Commercial leasing generated $216bn in revenue in 2019 alone… and 2019 isn’t even over yet! As rewarding as becoming a commercial landlord is, though, it comes with numerous challenges and requires lots of expertise if you want to remain successful.
New commercial real estate investors need to familiarize themselves with capital leases to ensure that they are able to negotiate good deals when renting out a commercial space and make informed decisions for the future of their business.
Let’s get started!
What are Capital Costs?
In the commercial context, capital costs are fixed, one-time expenses that are incurred due to the purchasing of assets or the rendering of services that will provide benefits over the next 12 months. Unlike operating expenses, capital costs are expensive, infrequent upgrades to a property with a long-term useful life.
Some capital costs are included in the lease agreement, while others are deemed as the responsibility of the leaseholder, depending on the nature of the cost and mutual agreement. Capital improvements can be divided into the following two types:
Growth capital costs
Capital costs that increase the value of a property over time are growth capital expenditures. For instance, adding an additional floor or installing an extra HVAC system in the property increases its overall value and, hence, is considered as growth capital costs.
A common assumption is that the commercial landlord is responsible for capital costs, as they increase the value of their property in the long-term. However, it’s not that simple, as commercial lease agreements can be long-term in nature.
For instance, if a tenant has signed a long-term lease agreement and is likely to derive benefits up to the useful life, then they might be liable to partially contribute or pay the amount of capital costs in full.
Maintenance capital costs
Capital costs that are incurred to maintain the existing condition of the property are considered to be maintenance capital costs. Again, taking the example of an HVAC system, if it’s broken and needs replacement, the replacement expenditure will qualify as maintenance capital costs.
The reason is that this expense isn’t improving the value of the property, but instead preserves it. In most cases, a commercial landlord is liable to pay for these costs. But, in case of a triple net lease, the tenant might be liable to pay for these costs.
Legally required improvements
Some capital costs are necessary when the city or state passes a new regulation. For instance, if the National Fire Protection Association issues changes in their codes and standards, it might give rise to a capital cost. In such cases, the situation must be evaluated to determine who’s liable to pay expenses to conform with the new standards.
Neither the landlord nor the tenant can anticipate these changes, hence it can be unfair for both of them if one of them has to pay because it’s not factored into the lease terms. Hence, most lease agreements have a provision for such expenditures and both parties decide in advance about dealing with costs associated with legally required improvements to avoid disputes.
About GCP Fund
Headquartered in New York, GCP Fund is a leading commercial lender that offers quick and hassle-free financing solutions to its clients at flexible terms. From bridge financing to hard money loans, the company provides an extensive range of commercial financial plans to investors in different part of the US, including Jacksonville FL, Tampa FL, Miami FL, Raleigh NC, Charlotte NC, Charleston SC, Columbia SC, and others.
For more information, call at 1-800-514-7350 or send an email at contact@gcpfund.com.
