Glossary
Financial Concepts
Amortization
The spreading of a large capital cost over its useful life, recognizing the expense in installments rather than all at once. In CAM, some leases permit landlords to amortize capital expenditures and pass the annual amortized portion through to tenants.
Firm impact
When a lease permits amortized CapEx in CAM, your firm must verify three things: that the useful life used is standard (not artificially compressed), that the amortization rate and interest are disclosed, and that the tenant is not paying amortization beyond their remaining lease term.
How this gets abused
A landlord amortized a $500,000 parking lot resurfacing over 5 years (unrealistically short). The 25-year useful life should have yielded $20,000/year; the accelerated schedule produced $100,000/year, overcharging tenants $80,000/year.
Practitioner note
If the lease allows amortized CapEx, require the landlord's amortization schedule for any capital project in the CAM pool. Compare the useful life assumption against IRS Publication 946 or the relevant ASHRAE/ASTM guideline. Artificially short useful lives are directly challengeable.
FAQ
Questions about amortization
What is a standard useful life for common building components?
HVAC systems: 15 to 20 years. Roofing: 20 to 25 years. Parking lot resurfacing: 15 to 25 years. Elevators: 20 to 25 years. Using a shorter useful life than these ranges accelerates amortization and overcharges tenants.
Can a tenant be charged amortization beyond their lease term?
No. A tenant should only pay amortization for periods within their lease term. If the lease ends in year 3 of a 10-year amortization schedule, the tenant owes only 3 years of amortized payments. This is a cleanly documented finding when the lease term is clear.
You know the term. Now check the math.
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