A capital improvement is a change in or restoration of an aspect of a property that will either enhance the property’s overall value, prolong its useful life, or adapt it to new uses. It is a permanent and substantial alteration that adds significant value to a property.
Capital improvements are utilized in value-add projects and are key factors in analyzing the potential of a real estate investment. When done by companies, capital improvements are often funded by capital expenditures, or CapEx.
Capital Improvement Examples
Capital improvement projects can vary greatly depending on the rental property and whether property owners make these upgrades in common areas or tenant areas. Examples in common areas include landscaping, installing a swimming pool or elevator, remodeling the lobby, or adding more parking. Tenant-area improvements could include new appliances, adding in-unit laundry, or changing the flooring. More broadly, the installation of an HVAC system or updated accessibility features can be improvements to any commercial property.
Repairs to normal wear and tear, such as replacing a leaky pipe, and general maintenance, such as painting, are not considered capital improvements.