I have a large national retail tenant who audited their CAM and removed from the CAM expenses the expense of replacing bark mulch (original installation) with rock mulch, claiming it is a capital expense. Our argument is that we had to place new mulch anyway whether it was bark or rock mulch shouldn't matter. The rock mulch will save money in the long run since it does not have to be replenished as frequently as bark. I am trying to see their view of this as a capital expense but am having a hard time seeing their side and can't agree with them at this point. I wonder if anyone out there has any thoughts to one side or the other that we have not considered or have had any luck in defending a similar position in the past.
Essentially you're saying that the rock mulch is better than the bark mulch, correct? My understanding of the definition of an operating expense is a routine expense. I would consider the bark mulch to be a routine expense since you are stating that it would need to be reapplied anyway.The definition of CapEx improves the useful life of an existing asset. The rock mulch would be considered an improvement to the asset because it will last longer and is a better product therefore possibly qualifying it as CapEx.
I agree with Emily but let me offer a counter argument a tenant could make. Let's say you have some common area carpet in your lobby that is worn and you decide to replace it with a hard flooring like granite because it will last longer. Would you consider that a capital cost or routine operating expense?
Thank you both for the dialogue. Both bring up great points.
To answer your question of is rock mulch better than bark mulch. Personally I like it better, but I think it comes down to personal preference. I like the look better and I also like that it stays in place better and does not have to be replaced as often as bark.
To your point as to a CapEX extending the useful life of the asset. Under that definition, couldn't any repair or maintenance done to HVAC, landscape sprinklers, building sprinklers, lighting, or any building system or common area repair fall under the definition of CapEX since it extends the useful life of the asset?
On the IRS website I found the following definition. "These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
• Business start-up cost (See the note below)
• Business assets
Would replacing the bark mulch with rock mulch be considered an improvement?