Within the very nature of an HOA itself lies the assumption that repairs, upgrades, and refurbishments of the property and buildings will at some point become a necessity. The HOA exists to fulfill these general necessities. Certain of these updates are referred to as “capital improvements”. These repairs are generally limited to around 5%-10% of the community’s budget. Anything beyond this percentage must gain the approval of the homeowners.
The topic of capital improvements is riddled with confusion. Residents and homeowners boards are oftentimes confused as to what constitutes a capital improvement which can lead to disputes and ill-feelings. So, what are considered to be capital improvements, and how do boards decide whether or not approval must be gained for a project?
Definition of Capital Improvements in North Carolina
In order to be categorized as a capital improvement, the project must must meet three conditions.
- The project substantially adds to the value and/or prolongs the life of the property in a substantial way.
- The project is a permanent construction, reconstruction, or remodeling of the real property.
- The removal of the addition would cause material damage to the property or the addition.
In simpler terms, these improvements are the larger repairs or replacements. Some examples of this type of improvement can be any of the following:
- Addition of a new building
- Significant expansion of an existing building
- Roof replacements
- Large landscaping projects
- Repainting of the property
- Security system upgrades
- Replacement or installation of air conditioning/heating
- Plumbing installation/repair
- Sprinkler installation/repair
- Electrical or lighting projects
Considerations of the Board
In the event that a repair or an update is needed on the property to increase the value or life of the community, there are several considerations that can be taken by the board to determine whether or not the addition or repair would be considered a capital improvement.
Is there a maximum spending cap? Most governing documents list a maximum spending cap for large projects. This is usually 5-10 percent of the association dues. If there is no spending cap, then the project can proceed.
Do the CC&Rs define capital improvements? If, as is usual, the CC&Rs limit capital improvements, it will be necessary to see how these documents define this type of improvement. Generally new buildings or upgrades will fall under the definition.
Where does the project fall in reference to this definition? If the project clearly falls within how the governing documents define capital improvement, it may be necessary to gain approval for the project.
Does the project come within the budget or spending percentage? If the 5-10 percent cap has not been reached within the year, and the budget for the project will cost less than this maximum, then the board can proceed without permission. If it exceeds the maximum however, approval must be gained.
These issues can be difficult to traverse. However, in the case of these large improvements, communication is key. Keeping residents up to date and giving them plenty of opportunities to be involved in the process will go a long way in keeping peace in the community and keeping the property beautiful, safe, and current.