What is the IRS test for distinguishing CapEx from operating expenses?

The IRS uses the UNICAP rules and the "betterment, restoration, or adaptation" test. A cost is capital if it: (1) betters the property by fixing a material condition that existed before acquisition; (2) restores the property to its original condition after deterioration; or (3) adapts the property to a new use. Costs that merely maintain current working condition are operating expenses.

My lease says capital improvements may be amortized into CAM. What does that mean?

It means the landlord may include a portion of capital improvement costs in CAM each year, but only the annual amortization — not the full cost at once. The amortization period should be the improvement's useful life per GAAP standards. You should also verify the interest rate applied to the unamortized balance is capped at a reasonable rate (typically prime + 2% or a fixed percentage).

What is the IRS test for distinguishing CapEx from operating expenses?

The IRS uses the UNICAP rules and the "betterment, restoration, or adaptation" test. A cost is capital if it: (1) betters the property by fixing a material condition that existed before acquisition; (2) restores the property to its original condition after deterioration; or (3) adapts the property to a new use. Costs that merely maintain current working condition are operating expenses.

My lease says capital improvements may be amortized into CAM. What does that mean?

It means the landlord may include a portion of capital improvement costs in CAM each year, but only the annual amortization — not the full cost at once. The amortization period should be the improvement's useful life per GAAP standards. You should also verify the interest rate applied to the unamortized balance is capped at a reasonable rate (typically prime + 2% or a fixed percentage).

Capital Improvements / CapEx: CAM Line Item Audit Guide

Expenditures that extend the useful life of the property, add new functionality, or restore an asset to substantially better than its original condition.

Recoverability & Controllability by Lease Type

Lease Type	Recoverable?	Controllable?
NNN	No	No
Modified Gross	No	No
Full-Service Gross	No	No

CapEx Risk: This line item is commonly used to disguise capital expenditures as operating expenses. Verify all invoices against GAAP standards.

Approximate budget share: 0% of total CAM pool.

Common Abuse Patterns

Landlords pass 100% of capital improvement costs through CAM in a single year — parking lot resurfacing, roof replacement, HVAC equipment replacement — without amortization over the asset's useful life.

Red Flags to Watch

ANY capital expenditure line item appearing on a CAM reconciliation statement without amortization
A single year's CAM costs are dramatically higher than prior years without explanation
Work performed by contractors rather than service vendors
Projects requiring permits or engineering approvals billed as operating maintenance

CapEx Risk Alert

This line item is commonly used to disguise capital expenditures as operating expenses. Capital expenditures must be excluded from CAM or amortized over their useful life per GAAP. If you see unusually high or one-time charges in this category, request all invoices and scope-of-work documentation before paying.

Your Right to Dispute

Absolutely exclude all CapEx from CAM unless your lease specifically permits amortization. Where amortization is permitted, require GAAP-compliant useful life periods and a cap on the interest rate applied to the amortized balance. No capital improvement may be expensed in full in the year incurred.

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Related Resources

GlossaryCAM Glossary GlossaryControllable Expenses ResourcesCAM Audit by State ToolsFree CAM Audit Tools

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This page provides general educational information. It is not legal advice and may not reflect the most current law in your state. Consult a licensed attorney for advice specific to your situation.

Lease Type

Recoverable?

Controllable?

NNN

Modified Gross

Full-Service Gross

Red Flags to Watch

ANY capital expenditure line item appearing on a CAM reconciliation statement without amortization

A single year's CAM costs are dramatically higher than prior years without explanation

Work performed by contractors rather than service vendors

Projects requiring permits or engineering approvals billed as operating maintenance

CapEx Risk Alert

Your Right to Dispute