What is a Capital Improvement

Residents choose communities that offer the lifestyle and amenities they desire. However, residents’ desires change over time, and so do their desired amenities. To keep up with these changing desires, communities may need to perform capital improvements. This article will discuss examples of capital improvements and how HOAs can pay for them.

For this discussion, a capital improvement is defined as a significant upgrade to an asset or the creation of a new asset with substantial expenditure. The Internal Revenue Department defines capital improvements differently, using specified standards. Although definitions may vary by state or industry, the Community Association industry generally accepts this one.

Examples of Capital Improvements

Over the past decade or so, pickleball has become very popular.  This has led to some communities building pickleball courts for their residents. The addition of pickleball courts would be a capital improvement. Other examples of additional sporting amenities would be tennis courts, bocce ball, and basketball courts, to name a few.

A community may have a modest play area that it wants to improve with a larger play structure. Based on its size and cost, consider the new structure a capital improvement. A community might lack a pool, but residents may want to add one as a desirable amenity. Adding a pool would be considered a capital improvement. Other examples include installing a surveillance system or constructing a clubhouse. Capital improvements vary based on community size and residents’ preferences for beneficial additions.

Examples of Capital Improvements: 

• Sporting amenities (tennis courts, bocce ball, basketball courts, etc.)
• Play areas and structures.
• Community pool
• Surveillance system
• Clubhouse or similar building

How do HOAs pay for Capital Improvements?

After inquiries from homeowners and considerable discussion by Board and Committee members, the Board of Directors may come to the decision that a capital improvement is in the best interest of the community. Inevitably, the next question to ask is: How do we pay for capital improvement?

Review Community Documents

The first step in funding major community projects is to review governing documents for restrictions on capital improvement funding. Some residents may suggest using reserve funds, but those are meant for long-term maintenance and replacement of existing assets. Reserve studies typically plan to replace assets at the end of their useful life, not for substantial improvements. They usually account for replacing assets with similar versions at comparable value. Therefore, if the asset is to be substantially improved, it may be considered a capital improvement. The community governing documents may also include restrictions preventing the use of reserve funds for these community improvements.

Loan or Special Assessment

Other funding options may include establishing a capital improvement fund, the Association taking out a loan or establishing a special assessment to fund the project.

Suppose a community’s governing documents allow for the collection of special closing fees. The Board of Directors may establish a closing fee to fund capital improvements. While this funding option may have the least impact on the community’s immediate finances, it also takes longer for the community to accumulate the desired funds as this relies on home closings; therefore, this may not provide a funding timeline that meets the desires of the community.

A more immediate funding option would be for the community to take out a capital improvement loan to fund the project. If allowed by the governing documents, the community needs to put together a comprehensive project plan to present with the loan application for the lending institution’s review. This may involve hiring a project manager, architect, or other professionals to assist in preparing these documents.

If the options above are not viable, the Board of Directors may choose to consider a special assessment to fund the project. A special assessment may provide more immediate funding for the project than collecting closing fees, and it avoids the challenges of getting funding from a lending institution; however, special assessments have their own challenges. Foremost, many homeowners do not like special assessments and may not be in a financial position to pay for them. In addition to the individual homeowner impact of a special assessment, the Association’s governing documents may have strict requirements for approval of special assessments. 

While the funding of improvements accounts may be a challenge, the project is completion result may add considerable value to the community and its residents through the quality of life, accessibility, exercise options, or increased overall monetary value of the community and its homes. Therefore, with open discussion, resident involvement, and thorough research, a capital improvement may benefit your community and your residents.