CAP EX - How do you calculate it?
I have a small commercial building, currently there is nothing within the lease that stipulates how CAP Ex should be handled. Tenants are renewing their lease soon and I want to explore whether or not it would be feasible to add CAP Ex into their additional rent.

I have no experience on how to do this, whether it is common or how it is calculated.

Let's assume the CAP Ex will be the replacement of the flat roof in a couple of years. How should I calculate and incorporate it into the additional rent?

Also, how much does a commercial flat roof cost per square feet?
[{"id": "czqfvjq", "text": "Hire an engineering firm to do a PNA (Property Needs Assessment) or PCNA.  They can do a 10 year 20 year, etc schedule for major items and they'll identify in their report (PCNA or PNA) what the conditions of current items and derive a schedule from that.  Partner Engineering, EBI, Dominion Due Diligence group are a few.  ", "replies": [], "depth": 1}, {"id": "czqix0z", "text": "Get a PCA report / cost estimates. Amortize that cost and add it to your tenant's CAM pools. ", "replies": [], "depth": 1}, {"id": "czqnem7", "text": "Commercial roofs in the US typically run between $5-10/sf depending on height of the building, location, and materials you want.", "replies": [{"id": "cztm0by", "text": "I don't have a PSF number, but you will also need to check and see what insulation is in place. IIRC, the latest International Building Code has an increased r-value for roof insulation, which may be a most costly replacement. Of course, if you don't have to pull a permit in your jurisdiction (as is my case), there is no way to enforce the increased insulation code.", "replies": [], "depth": 2}], "depth": 1}, {"id": "czqq0r7", "text": "In my experience I haven't ever seen a roof replacement passed on to the tenant. Doesn't mean you can't do it,  but it seems less common.  ", "replies": [], "depth": 1}, {"id": "czqqv1b", "text": "CAM (common area maintenance) should be defined in the lease. Different buildings will have a different formula for calculating it with different things included.\n\nMajor capital expenditures may go beyond what is included as part of CAM typically.\n\nYou could structure a completely net lease with your tenant responsible for all of the building costs, but you are going to want a real estate attorney to draft that for you.\n", "replies": [], "depth": 1}, {"id": "czqsjsv", "text": "Oh boy, it's rare that a topic about accounting comes up on this subreddit! I'm a commercial real estate accountant, and I feel somewhat qualified to answer this from the accounting perspective.\n\n(The accounting perspective means I do not know anything about what needs to be included in the lease language, and I do not know anything I don't mention here.)\n\nFirst of all, I have never seen a capital expenditure passed onto a tenant *before* it is actually paid for. In fact, I am not even sure how that would work from an accounting perspective. You are expecting a tenant with, say, a 3 year lease to start paying for a capital project that will not be incurred for another 5 years? Other problems include: we typically don't accrue for balance sheet items - they're booked on a cash basis - and I would be wary about accepting reimbursements for things that you have not spent any money on. I'm not saying this isn't possible, it's just something that I have never seen, and I honestly believe that CAMs should be for *reimbursements only*.\n\nHowever, once you have actually paid for the roof, you can probably pass it through to tenants. In your annual CAM rec, I would add a separate expense category for amortized capital projects. So if you amortize a $100,000 roof over 5 years, it adds $20,0000 to the building's reimbursable opex every year for 5 years. This is pretty common, probably 20% of class A office that I have done has had at least one amortized capital expenditure included in the CAM rec.\n\nIn summary: why not just renew the leases at a higher base rent and pay for the roof out of that? Why do you specifically want this included in additional rent?", "replies": [{"id": "czr4rs4", "text": "I guess that makes sense, charge it after the fact. It doesn't HAVE to be out of additional rent, I only thought that was suppose to be in with the additional rent. No with the $20,000, do I simply divide it proportionately between tenants and charge them monthly or is there a specific calculation for it that incorporates interest rates etc...", "replies": [{"id": "czr7aby", "text": "&gt;No with the $20,000, do I simply divide it proportionately between tenants and charge them monthly or is there a specific calculation for it that incorporates interest rates etc\n\nIt's typically passed through to tenants proportionately by square footage, with no accommodations for interest rates, cpi, etc (so you will lose money due to inflation). \n\nHow they pay for it will depend on their individual leases:  If your tenants all have gross leases, you may not be able to pass it onto them at all. Some tenants (especially those with older base years) will pay a monthly, estimated CAM charge, which is then reconciled at the beginning of the following year. \n\nSend me a PM with your email address and I will email you the excel file I am using for a cam rec that includes amortized capital projects. You can use that as an example. Or, if you want, send me a rent roll with lease details and I can make something up for you.", "replies": [{"id": "czrci97", "text": "You are too awesome!!!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "czxrmmf", "text": "You can have the tenant pay for it through amortized payments over like 10 years but not until you replace it.", "replies": [{"id": "czylq8n", "text": "How does calculation work?\nSay the roof is $40,000", "replies": [{"id": "czypggy", "text": "you can think of it like a $40,000 loan to your tenant, to be paid back over 10 years (for example) at a 5% (for example) interest rate. So each month they would make the amortized payment on the loan. the cost amount, length of payback time and interest rate are all points of negotiation with your tenant. Does that make sense?", "replies": [{"id": "czzlvp6", "text": "ok, makes sense!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]