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CAPITAL
IMPROVEMENTS
 QUESTION:
We need to replace our roof. We have money in reserves for that purpose but one
of our owners, a CPA, insists that replacing the roof is a capital improvement
requiring membership approval. That can't be right. Do we need approval?
ANSWER: CC&Rs
often require membership approval for improvements costing over 5% of the annual
budget. In my opinion, the general definition of capital improvement is for tax
purposes and does not
apply to community associations.
Tax Definition. In the business
community, a capital
improvement
is anything that (i) enhances the value of a property, (ii) extends
the useful life of an asset, or (iii) adds to its value. Using this
definition, virtually every reserve expenditure is a capital improvement
requiring membership approval. This broad definition was created for tax
purposes and has no practical application in the
community association industry.
Community Associations. For
community associations, a different definition is required. You should use the following:
"A capital improvement is any (i) substantial
discretionary addition to the common areas, (ii) voluntary significant upgrade to common area
materials, or (iii) discretionary material alterations to the appearance of the
development."
 Discretionary Additions. The discretionary addition of new facilities which were not previously part of the development's original construction,
which exceeds 5% of the budget, requires membership approval. Examples include the construction of a clubhouse,
tennis court, swimming pool, or gym.
Exceptions. Capital improvements that do
not require membership approval are (i) those required for safety purposes, and
(ii) governmentally mandated improvements. The voluntary addition of
a retaining wall to stabilize a slope for safety purposes should not require membership approval. The installation of a fire control system ordered
by local fire authorities does not require membership approval.
 Significant
Upgrades. Boards should take advantage of improved
building materials and designs whenever possible. However, discretionary upgrades that
are appreciably more expensive
need membership approval. For example, replacing chain link fences costing $25,000 with slumpstone
costing $100,000 requires membership approval. Replacing
lobby carpet that costs $62,000 with tile
at $120,000 requires membership approval. Upgrading carpet from $62,000
to a higher quality at $70,000 does not require membership approval if it falls
within 5% of the annual operating budget.
Exception. An exception is a mandated upgrade. If an association repairs its 30-year old
elevators and the city orders a substantial upgrade to integrate the elevators with the building's fire alarm system, this capital improvement
does not require membership
approval. The upgrade is required regardless of the membership's approval or
disapproval.
 Material Alteration
in Appearance. Any repair or replacement that constitutes a substantial alteration in
the appearance of the
development should require membership approval even if the cost does not exceed
the 5% restriction. For example, replacing
a decorative fountain with a statue is a material alteration
to the
appearance. Failure to get membership approval could have significant
consequences.
Exception. Replacing wood
shingles with fireproof shingles to satisfy fire codes does not require
membership approval. Even though the new shingles exceed the 5% restriction, the
membership cannot veto the change. However, the membership should vote
on any discretionary change in the appearance, such using red clay tile over gray slate.
RECOMMENDATION.
Because of the uncertainty created by the 5% capital improvement
restriction, associations should define "capital improvement" whenever they amend or restate
their CC&Rs.
Very truly yours,
Adrian Adams, Esq.
Adams Kessler PLC
Apology. I want to
apologize to readers who did not receive replies to their questions. This past
week I discovered that my newsletter service
installed a spam filter which diverted over 2,000 of your e-mails to a folder.
I am currently reviewing
them and will do my best to respond to everyone. |
