Capital Improvements Getting Financing and Board Approvals

Even if your condominium or homeowner’s association (HOA) is a fortified castle atop a hill and surrounded by a moat, one day, someone will hit it with a really big rock, and thus it’s inevitable: work will be done, repairs will be made, the sun will set. But some projects are of greater consequence than others, and these are often referred to as “capital improvements.” 

The New York Department of Taxation and Finance defines a capital improvement as “any addition or alteration to real property that meets all three of the following conditions: It substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property. It becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage and it is intended to become permanent.”

In the New England area the definition may be more ambiguous, due to the fact that more states/cities /municipalities/associations are in play, but it’s still a term derived from accounting that carries the same basic connotation, not to mention the same substance. These aren’t regular maintenance tasks, but significant endeavors that may involve a dialogue, vote, or even additional financial contributions from ownership on top of the regular monthly assessments and fees. It’s important for a board of trustees to plan from day one for these types of projects, lest it be caught unaware as the sky—or possibly the roof—comes falling down.

Legalese

To echo the definition above, attorney Mark S. Einhorn, a partner with the law firm of Marcus, Errico, Emmer & Brooks P.C. in Braintree, Massachusetts, explains that the term ‘capital improvement’ was, at the outset, a term found in IRS tax code that referred to property alterations that affected an increase in value.

“Capital improvements under the IRS tax code are distinguished from routine maintenance,” says Einhorn. “Generally, recurring activities (inspection, cleaning, testing, replacing parts, etc.) that are expected be performed as a result of the use of property to keep said property in its ordinarily operating condition aren’t capital improvements.”

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