Industry Capex Benchmarks
Class A office: 0.75-1.0% (well-maintained, modern systems). Class B: 1.0-1.25% (moderate deferred maintenance). Class C: 1.25-1.50%. Multi-tenant retail: 0.75-1.0%. Single-tenant NNN: 0.0-0.25% (tenant pays). Industrial: 0.5-0.75% (simpler). Apartments: 1.0-1.25% (regular turnover). A $5M Class B office needs $55K annually. But examine actual replacements: Roof $150K (20-year cycle) = $7,500/year. HVAC $80K (15 years) = $5,333. Parking seal $30K (5 years) = $6,000. Paint $60K (7 years) = $8,571. Parking repave $100K (10 years) = $10,000. Lobby refresh $50K (8 years) = $6,250. Total: $43,654 needed annually.
Tenant Turnover Costs
Leasing commissions: 4-6% of first-year rent for lease term. $20K annual rent, 5-year lease: $20K times 5 times 5% = $5,000. Tenant improvements: $10-30 per sqft. 3,000 sqft space: $30-90K. Turnover costs (paint, clean, minor repair): $2-5 per sqft. Vacancy loss: 2-4 months. $20K rent tenant vacating: $3,333-6,667 loss. For multi-tenant with 20% annual turnover at 5 spaces: 1 space turns per year. Cost: $5K commission plus $40K TI plus $5K turnover plus $5K vacancy = $55K annually, or 5.5% of NOI on $1M rent property.
Critical Truth: Most pro formas model 0-2% capex and ignore turnover. Actual properties spend 2-4% capex plus 3-6% turnover = 5-10% of NOI. This explains the gap between projected and actual returns.
Establishing Reserves
Lenders require segregated reserve accounts. Typical requirements: 6-12 months debt service, 3-6 months operating expenses, 0.5-1% of purchase price for capital. Reserves must be funded at closing then replenished monthly. Monthly contributions: Annual capex divided by 12 plus annual turnover divided by 12. For $5M office with $55K capex and $50K turnover: ($55K plus $50K) divided by 12 = $8,750/month. If NOI is $350K monthly, that's 2.5% reserved. Over 5 years, accumulate $525K in reserves for emergencies.
Frequently Asked Questions
How much capex for first 3 years?
Conservative: 1.5x benchmark for first 3 years (deferred maintenance catch-up), then drop to benchmark. Accounts for post-acquisition repairs.
No capex reserves?
Cash flow shortfalls when systems need replacement. Lenders restrict distributions. May need refinance or additional debt. Deferred maintenance compounds. Property deteriorates. Valuations drop 10-20%.
Tax deductible?
Leasing commissions and turnover deductible. TI may be capitalized and depreciated. Consult tax advisor on treatment.