HOA capital improvements play a crucial role in planned developments. However, not all HOA boards understand these and why they are so important. Beyond that, it takes smart financial planning to fund capital projects.

What are HOA Capital Improvements?

A capital improvement is a project that enhances a property, changes it for a new use, or is a new construction. Homeowners association capital improvements add value to the community and are typically permanent. They are structural changes that last more than a year.

It is worth noting that capital improvements can take the form of new construction (such as adding a new amenity). This significant change enhances an existing asset and extends its life, or adapts an existing property for a new function.

What is the Difference Between Repairs and Capital Improvements?

Many HOA boards use repairs and capital improvements interchangeably. However, there is a distinct difference between the two. It is important to identify these differences, as they can be critical in determining funding and whether or not membership approval is necessary.

A capital improvement is a permanent enhancement, upgrade, construction, or adaptation. HOA capital projects significantly increase a property’s value. This usually entails structural work or restoration.

In comparison, a repair involves routine maintenance and preventive maintenance. It is performed to keep a property in its original condition. Repairs and maintenance don’t add significant value to the property and are also typically smaller in nature.

What’s Considered a Capital Improvement?

Classifying which projects count as HOA capital improvements and which don’t is often difficult. Here are some of the most common examples of capital improvements.

1. Major upgrades to an HOA’s landscaping

2. Installation of a new amenity (such as a pool or fitness center)

3. Restoration of an old building

4. Conversion of a tennis court into a pickleball court

5. Paving a new road or parking lot

6. Renovation of a clubhouse or common area

7. Addition of an annex to an existing building

What is an HOA Capital Improvement Fee?

A homeowner may occasionally encounter a capital improvement fee. Simply put, a capital improvement fee is an amount that an HOA collects from a new homeowner, usually only once. An HOA usually charges this fee every time a property in the community is sold. The fee goes into a fund that covers the cost of future HOA capital improvement projects.

There is no standard amount when it comes to capital improvement fees. Every HOA is different and, therefore, has different needs and amenities. As such, the capital improvement fee can vary from one community to another. On average, homeowners should expect to pay one year’s worth of HOA fees as their capital contribution.

How to Build an HOA Capital Improvement Fund

Not all homeowners associations charge a capital improvement fee. As such, when a capital project is needed, an HOA will have to source the funds from somewhere.

Here are three ways to fund HOA capital improvements.

1. Surplus Funds

The first way is through the association’s operating account. An HOA operating fund covers the cost of regular expenses, including management fees, maintenance and repairs, office supplies, and insurance premiums.

Homeowner fees, otherwise known as HOA fees or HOA dues, fund the operating account. The HOA board calculates these fees based on an operating budget. Sometimes, though, an HOA will have a budget surplus. This happens when an HOA’s revenue exceeds its expenses.

When there is a budget surplus, there is leftover money. In some states, the law dictates what an HOA must do with surplus funds, and an HOA’s governing documents may contain similar provisions. However, state laws and CC&Rs permit an HOA to set aside the surplus funds to pay for capital projects.

2. Special Assessments

Special assessments are another type of fee that an HOA may levy from homeowners. Ideally, an HOA won’t need to charge special assessments if the board budgets correctly and all homeowners pay their dues. However, budget deficits and unanticipated costs can result in a cash shortfall.

If an HOA does not have enough funding for capital improvement, it may impose a special assessment. Board members, though, should anticipate some pushback from homeowners. Special assessments can be costly and sudden, so the HOA board will likely receive criticism for the decision.

Boards should expect to face collection struggles. The HOA may not collect sufficient funds if homeowners can’t find extra money in their household budget to pay special assessments. In extreme cases, homeowners may even challenge the board’s decision to levy special assessments. This can sometimes result in lengthy delays and costly legal action.

Before charging a special assessment, though, the HOA board should check state laws and the governing documents. These two typically outline the association’s authority to collect a special assessment, including any caps on amounts. Furthermore, some provisions may only allow special assessments for certain expenses.

Assuming the board follows proper procedures and fulfills all the requirements, it may proceed to impose a special assessment. When doing so, it is essential to maintain an open line of communication with residents. Let them know how much they must pay and what it is for. Provide timely and regular updates relating to the project’s progress. Lastly, present a financial report to the residents to ensure transparency.

3. HOA Loans

The third option is to obtain an HOA loan. The main benefit of a loan is that homeowners won’t need to shell out a single lump sum in special assessments. With a loan, an HOA receives time to repay the principal and interest, allowing it to collect money from homeowners in installments. Most banks offer up to 15 years as a repayment duration.

Additionally, an HOA loan provides immediate access to funds. This is particularly helpful for more urgent projects that require an HOA to make a significant upfront payment.

Of course, not all HOAs can take out a loan. Before taking action, an HOA board should review its state laws and governing documents. For instance, in California, Section 7140(I) of the Corporations Code allows corporations, such as HOAs, to borrow money. Some HOAs only receive permission to secure a loan for specific circumstances.

Can an HOA Use Reserve Funds for Capital Improvements?

Whether or not an HOA can use its reserves to pay for capital improvements depends on state laws and the governing documents. An HOA’s reserve fund covers the cost of major repairs, replacements, and maintenance. Capital improvements typically don’t fall under this category.

That said, depending on its CC&Rs, a board may be able to use its reserves for HOA capital improvements. However, this comes with the drawback of depleting the association’s savings for future repairs and replacements. Furthermore, some HOAs require approval from the membership before using the reserves for other purposes.

Communities and Capital Improvements

HOA capital improvements add value to the community, attracting new homeowners and keeping property values high. As such, it makes sense for an HOA board to want to invest in these projects. However, understanding what counts as a capital improvement and how an HOA can fund it is integral to maintaining a successful association.

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