For a homeowners’ association (HOA) board looking for ways to enhance the community, capital improvements can help boost property values and overall resident satisfaction. These significant upgrades or additions to the neighborhood enrich homeowners’ living experience and the desirability of the HOA.
However, funding these projects can be challenging if you don’t adequately budget or prepare for capital improvement expenses. Here’s more on what capital improvements are and how to fund them successfully.
What’s a Capital Improvement?
Your HOA may take on several capital improvements throughout its evolution. A capital improvement is:
- A change that adds substantial value or considerably extends the useful life of a property.
- A significant property enhancement that’s permanent or expected to last for more than one year.
- An upgrade, restoration, or addition that would cause damage or a decrease in value if removed.
To summarize, a capital improvement project involves changes that enhance the asset or adapt the property for a new use. When these changes add value, are permanent, and become integral to the structure, they’re a capital improvement.
What Are Examples of Capital Improvements?
Because HOA capital improvements increase the value of a community’s assets, a wide range of projects qualify. From structural upgrades to technology developments, here are a few common capital projects examples:
- Replacing the roof of a common building
- Major landscaping upgrades
- Repairing damaged roads or parking lots
- Making an existing building more energy-efficient
- Renovating a clubhouse or other community space
- Large-scale painting projects
What’s the Difference Between HOA Maintenance and Capital Improvements?
Although regular repairs and maintenance are essential for communities to look and function at their best, they’re not capital improvements. Capital improvement projects aim to upgrade or extend the useful life of an asset or property. HOA maintenance keeps the asset in optimal shape to ensure it reaches its expected lifespan.
Depending on the details in your HOA’s covenants, conditions, and restrictions (CC&Rs), the association may be responsible for routine HOA maintenance in common areas. Examples include:
- Regular HVAC inspections in shared buildings
- Community pool upkeep
- Maintenance of playgrounds and fitness centers
- Routine landscaping
As a board member, it’s vital to understand the difference between capital improvements and HOA maintenance costs and how each is funded. HOA repairs and maintenance expenses are typically budgeted for and paid from your community’s operating fund. Capital improvements are often more complex and expensive projects that require additional funds from other sources.
A maintenance plan is crucial. Read “The 5 Essential Steps To Developing A Community Maintenance Plan That Works” for tips on building one for your community.
How Do You Fund Capital Improvement Projects?
Depending on the project, capital improvement expenses can be substantial—but managing your budget wisely, planning ahead, and looking at all your financing options will help the project go smoothly with the least financial disruption to homeowners. Here are the most common ways to fund HOA capital improvements:
1. Special Assessments
While homeowners contribute monthly dues that go towards the operating budget, your governing documents may also permit special assessments. Special assessments are additional fees levied by a board to cover unexpected expenses, including costs associated with capital improvements.
However, it’s important to note that special assessments should be carefully considered and imposed sparingly. While there are exceptions and times when a special assessment is necessary, extra fees are unpopular with homeowners and may give the impression that the board isn’t managing the budget well. Remember to follow appropriate special assessment protocols and be transparent about why the special assessment is necessary and exactly how the association will use the funds.
2. Reserve Funds
Every HOA should have a reserve fund used explicitly for major repairs, renovations, and improvement projects that don’t occur on a regular basis. The board is responsible for ensuring the reserve account is properly managed and funded according to your HOA’s latest reserve study and state’s guidelines. If your reserve account is fully funded, you may have enough to cover anticipated expenses of capital improvements.
Refer to your HOA’s governing documents to understand the process for approving capital improvements and using reserve funds to pay for the cost. You may need the approval of association members before you can tap into reserve funds for certain projects. You can also speak with your HOA’s certified public accountant (CPA) or association attorney to see if the project is considered a capital improvement.
Learn more about reserves! Read “8 Essential Things You Need to Know About Reserve Funds & Studies” now.
3. HOA Loans
An HOA loan is often a smart choice because it allows homeowners to pay for the project over time rather than a hefty special assessment. The loan is collateralized against future assessments and may not even require an increase in regular homeowner dues. Additionally, an HOA loan may:
- Offer immediate access to funds without having to deplete the reserve account.
- Work in conjunction with a reserve fund or special assessment to help fund the project.
Tax Breaks on Capital Improvements
While they’re a considerable expense, some capital improvements may be tax-deductible for your HOA. Also, there may be federal tax incentives or additional credits offered by your state when you make energy-efficient upgrades and other improvements.
How to Get a Loan for Your HOA Capital Improvement Project
If your HOA is considering a capital improvement but funds are coming up short, a loan may be a great option. However, finding the right financial fit for your HOA project is key. To help you make the most informed decision for your community, download our free ebook, “Everything You Need To Know About Securing a Loan For Your Homeowner Association Project.”