What is Capital vs Operating Expense?

Definition

Capital expenses (CapEx) are improvements that extend the useful life of the asset or add value — roof replacements, HVAC system installations, parking lot reconstruction, and structural upgrades. Operating expenses (OpEx) are routine costs of building operation — janitorial, landscaping, lighting, and minor repairs. Most NNN leases prohibit landlords from recovering capital expenditures through CAM, making the classification financially critical. The distinction is not always clear-cut, particularly for items like major repairs that extend useful life but are not improvements. Misclassifying CapEx as OpEx inflates recoverable expenses and is one of the top findings in tenant audits.