Capital Expenditure Exclusion
Provisions defining which capital costs are recoverable through CAM and how they are amortized, distinguishing between true operating expenses and capital improvements.
Model Lease Language Variations
“Operating Expenses shall include the annual amortization (over the useful life as determined by Landlord) of capital improvements made to reduce Operating Expenses or as required by governmental authorities enacted after the Commencement Date. Amortization shall include interest at Landlord's actual borrowing rate or ten percent (10%) per annum, whichever is greater.”
Broad inclusion of cost-saving and compliance capital. Landlord determines useful life (shorter = higher annual charge). Interest at greater of actual or 10% — above-market.
“Capital Expenditures shall be excluded from Operating Expenses, except that the annual amortization (on a straight-line basis over the GAAP useful life, with interest at the Wall Street Journal prime rate plus two percent) of capital improvements (i) required by governmental regulations enacted after the date hereof, or (ii) reasonably intended to reduce Operating Expenses, shall be included in Operating Expenses, provided the annual amortized amount for cost-saving improvements shall not exceed the documented annual savings.”
Standard market provision. GAAP useful life. Market-rate interest. Cost-saving capex limited to actual documented savings — landlord can't profit on the amortization.
“Capital Expenditures are excluded from Operating Expenses. No capital item with a useful life in excess of one (1) year or costing more than $10,000 shall be included in Operating Expenses regardless of the purpose of such expenditure. Repairs necessitated by Landlord's negligence, design defects, or deferred maintenance shall not be classified as Operating Expenses.”
Bright-line exclusion with dollar and useful life thresholds. No exceptions for compliance or cost-savings. Prevents relabeling maintenance as operating expense.
Calculation Methodology
1. Classify each expense as operating or capital using GAAP criteria (useful life > 1 year, cost exceeds materiality threshold). 2. For permitted capital inclusions: determine useful life per GAAP or lease terms. 3. Amortize on straight-line basis over useful life. 4. Add interest at the lease-specified rate to the unamortized balance. 5. Include only the current-year amortization in operating expenses. 6. For cost-saving capex: document annual savings and cap amortization at savings amount.
Common Drafting Errors
Failing to define 'capital expenditure' — allows landlord to classify major renovations as repairs and pass them through as operating expenses
Not specifying the amortization method (straight-line vs. accelerated) or useful life standard (GAAP vs. landlord's discretion)
Omitting an interest rate cap on amortization — landlord could charge well above market rates on unamortized balances
Not addressing whether amortized capex counts toward CAM caps — if excluded from caps, it becomes an uncapped pass-through
Relevant Case Law
Landlord amortized $2.1M parking lot replacement over 5 years as an operating expense. Court held it was a capital expenditure excluded by the lease, as the lot's useful life exceeded 15 years.
Billing System Implications (Yardi / MRI)
In Yardi, capital expenditures are tracked using the Fixed Asset module with amortization schedules feeding into recovery pools. Common error: expensing a capital item directly to an operating expense GL code, bypassing amortization entirely. In MRI, capital amortization is configured in the Fixed Asset Manager — verify that amortization schedules match lease terms and that the interest component is calculated correctly.
CapVeri Analysis
Capital expenditure classification is the second most common CAM audit finding after gross-up errors. Landlords frequently expense items that should be capitalized, or amortize over shorter periods than GAAP requires. CapVeri flags expenses exceeding $10,000 or items with characteristics suggesting capital classification.
Related Resources
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