Multifamily capex vs R&M
For all you multifamily monkeys - how does your firm view capital expenditures vs R&M for items like appliances, hot water heaters, and carpet cleaning. Assuming you’re not doing a full renovation, but you need to buy a new appliance, do you all stick the cost into capex? Or do you say out of 250 units, I need to replace 25 fridge‘s per year, so it’s an operating expense and therefore R&M? Curious how everyone does it. I’ve seen it a few ways.
Depends when you're doing the work. If you have enough cash flow/funded reserves, it's R&M. If it's being done on acquisition, it's capex.
Interesting, thanks. I would have thought that if doing a renovation it’s always capex than if you buy a new fridge and oven for 20 units once year because they reach their end of the useful life, it would be considered capex too.
I mean, at the end of the day you can do whatever you think you'll get away with. But if a unit turns over, making it lease ready is part of operations. Capitalize all you want, but the IRS is always lurking. Maybe you do it for a fridge. But that's a slippery slope. What about paint or tiling?
My general thesis is that if we're raising equity to pay for it, we'll treat it as a capitalized expense (so... any repair work we do immediately on acquisition). And beyond that, replacements of building systems/envelope count too.
Not an accountant but I talked to a CPA about this a few years ago when the TPR regs came out and technically replacing something like a stove or carpet in 20 units a year as they wear out is a repair, because a stove is probably under your capitalization limit (I think typical is 2,500) and each unit is looked at individually. If you’re operating a long term hold, great, it’s getting expensed. Probably not doing this topic justice.
While I appreciate the CPA comments, I’m looking at it more from the lens of an operating budget and the expense to be included in NOI, therefore adjusting value down, or excluded and increasing sale value. Not from a tax perspective.
Larger Institutional companies will generally put those into the "replacement reserves" above NOI (look at any appraisal to see this), not generally R&M (you're not repairing or maintaining). Still hits NOI, just its own category
Smaller shops are all over the place could be R&M, could be replacement reserves, could be CapEx.
As a side note a lot of shady stuff happens on transactions. Shops will classify as much as they reasonably can as "CapEx" below the line and then never provide you their CapEx, makes NOI look great as long as you don't look at the $1k/unit in expenses they moved below the line to get there.
Expense for taxes
capitalize for better noi / valuation
can you get away with both?
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