What are capital improvements, and how does it affect you as a homeowner? Capital improvements definitions can differ from one state to the next, but as a general rule, any permanent change in a community property can fall under the category. Capital improvements can include things like a community pool upgrade or a new condominium roof. The list of capital improvements your HOA can do will mostly include permanent structures that improve the community, but it will also cover major repairs and replacements, as well.
What Are Capital Improvements?
To be categorized as a capital improvement, the project 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.
As a useful rule of thumb, you can generally consider the addition or extension of a property as a capital improvement if you can reasonably expect to use it for more than a year. The Internal Revenue Service (IRS) definition of capital improvement has a few more details on what is a capital improvement and what is not as well as the tax rules for each case.
Some states do not have much in the way of governing rules for capital improvements. In these cases, it is the HOA governing rules that place a limit on what capital improvements can be done by the board at their discretion, and which ones will need to be voted on by the homeowners.
Funding and Approval of Capital Improvements
Most HOA boards are restricted by their governing documents when it comes to capital improvements. Many HOA Covenants, Conditions & Restrictions (CC&Rs) will have a clause that puts a spending cap on capital improvements, usually around 5 to 10 percent of the current budget.
If a project falls under the category of capital improvements and the cost exceeds that cap, then approval from the homeowners may be required to move the project forward.
In the case of the HOA CC&Rs placing a spending cap on capital improvements, homeowners can vote for or against a capital improvement that goes past that cap. Some CC&Rs could require as much as 75 percent of owner approval to move these projects forward, while others may call for a lower vote.
In many cases, capital improvement projects that cost less than the cap can be funded at the discretion of the board.
Capital Improvements vs Repairs and Maintenance
Wear and tear happen, and that’s why the HOA needs to plan for repairs, upgrades, and refurbishments of the property and buildings that will become necessary at some point. What are capital improvements then in relation to routine repair and maintenance expenses?
Most routine repairs can be covered by a regular allocation from the HOA. Some of these repairs, however, can make a significant change to the community property’s intended use, assessed value, or the length of its useful life. In these cases, these updates can fall under the category of capital improvements, and thus, may require the approval of the homeowners before it can proceed.
What are capital improvements vs repairs and maintenance? One way to look at repairs vs capital improvements is how the project affects the value of the property. Does it maintain or restore the building or area in its original condition, more or less? Then it will usually fall under the Repairs and Maintenance (R&M) column of the HOA budget. Lawn care, cleaning, snow removal, and other routine services easily fall under this distinction.
On the other hand, capital improvements tend to improve the value of the property. If a project enhances the market value of your swimming pool or community tennis court, then chances are it’s a capital improvement expense. These improvements need not be expensive ones, either, even just switching the lights of the community gazebo to energy-efficient LED bulbs can also count as a value-adding upgrade.
In practical terms, these improvements are the larger repairs or replacements. Some examples of this type of improvement can be any of the following in this partial list of capital improvements:
- Addition of a new building
- Significant expansion of an existing building
- Roof replacements
- Large landscaping projects
- Repainting of the entire property
- Security system upgrades
- Replacement or installation of air conditioning/heating
- Plumbing installation or major repairs
- Sprinkler installation or major repairs
- Electrical or lighting projects
There may seem to be a bit of overlap between repairs and capital improvements, but a good HOA board should be able to explain their reasons for proposing a large project as a capital improvement. For example, the repair or replacement of a few windows at the community gym might be a routine repair job. If the HOA discovers that they have to replace all the windows of the gym, then the board may have a capital improvement project on their hands.
In another common example, a routine roof maintenance job on a condo can reveal leaks and drainage issues. The roofing expert may then decide that the useful life of the roof is over, and the building will need a whole new roof. What was a simple roof cleanup task suddenly became a capital improvement expense. A CC&R that’s clearly written and understood by the HOA board will go a long way to help them explain to the residents the necessity of this new project.
What Are Capital Improvements Doing for Your Community?
What are capital improvements good for, and why should you, as a homeowner, support your HOA to implement them? Capital improvements extend the useful life of an existing community facility, so you and your family can enjoy them for years to come. Not only that but capital improvement projects can also improve an amenity to make it nicer or repurpose it for additional uses. Perhaps even more exciting for you as a homeowner, capital improvements can add a whole new amenity that the whole community can enjoy.
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