Capital expenditure is money spent on the building itself rather than on running it: a roof, a new electrical panel, windows, a repiping, a parking lot. It buys an asset with a life of years, so it sits outside operating expenses and outside NOI, and it is funded from reserves, from a loan, or from the owner's pocket.
- Excluding it from NOI is correct accounting and misleading planning. A building with no reserve is not cheaper to own, it is deferred.
- The line between a repair and a capital item is where sellers' statements are most flattering, and where a buyer should look first.
- Underwrite a per-unit annual reserve even when the seller shows none. Lenders usually will, and they are not being conservative.
- Timing matters more than the total. A roof due in year one and a roof due in year ten are different purchase prices.
A roof on the same eight-unit building, assumed at $55,000 with a twenty-year life, against the building's own NOI.
The same $55,000 is a reserve or an expense depending on where it is booked, and at a 6.0% cap that choice moves stated value by nearly a million.
Related terms
All termsNOI (Net Operating Income)
Net operating income is what a property earns from operations in a year: all collected income minus operating expenses, before any mortgage payment, income tax, or capital projects.
InvestmentOperating Expense Ratio
The operating expense ratio is total operating expenses divided by effective gross income, expressed as a percentage.
OwnershipT-12 (Trailing Twelve)
A T-12 is the operating statement for the last twelve months: what the property actually collected and actually spent, month by month, through the most recent closed period.
Terms arrive with the writing.
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