What are Capital Improvements?
Capital improvement is work done to a commercial property (office, retail, or industrial) that is undertaken to improve or extend the normal economic life of an existing structure. Deductions are not done for capital repairs, the cost is added to the cost of the property.
Why does this matter to tenants?
The cost of a capital improvement cannot be deducted from income from the building. It must be added to the cost of the property. In other words, the landlord cannot treat these type of repairs as an expense.
How does this affect my cost in a lease?
Capital improvements on a building will cause the tenants’ CAM or NNN rates go up which results in a higher overall rent expense for the tenant in most cases.