Do you ask to reset the capex meter?

Published on Friday, 14 June 2013 07:57:46    Written by Marc

When you are entering into a new lease, do you ask the landlord to reset the capex meter? When a landlord decides to proceed with a major repair or renovation which he can capitalize and recharge the tenants (rechargeable work such as major HVAC replacement,

oursolution2 roofing or major parking repair for example which under the lease forces the landlord to capitalize and amortize over a certain period of time), the typical process would have the landlord do the work, pay for it and then recharge the tenants through their leases with interest over a period of time. However, new tenants can sometimes ask the landlord not to pay for any past capex work that is capital expenditures that happened before the tenant occupied his premises.

When you are entering into a new lease, do you ask the landlord to reset the capex meter?

When a landlord decides to proceed with a major repair or renovation which he can capitalize and recharge the tenants (rechargeable work such as major HVAC replacement, roofing or major parking repair for example which under the lease forces the landlord to capitalize and amortize over a certain period of time), the typical process would have the landlord do the work, pay for it and then recharge the tenants through their leases with interest over a period of time. However, new tenants can sometimes ask the landlord not to pay for any past capex work that is capital expenditures that happened before the tenant occupied his premises. In this case, the tenant can ask to pay for only his share of the new capex that will occur in the future but not the existing capex that the landlord is currently amortizing and recharging to the other tenants in the building. The logic behind this is that a tenant should normally expect to come into a building that does not require major repairs. After all, the tenant could simply go and choose a building that does not need major repairs. The advantage for a tenant to not participate in past capital expenses is an obvious one from a monetary point of view. For example, if the landlord replaced the HVAC chillers of the building 5 years ago and he is still amortizing them and recharging the tenants for the chillers, if a new tenant can negotiate to not pay his share for these past expenses, there is an immediate saving here. Some will argue that by not paying one’s share of these expenses will force the landlord to charge all the other tenants higher rates, but in all fairness, business is business and you get what you negotiate for. Whenever I signed leases, especially for office spaces, I always asked the landlord to reset the capex meter for our new lease. We would only agree to pay our share of new capex going forward. A final word of advice: make sure that the landlord is obligated to amortize any new capex work on the reasonable life span of the item; this will avoid having you pay for more than your share. For example, if you have a five (5) year lease and the landlord is installing a new roof that will last for 15 years, you should push to have those costs amortized over 15 years (the lifespan of the roof) so that over the course of your five year lease, you only pay about one third of this. If not, you might end up paying for more than your share.