Capital Expenditures for Industrial Properties
Also known as CapEx, these expenses are important to understand when making an industrial property investment and setting rates.
Capital expenditures, often called CapEx, are large investments made to acquire, rehabilitate, or maintain a property to extend its economic life. They also include acquisitions of new equipment for the asset.
For instance, when a property owner replaces the roof of a building or installs new plumbing, both investments would be considered capital expenditures. With each of these investments, the owner is repairing or replacing a critical building element, and thus extending the asset’s economic life.
Investments made to replace or repair elements like flooring, electrical systems, plumbing, and ductwork form a large part of the costs considered capital expenditures. CapEx also incorporates significant investments made to renovate or upgrade a property to make it more valuable. These capital expenditures include things like adding floor space, repurposing space into an office component, or adding a mezzanine level. Investments like these make the asset more attractive to potential tenants or entice current tenants to extend their lease.
CapEx Impacts on Industrial Rents
Industrial investors must consider potential capital expenditures when setting rents. If a rent schedule — often locked in for five or more years for industrial tenants — doesn’t take these costs into account, there may not be sufficient capital on hand to make necessary repairs. This can be especially troublesome should a major building component fail. Consider if refrigeration systems at a cold-storage warehouse stopped functioning. Repairs would need to be made immediately, and the costs may be prohibitive. Similarly, a leaky roof or malfunctioning dock doors may also compromise the safety and security of a warehouse’s goods.
What’s Not Included in CapEx
While capital expenditures cover a lot of the larger expenses involved in owning and maintaining an industrial asset, there are many things that do not fall into this category. Generally, smaller costs that are involved in the day-to-day operations of a property would be excluded. Regular maintenance, minor repairs, and other similar expenses would broadly fall under operating expenditures, or OpEx.
Related Questions
What are the most common capital expenditures for industrial properties?
The most common capital expenditures for industrial properties include replacing or significantly repairing flooring, electrical systems, plumbing systems, and ductwork. Additionally, funds that are put towards upgrading the property to make it more valuable also count under CapEx. This could include adding new equipment to an industrial facility to make it more attractive to potential tenants or to induce current tenants to extend their lease.
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What are the benefits of investing in capital expenditures for industrial properties?
Investing in capital expenditures for industrial properties can have a number of benefits. For instance, it can help to increase the value of the property, making it more attractive to potential tenants or inducing current tenants to extend their lease. Additionally, it can help to extend the economic life of the property, as investments in structural elements such as windows, heating systems, and flooring can help to reduce the need for costly repairs in the future. Finally, it can help to improve the efficiency of the property, as investments in new equipment can help to reduce energy costs and increase productivity.
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What are the risks associated with capital expenditures for industrial properties?
The risks associated with capital expenditures for industrial properties include the possibility of decreased net operating income, the need to make principal and interest payments, and the possibility of having to pay back the entire loan prematurely. Additionally, income taxes, the amount of money to be borrowed, and the various financing alternatives available should be studied thoroughly prior to making any decision. This article and this article provide more information on the risks involved in industrial property investments.
What are the tax implications of capital expenditures for industrial properties?
Capital expenditures for industrial properties are subject to the same tax implications as other commercial real estate investments. Capital expenditures are depreciated over the course of several years, and the depreciation can be used to reduce taxable income. When the property is sold, the investor will need to pay taxes on the accumulated depreciation, also known as a Section 1250 gain, which is taxed at 25%.
In addition, industrial property investors may be able to “accelerate depreciation” by ordering a cost segregation study, which will identify areas of a property that can be depreciated more quickly. This can greatly reduce an investor’s tax burden in the initial years of an investment, but all accumulated depreciation will still subject to the depreciation recapture tax.
For more information, please see Federal Tax Implications for Commercial Real Estate in 2022 and Capital Gains Taxes in Commercial Real Estate.
What are the financing options available for capital expenditures for industrial properties?
For capital expenditures for industrial properties, there are a variety of financing options available. These include CMBS, Life Company, Bank Loans, and Small Balance Loans. Loans start at $1,000,000 with amortizations as long as 30 years and leverage up to 75%. For more information, our advisors can connect you with a wide variety of lenders to get a quote at no charge.
How can I maximize the return on investment for capital expenditures for industrial properties?
You can maximize the return on investment for capital expenditures for industrial properties by repositioning a dated industrial facility. This can be done by buying a Class B asset at a significantly lower price point and bringing it up to speed. This is particularly true in markets where there’s limited land available for development and soaring demand.
You should also explore your industrial acquisition financing options. There are many types of financing available for amounts both large and small. To get more information about what loan may be right for your situation, head to our portal and our advisors will connect you with a wide variety of lenders to get a quote at no charge.