Capital Expenditure (CapEx) refers to significant investments in property improvements or replacements that extend beyond regular maintenance. Examples include:

• Roof replacement
• HVAC system upgrades
• Major renovations
• Parking lot resurfacing
• Building system upgrades

These expenses are typically large, infrequent, and affect the property's long-term value and performance.

CapEx affects property performance in several ways:

• Reduces Net Operating Income when annualized over its lifespan
• Impacts the property's cap rate
• Can increase property value and rental income potential
• May reduce ongoing maintenance costs
• Affects the property's competitive position in the market

Annualized CapEx is the total capital expenditure spread over its expected useful life. For example:

• A $100,000 roof replacement with a 20-year lifespan has an annualized CapEx of $5,000
• This helps in understanding the true annual cost of ownership
• Allows for better comparison between properties
• Helps in budgeting and financial planning

Effective CapEx planning involves several strategies:

• Regular property inspections to identify future needs
• Setting aside reserves based on annualized CapEx calculations
• Creating a detailed capital improvement schedule
• Considering property age and condition in planning
• Balancing immediate needs with long-term improvements

Key differences include:

• CapEx: Large, infrequent expenses that improve or replace major property components
• Operating Expenses: Regular, recurring costs for day-to-day operations
• CapEx typically extends property life or adds value
• Operating expenses maintain current condition
• CapEx is often capitalized for tax purposes, while operating expenses are deducted annually