A 2022 reconciliation included a $4,800 line item labeled "HVAC amortization, Year 2 of 5." The lease permitted CAM recovery only for operating expenses and explicitly excluded capital improvements. CAMAudit flagged the charge as impermissible CapEx amortization because the lease contained no authorization for capital recovery in any form.
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Rule 19 of 20 · Classification rule
Capex Amortization Compliance: When Landlords Spread Capital Costs the Wrong Way
Capital costs recovered through amortization are only allowable if the lease explicitly permits it. Verify the lease language, the asset life, and the annual billing amount before accepting amortized CapEx charges.
A landlord who amortizes a $200,000 roof replacement over five years and bills the tenant's pro-rata share each year is charging the tenant for capital costs, and that recovery is only allowable if the lease explicitly permits it and the schedule is correct.
What it checks
Capex amortization compliance issues arise when a landlord includes amortized capital expenditures in the CAM pool without lease authorization, uses an amortization period shorter than the useful life of the asset, or bills more than the current-year share of an amortized improvement. Many leases exclude capital expenditures entirely. Others allow amortization only for improvements that reduce operating costs or are required by law, and only over the useful life of the improvement. This rule evaluates whether any amortized CapEx in the reconciliation is permitted by the lease, whether the amortization schedule is reasonable, and whether the amount billed corresponds to the correct annual installment.
The logic
Capex Amortization Compliance in 3 passes
- 1
CAMAudit identifies line items in the reconciliation labeled as amortized improvements, capital recovery, building improvements, or similar terms that suggest multi-year cost recovery.
- 2
CAMAudit checks the lease for explicit authorization of capital cost recovery and any conditions such as cost-reduction requirements, legal mandates, or minimum useful life thresholds.
- 3
CAMAudit flags amortized charges where the lease is silent, where the amortization period appears shorter than reasonable useful life, or where the billed annual amount does not match the expected installment from the stated cost and period.
What a finding cites
Related glossary terms
FAQ
Questions about capex amortization compliance
Can landlords ever recover capital costs through CAM?
Yes, but only if the lease explicitly permits it. Typical authorizations cover capital improvements required by law, upgrades that reduce operating costs over their useful life, or replacements where the lease uses an "operating expense" definition broad enough to include amortized capital items. The authorization must be present in the lease, not just assumed.
What amortization period is considered reasonable?
Reasonableness is generally measured against the useful life of the asset. HVAC systems typically have a 15-20 year useful life. Roofing is often 20-25 years. Short amortization periods accelerate cost recovery in ways that can inflate annual CAM charges significantly.
How does a firm dispute an impermissible amortization charge?
Request the capital improvement documentation including the invoice, project scope, total cost, amortization schedule, useful life assumption, and the specific lease provision authorizing recovery. If no authorization exists, cite the capital exclusion clause or the operating expense definition from the lease.
What should an amortization schedule look like if CapEx recovery is permitted?
The landlord should provide the original cost of the improvement, the assumed useful life, the annual amortization amount, the year of the improvement, and the tenant pro-rata share applied. For a $100,000 improvement amortized over 20 years, the tenant's annual share at 5% pro-rata would be $250. Verify that the math is correct and that the recovery period matches the useful life stated in the supporting documentation.
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