MF Analysis - are you using OpEx or CapEx for this?

Question

I’m currently pursuing Multifamily deals 10-50 units in size and am curious how others are treating in their own analysis line items that sellers vary in how they are presented. For costs associated with unit rollover like new flooring or dry wall repair, are you placing those in your OpEx (impacting NOI and sale value) or in CapEx (not impacting NOI and sale value). What about one off appliances that fail and are replaced?

Evan Polaski · Answer

@Bob Landers, this is actually tougher than @Bjorn Ahlblad states. GAAP principles, as I understand them and remember I am not a CPA, would have anything that increases the value of the property is CapEx. So if you replace carpet with the same carpet that would be repair (OpEx). If you change the carpet for hardwoods, you could argue that is CapEx, since typically hardwoods are valued higher in sale than carpet.

Paint, drywall repairs are OpEx.

Spencer Gray · Answer

Seller's are notorious for labeling the vast majority of maintenance expenses that would normally be considered OpEx as CapEx in the year leading up to a sale. The reason being that it lowers your total OpEx and to show an inflated NOI and thus an inflated valuation to the market.

It's relativity easy to identify and the easiest way to factor it into your own underwriting is to understand how much it will cost you or your PM to do turns/regular maintenance. You can use their figures in Opex and CapEx as a guide but don't assume it will be the same when you are operating the asset. If you are using a Property Management company they should have a very good idea of what expenses should be.

Kristina Sparrow · Answer

If you are just turning and releasing the unit after a tenant moves out, I would classify this as OpEx (turnover expense, or make lease ready expense). These would be small repairs like paint, replacing the carpet, cleaning, small cosmetic repairs. If you plan on doing more extensive renovations after a tenant moves out, like replacing flooring type, appliances, cabinets, countertops, bathroom renovations, this would be considered CapEx because it adds value to the property.

Dan LaFontaine · Answer

@Bob Landers .  For anything that's part of the building... whether you're replacing something entirely or just fixing something, if the goal is to restore to previous or original condition, that's maintenance, so Opex.  However if a replacement is a meaningful upgrade (and value-add) from the original material or item, CapEx.  As for things that aren't part of the building, like appliances, it depends on how your tax basis is setup - if the original appliances were part of the building's cost basis, you might have to treat as Opex, but if they were segregated and tracked as their own assets, you'd have a capital disposal and a new CapEx purchase.  Best to speak to your accountant and cover the nuances.

Bjorn Ahlblad · Answer

@Bob Landers Things that are part of the building-garage door, roof, front door etc are generally capex. Refrigerators etc paint and flooring in unit are expensed.

MF Analysis - are you using OpEx or CapEx for this?

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