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 has to get membership approval before it can replace the roof. Do we really need membership approval to use the money in the reserve account to replace the roof?
ANSWER: No, the board does not need membership approval to use reserve funds to replace the clubhouse roof. While a new roof might be a "capital improvement" in an accountant's eyes, it is not the kind of improvement that requires membership approval. By statute and an association's governing documents, boards have a duty to maintain, repair and replace elements of the common areas. Monies are set aside in a reserve account for that specific purpose.
Capital Improvements. 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. If the association does not have sufficient funds to pay for the improvement and needs to impose a special assessment that exceeds 5% of the budgeted gross expenses, the board will need membership approval.
Mandatory Changes. Some alterations or expansions of existing common area amenities may be required for safety purposes and/or dictated by changes in the building codes. For example, a board might choose to construct a retaining wall in the common area, in order to stabilize a slope for safety purposes. Or 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. If there is insufficient funds to pay for the work, the board could impose an emergency assessment.
Upgrades of Materials and Technologies. Boards are encouraged to take advantage of improved building materials and designs, and improved 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 that have a longer useful life and/or provide more benefit/cost savings than what they are replacing (e.g., replacing incandescent and fluorescent bulbs with LED bulbs). However, where an upgrade that is significantly more expensive than what is being replaced or significantly changes the look of the amenity, membership approval may be required.
Significant Alteration in Appearance. Any repair or replacement that constitutes a significant alteration in the appearance of the development or of a major amenity should involve the membership's input in some way or another, even if the estimated cost does not exceed the 5% threshold. Generally, boards need not seek membership input to change the kind of materials used, as long as the color and look are the same or similar (e.g., grey-painted wood siding changed to grey-colored fire-resistant siding).
Privately Funded. Private funding of a capital improvement is permissable. If an owner wants to donate money for example for new playground equipment or a fountain, the association can accept the funds and set them aside for that purpose.
Recommendation: When faced with the kinds of issues described above, boards should seek legal counsel.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.