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 has to get membership approval before replacing the roof. Do we really need membership approval to use the money in the reserve account to replace the roof?
ANSWER: 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 does not require membership approval. 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. 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 require membership approval.
When to Seek Membership Approval
Mandatory Changes to Common Areas. 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 construct a retaining wall in the common area to stabilize a slope for safety. The local fire authority might require installing 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.
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 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, membership approval may be required for an upgrade that is significantly more expensive than what is being replaced or substantially changes the look of the amenity.
Significant Alteration in Appearance. Any repair or replacement that constitutes a significant alteration in the appearance of the development or 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 Funding of 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.