: 1,000 SF tenant in a 100,000 SF building pays $250/year vs $5,000/year, a 20x difference.
Landlords negotiate to keep certain categories in OpEx: 'replacement of building systems with similar systems' (HVAC unit-for-unit), 'repairs that extend useful life by less than 5 years.' These can be reasonable (a full-system swap is operations) or abusive (a major rebuild is capital). Negotiate at LOI with specific carve-outs.
Example
- Capital improvement: new roof
- $500,000 cost, 20-year useful life
- Properly amortized in OpEx
- $25,000/year × 20 years
- Improperly expensed in OpEx
- $500,000 in year of installation
- Tenant cost (1,000 SF in 100k SF building)
- $250/year amortized vs $5,000 expensed
Broker perspective
Always request three years of OpEx history during due diligence and review for capex line items. A landlord whose 'operating expenses' includes a $200k roof replacement, a $150k parking lot, and $80k of HVAC 'maintenance' is signaling either bad accounting or active capex pass-through. Either way, you negotiate hard exclusions and audit rights at LOI.
Frequently asked
People also ask
Should CapEx be in operating expenses?
Generally no. Most institutional leases exclude CapEx from OpEx or require amortization over useful life. Negotiate exclusions at LOI.
What's the threshold for CapEx?
Tenant-friendly: any expense over $25k or any expense with useful life over 5 years. Landlord-friendly: defines specific items, leaves much in OpEx.
How is useful life determined?
IRS guidelines (typically 5–39 years depending on category) or industry standard. The lease should specify the methodology.
Are tenant-paid capital improvements (TI) the same as CapEx?
No. CapEx is landlord spending. TI is landlord spending allocated for the tenant's space, separately funded.
Related terms
Operating expenses (OpEx)
All costs to run the building, taxes, insurance, utilities, janitorial, management, that get passed through to tenants in NNN and modified gross structures.
Common area maintenance (CAM)
Tenant's share of the cost to operate and maintain shared building areas, lobbies, parking, landscaping, HVAC, security.
Modified gross lease
A hybrid where the landlord covers some operating expenses in base rent and passes through others, middle ground between full-service and NNN.
Tenant improvements (TI / TIA)
Money the landlord contributes toward customizing the space for the tenant, usually expressed as $/SF.
See capital expenditure (capex) extracted from a real lease.
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