Real Property Depreciation — Straight-Line Over 39 Years (Non-Residential) and Recurring CapEx

💡 Accountant's Note

Real property depreciation is the largest non-cash expense for equity REITs — driving the gap between GAAP net income and FFO. Depreciation rules: (1) BUILDING: straight-line over 39 years (non-residential) or 27.5 years (residential). For a $58M building: $58M / 39 = $1.487M/year per $10M of building cost (or $2.1M/year for $58M). (2) BUILDING IMPROVEMENTS: capitalized additions to the building — depreciated over the remaining useful life of the improvement (typically 5–15 years for major components like HVAC, roofs, elevators, lobby renovations). (3) TENANT IMPROVEMENTS: costs the landlord pays to customize space for a specific tenant — depreciated over the shorter of the asset life or the remaining lease term (because if the tenant leaves, the improvement may be demolished). (4) EXPENSED MAINTENANCE: routine repairs that maintain the property's current condition without extending its useful life — immediately expensed. The capitalize vs. expense distinction is one of the most judgment-intensive areas in REIT accounting — aggressive capitalization inflates assets and defers expenses; conservative capitalization reduces assets but improves FFO metrics.