What counts as Cap Ex?

[Ryan Kenneth]

Hi all!

What do you guys consider to be a cap ex item?

Each month I set aside a percentage of rent collected and place it in a savings account so that it builds up and is eventually ready to go towards the costs of large cap ex items that come up (roofs/furnace/driveway etc).

One of the more common expenses that comes up is on unit turnover where a tenant has stayed for years and the unit needs new floors/paint before the next tenant moves in.

Does anyone consider those to be cap ex? Are you dipping into your cap ex reserve fund to cover those?

Thanks guys

Ryan

[Jake Wiley]

@Ryan Kenneth CapEx is somewhat interesting in that it is driven by tax definitions and policies at the beginning of time. In your case, if you are doing a complete repaint and replacing floors that would meet the definition, but if you are just making spot fixes it likely wouldn't. However, you could also have a policy that says that you'll expense items under a certain dollar threshold so that you are not capitalizing lots of little things that then need to be separately tracked and depreciated because it's not simple and obviously compounds over time. You'd typically see CapEx being applied when a unit is not just being turned over but updated and part of a programmatic upgrade program.

[Chris Baxter]

@Ryan Kenneth   from my recent experience, the CRA (see https://www.canada.ca/en/reven...) and accountants see it one way, while lenders can see it another. My accountant (and most Canadian real estate books) affirm that replacing like for like is NOT capex and should be treated as an expense (which is great from a tax perspective). This would include paining the walls, replacing vinyl floor with vinyl floor, replacing Formica counter top with Formica counter top. If you upgrade (to granite counter tops, hardwood floors, etc.) this would be capitalized. Unfortunately, when it comes time to refinance, all the expenses incurred to bring a unit up to market that aren't capitalized play havoc with your NOI, so you may need to wait a while to show stabilized expenses.