Title: What is a Capital Improvement? – HOA Brief
Headings: What is a Capital Improvement?
What is a Capital Improvement?
Author: Robert M. DeNichilo

Content: This definition of “capital improvement” provides little guidance to a Board as to whether an expense is a “capital improvement” which might require member approval. For example, new roofs on a building both enhance the property’s overall value and increase its useful life. Therefore, they could be considered a “capital improvement”. Treating new roofs as a “capital improvement” may require member approval prior to incurring the expense. Such a requirement would conflict with the Board’s authority to maintain the common area facilities. Therefore, a better definition for common interest developments is needed for purposes of CC&R restrictions. Some in the industry suggest Associations consider adopting the following definition for capital improvement: 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. While adopting such a definition would go a long way towards resolving the confusion caused by the use of an accounting term in the HOA context, even this definition is subject to confusion in its application. A Board would still have to determine if an expense is for a “substantial” discretionary addition or if it is for an “insubstantial” discretionary addition, or if the expense is for a “significant” upgrade to common area or if it is an “insignificant” upgrade.