The term capital improvement is really an accounting term, (I know because my accountant friend from Houston debated me on the terms meaning) so there is no industry adopted definition as to what a capital improvement really is. Often times a “capital improvement” is defined as the addition of a permanent structural improvement or the restoration of some aspect of a property that will either enhance the property’s overall value or increase its useful life. This definition however can interfere with the boards authority to maintain the common area facilities without member vote.
Capital improvement, can you identify one?
More importantly, can your condo association identify one? Most HOAs have rules in their governing documents such as a spending cap without member approval but they have one common problem, often the term “capital improvement” is not defined. Even in Houston we find this problem today.
Many in the industry think Associations should adopt the following definition:
A capital improvement is any (i) substantial discretionary addition to the common areas, (ii) voluntary significant upgrade to common area materials, or (iii) discretionary material alterations to the appearance of the development
Even this definition has some gray areas in it like a rainy Houston morning, but it would move us forward and that’s the way to go. If the bylaws or rules in your association do not define “capital improvement” it would be best to consider amendment now to avoid future issues.
So how do you pay for it?
Once you have determined you have a capital improvement, then you need to refer to your rules and bylaws to see what they say regarding spending caps, special assessments and other funding options for capital improvement.
Can you use reserve funds to pay for capital improvements? Technically while they are close to the same thing, they are really horses of a different color. A reserve expenditure enhances an already existent feature while a capital item is a completely new item where there was no need prior. Make sure your bylaws and rules, plus your condo association understands and defines both.
There are companies that can finance capital improvements for condominiums that are then paid for by a slight increase in association fees for a set period of time.
You can do a one-time assessment to all owners to pay for a capital improvement. Consider how difficult this option may be on your owners; in an older population many may be on very fixed incomes that limit their capacity for payment of a large assessment.
Plan for the future
The best way to avoid unnecessary burdens and definitions is to plan ahead for capital improvements. Plan 5 years out, reviewing the plan at every meeting so adjustments can be made and have a fund that is earmarked for capital improvements and a permanent part of the association dues.
Talk to your management company, condo association or HOA today so you are ready for funding the future.