Capital Improvement Defined
QUESTION: We need to replace the roof of our common area clubhouse. We already have enough money in the reserve account for the new roof, but one of our owners (a CPA) insists that replacing the roof is a "capital improvement," and therefore, the board must obtain membership approval before replacing it. Do we really need membership approval to use the money in the reserve account to replace the roof?
ANSWER: Some CPAs, especially those who do not specialize in the HOA industry, don't understand the difference between capital expenditures and capital improvements. Boards do not need membership approval to use reserve funds to replace roofs. By statute and an association's governing documents, boards must maintain, repair, and replace elements of the common areas. Monies are set aside in a reserve account for that specific purpose.
Pickleball Court. For common interest developments, a capital improvement requiring membership approval (if required by the governing documents) is the addition of a new amenity, i.e., something that did not previously exist and costs more than 5% of the association's annual budget. A new pickleball court is an example. If the association does not have sufficient funds to pay for the improvement and must impose a special assessment exceeding 5% of the budgeted gross expenses, the board will require membership approval.
When Membership Approval is Not Required
Mandatory Changes to Common Areas. Some alterations or expansions of existing common area amenities may be required for safety purposes or mandated by changes in building codes. For example, a board might construct a retaining wall in the common area to stabilize a slope for safety. The local fire authority might require the installation of a fire control system. If, as part of a major repair to an association's 30-year-old elevators, the city orders a substantial upgrade to integrate the elevators with the building's fire alarm system, this "capital improvement" would not require membership approval, even if it costs more than 5% of the budgeted gross expenses, because it is not voluntary. The board could impose an emergency assessment if insufficient funds exist to pay for the work.
Roof Repairs. Replacing a hot tar built-up roof with a modified bitumen roofing system does not qualify as a capital improvement. It is a roof replacement with a less costly, more efficient material. Adding crickets to a flat roof to prevent ponding is not a capital improvement — it's a roof repair.
Upgrades to Materials and New Technologies. Boards are encouraged to use improved building materials, designs, and technologies whenever possible. The installation or incorporation of upgraded materials and technologies into a repair/replacement does not require membership approval when those upgrades result in components with a longer useful life and/or provide greater cost savings than what they replace (e.g., replacing incandescent and fluorescent bulbs with LED bulbs). However, membership approval may be required for an upgrade that is significantly more expensive than what it replaces, or that substantially changes the amenity's appearance.
Significant Alteration in Appearance. Any repair or replacement that constitutes a significant alteration to the development's appearance or a major amenity should involve the membership's input in some way, even if the estimated cost does not exceed the 5% threshold. Generally, boards need not seek membership input to change the type of materials used, as long as the color and appearance are the same or similar (e.g., grey-painted wood siding changed to grey-colored fire-resistant siding).
Privately Funded Improvements
Private funding for capital improvement is permissible. If an owner donates money, for example, for new playground equipment or a fountain, the association can accept the funds and set them aside for that purpose.
Cases that address capital improvements:
Behm v. Victory Lane Unit Owners' Association (1999) 133 Ohio App.3d 484.
George v. Beach Club Villas Condominium (2002) 833 So.2d 86.
Litvak v. 155 Harbor Drive Condominium Association (1993) 244 Ill.App.3d 220.
Ocean Club Condominium Association v. Gardner (1998) 318 N.J. Super. 237.
Ralph v. Envoy Point Condominium Association (1984) 455 So.2d 454.
Tiffany Place Condominium Association v. Spencer (1982) 416 So.2d 823.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.