What Is Capitalized Cost

159

A Capitalized cost is something that is charged at the beginning of a project when calculating what is payable for a project. The meaning of Capitalized Cost is something that is charged at the beginning and at the end of a project, when the total cost is figured out over time. So if you were to lease a car, and then buy it after a certain amount of time, you would be charged a capital cost. A Capitalized cost is always equal to the total of future payments, less any existing cost. In other words what is the capitalized cost is what is called an expense.

In the business world, what is capitalized cost is a key concept. This includes all costs of doing business and that includes your time, money and energy as well as your effort in putting together a good deal. There are many aspects of what is capitalized cost in a lease contract. Capitalizing is the difference between what is known as the lease price, and what is known as the contract price.

This is where the capitalization equation comes into play. What is capitalized cost and why is it important to know what is the cap cost? The answer to that question will help you understand why it is so important to have the legwork done before you sign a lease contract for any type of commercial real estate property.

A cap cost is what is known as the actual, current or future total cost that will be involved in the entire leasing process. For example you may have a tenant who decides that he wants to move out after one year. Now the lease contract says that you are able to do everything within the guidelines of the cap cost that you have set for your apartment. If you do not take advantage of the cap cost, you could be stuck with what is known as a ‘pay as you go’ arrangement.

Lets look at an example of what this means. Say you go through an automobile lease contract that has a cap cost of ten thousand dollars per year. Now if you do not account for this in your car lease, and the car is not paid off by the end of the contract you will have your car paid for, but you will still owe the leasing company seven hundred and fifty dollars for the automobile. Now depending on how long the car is left on the lot, you could be faced with paying another thousand dollars to your leasing company for the automobile.

With car leasing this is not such a big deal. You can use what is called an ‘adjustable lease term’ which allows you to adjust the length of time you lease the automobile to. Most people find this to be a very good deal. Instead of paying several thousand dollars up front for a car, and potentially several more thousands each month for the monthly lease payments, you can lease for a short period of time and end up with a good deal.

An ‘adjustable lease term’ can be anything from three months to ten years, it is completely up to you as the lessee. What is important is that you get this amount written into your lease. If you do not get this amount written into the lease then you are going to end up having your monthly lease payments ‘sticky’ to where they are at the end of the term, and then be stuck paying this money out of your pocket during the final months of the lease period. This is very frustrating because as the months go on the lease amount is increasing, and by the end of the term if you have not paid this money out you have hit a dead end and have no choice but to renew the contract with another company.

Fortunately there is something called an annual interest rate cap. This cap is set at a specific figure and if your yearly interest rate goes above that figure then you are not going to have to pay any of that money that you would have been paying if your yearly interest rate was lower. This is perfect for you if you are going to be leasing a property for a very short period of time as you will be able to lease for only a couple of years and if you find that you have a lot of extra money in the beginning of your lease and then have to make some repairs and or updates then your annual interest rate cap will protect you and save you a lot of money. The reason that annual interest caps are so good for those who are going through a rocky financial patch is because if the economy starts to pick up in the next couple years then these caps are likely to go back up again making it more expensive for you to lease than it is today.