“Capital costs” refer to spending on items that will provide benefits for many years to come.
The most common capital costs for properties are Capital Expenditures (CapEx), Tenant Improvements (TIs), and Leasing Commissions (LCs).
In the simple real estate pro-forma above, we group these items into a single line (“CapEx, TIs, and LCs”), but we calculate them separately and show them on separate lines in more complex models.
CapEx represents items that are not specific to one tenant, such as a new roof, elevator, air conditioning, heating system, etc. (usually a $ per square foot or square meter figure).
CapEx may vary greatly from year to year, depending on the property’s age and condition.
Simple Calculation: If CapEx per Gross Square Foot is $5 and there are 50,000 Gross Square Feet in the property, CapEx is $250K.
Tenant Improvements (TIs) are items that are specific to individual tenants, paid as incentives to those tenants (additional walls, doors, etc.).
Simple Calculation: If the TIs per Rentable Square Foot for a tenant are $50 and the tenant is renting 10,000 square feet, the TIs will be $500,000 upon initial move-in.
Those TIs will not recur each year – only when a tenant renews a lease, or a new lease begins.
Leasing Commissions (LCs) are paid to brokerage companies and agents to find new tenants, or to negotiate with existing tenants and get them to renew.
LCs are almost always based on a percentage of the total lease value over the term of the lease.
Simple Calculation: A tenant signs a 5-year lease for 10,000 square feet that initially starts at $50 per rentable square foot and then increases to $52, $54, $56, and $58 over the term.
The Leasing Commissions will be 5% of the total lease value over these 5 years.
Therefore, the LCs will be 5% ($50 + $52 + $54 + $56 + $58) 10,000 = $135,000.
As with TIs, LCs are incurred only when a new tenant moves in, or an existing one renews.
NOTE: We simplified this calculation in the Excel example here and didn’t account for lease escalations, but in a more complex version, we would.
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