What repairs are considered "capital expenses? I was told to exclude them when calculating NOI.

In Buying Property - Asked by Deonta M. - Nov 28, 2012
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Answer(s)

Andy F.
Broker/Agent
Dallas, TX

In real estate, capital expenses are charges for improvements or equipment that will last longer than one year. For example, patching a hole the parking lot might be considered an operating expense (and therefore be deducted when calculating NOI) but replacing an entire section of the lot might be considered a capital expense, because it extends the life of the lot. Accounting rules require capital items to be depreciated over the expected life of the asset. Therefore, such items are excluded from NOI because they aren't operating expenses.

Nov 30, 2012
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Leo D G.
Broker/Agent
Plymouth, MI

for ongoing capital expenses parking lot roofs HVAC I would reserve .25 a sf per yr for shopping center built in the las 10 years and .50 a sf for shopping center built 10-20 years ago

Nov 30, 2012
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Debbie H.
Broker/Agent
Loma Linda, CA

Anything that adds value or extends the overall life of the property (roof, new room/unit)

Dec 1, 2012
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Peter M.
Broker/Agent
Wilmington, DE

Often times, Cap Ex is not part of the NOI calculation. That, in and of itself, does not make it right as Cap Ex is painted w/ a very broad brush anyway. Most underwritings account for Cap Ex to a degree BELOW the NOI line with the inclusion of Replacements & Reserves. NOI as calculated by a listing agent is done so with his client's, the seller, best interests in mind. Rightfully so, but to account for at least some Cap Ex looking forward, I am staunchly of the opinion that Cap Ex be addressed to a small degree by including Reserves ABOVE the NOI line. A per unit number seems to be adequate, larger for old properties, smaller for newer properties. But I believe they belong above the NOI line to be sure. $250/unit give or take works most of the time. Will the building need new carpet tomorrow. No. Will it someday ? Yes. And so it goes w/ appliances, counter tops, cabinets, bathrooms, windows, roof, parking lot, brick repointing, etc., etc. And those funds need to be accounted for to a degree and, in my view, included in the operating numbers by putting Reserves above the NOI line. Don't anticipate accounting for all your Cap Ex in NOI, but do address it to some degree nonetheless.

Dec 3, 2012
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Peter M.
Broker/Agent
Wilmington, DE

Often times, Cap Ex is not part of the NOI calculation. That, in and of itself, does not make it right as Cap Ex is painted w/ a very broad brush anyway. Most underwritings account for Cap Ex to a degree BELOW the NOI line with the inclusion of Replacements & Reserves. NOI as calculated by a listing agent is done so with his client's, the seller, best interests in mind. Rightfully so, but to account for at least some Cap Ex looking forward, I am staunchly of the opinion that Cap Ex be addressed to a small degree by including Reserves ABOVE the NOI line. A per unit number seems to be adequate, larger for old properties, smaller for newer properties. But I believe they belong above the NOI line to be sure. $250/unit give or take works most of the time. Will the building need new carpet tomorrow. No. Will it someday ? Yes. And so it goes w/ appliances, counter tops, cabinets, bathrooms, windows, roof, parking lot, brick repointing, etc., etc. And those funds need to be accounted for to a degree and, in my view, included in the operating numbers by putting Reserves above the NOI line. Don't anticipate accounting for all your Cap Ex in NOI, but do address it to some degree nonetheless.

Dec 3, 2012
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