The current cost to replace a building component or system with a functionally equivalent one at today's prices. Replacement cost is used to determine the amortization base for capital expenditures passed through CAM and to evaluate insurance coverage adequacy.
Replacement cost is the estimated expenditure required to construct or install a functionally equivalent asset at current market prices, including materials, labor, permits, and design fees. In CAM, replacement cost matters in two contexts: (1) when a capital asset is replaced and the landlord amortizes the actual replacement cost through CAM, and (2) when insurance coverage is set at replacement cost value, which determines insurance premiums passed through to tenants. Replacement cost is distinct from book value (original cost minus depreciation) and market value (what a buyer would pay).
A landlord replaced a 15-year-old HVAC system and amortized the replacement cost through CAM. However, the landlord used a "like-for-like" estimate of $180,000 as the amortization base rather than the actual cost of $130,000, inflating the annual pass-through by $3,300 per year for the 15-year amortization period.
When a landlord amortizes a capital expenditure through CAM, verify that the amortization base is the actual cost paid, not an estimated replacement cost or appraised value. Request the vendor invoice and compare it to the amortization schedule. The numbers should match.
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Find My OverchargesThis page provides general educational information. It is not legal advice and may not reflect the most current law in your state. Consult a licensed attorney for advice specific to your situation.
