Capital improvements: Overview, definition, and example
What are capital improvements?
Capital improvements refer to significant upgrades or enhancements made to a property or asset that increase its value or extend its useful life. These improvements typically involve substantial work or construction that goes beyond routine maintenance or repairs. Capital improvements can include things like building additions, renovations, major systems upgrades, or the installation of new equipment that improves the property’s functionality or market value.
For example, installing a new roof, adding an extra floor to a building, or upgrading a property’s plumbing system are all considered capital improvements.
Why are capital improvements important?
Capital improvements are important because they enhance the long-term value and usefulness of a property or asset. They help businesses, property owners, or investors improve their assets’ efficiency and appeal, which can lead to higher returns, lower operating costs, or an increase in property value. For businesses, making capital improvements can also create a better working environment, attract more customers, or meet regulatory requirements.
Additionally, capital improvements are typically treated differently for tax purposes than regular repairs and maintenance, often resulting in depreciation benefits for businesses that make such investments.
Understanding capital improvements through an example
Imagine a commercial building that needs significant updates to stay competitive in the market. The owner decides to install a new HVAC system, renovate the lobby, and upgrade the building’s electrical wiring. These actions would all be considered capital improvements, as they are long-term upgrades that add value and improve the functionality of the building.
In another example, a company that owns office space might decide to add a new conference room and install advanced video conferencing equipment. These upgrades would improve the building's appeal to potential tenants, making it a capital improvement that could result in higher rental income.
An example of a capital improvements clause
Here’s how a clause like this might appear in a contract:
“The Tenant agrees to notify the Landlord before making any Capital Improvements to the leased property. Any Capital Improvements must be approved in writing by the Landlord and may be subject to reimbursement or compensation based on the terms of this Agreement.”
Conclusion
Capital improvements are substantial upgrades or enhancements made to a property or asset that add long-term value. For businesses, these improvements can improve functionality, increase efficiency, and lead to higher property value. Understanding what qualifies as a capital improvement is crucial for managing finances, taxes, and maintaining valuable assets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.